CIMA P1 Syllabus A. Cost Accounting For Decision And Control - Value By-Products & Joint Products - Notes ^{9 / 10}

A joint product is an important saleable item, and so it should be separately costed

The profitability of each joint product should be assessed in the cost accounts.

Joint process costs (pre-separation costs) occur before the split-off point. 

These costs have to be apportioned between the joint products at the split-off point to obtain the costs of each of the products in order to value closing inventory and cost of sales.

The main methods of apportioning joint costs, each of which can produce significantly different results are

1. Sales value of production (market value)

2. Production units (Physical unit basis)

3. Net realisable value = Sales value - further cost to process after product leaves joint process

A by-product

• is not important as a saleable item, and whatever revenue is earned from the by product sale, is deducted from the joint process cost before the cost is shared between the joint products.

Illustration - Physical Unit Basis

Joint process costs $800,000

Production
A 120,000 units
B 100,000 units
By product C 20,000 units sold for $1.5/unit

What is the cost per unit of Product A, if the physical method of apportionment is used?

Solution

1. Step 1 - Total cost to be apportioned

   Joint costs  -  (By product (Production)  x  Selling Price)

   $800,000 - (20,000 x $1.5) = $770,000

2. Step 2 - Cost per unit of A 

   Costs apportioned to all products / Number of Joint Product Units

   = $770,000/220,000 
   = $3.5/unit

Illustration - Sales Value Method

Joint process costs $50,000

Production and Sales value/unit
A 3,000 units sold for $8.4/unit
B 6,000 units sold for $4.5/unit

What is the cost of one unit of Product A, if the sales value method of apportionment is used?

Solution

1. Step 1 -  Joint costs  -  (By product (Production) x  Selling Price)

   Total cost to apportion are $50,000

2. Step 2 -  Production (units) x sales value per unit

   Total sales value is: (3,000 x $8.4)+(6,000 x $4.5) = $52,200

3. Step 3 - Total cost to apportion to product = Joint Costs x Sales value (product) / All products sales value

   Product A sales value is: (3,000 x $8.4) = $25,200

   Cost to apportion to A = 50,000 x ($25,200/$52,200) = $24,138

4. Step 4 - Cost Per unit of Product  = Total cost to apportion to product  / Number of units (Product)

   Cost per unit of A = $24,138/3,000 units = $8.05/unit

Illustration - Net realisable value method

Total cost to apportion are $100,000

Production and Net realisable value/unit
A 7,000 units sold for $3.6/unit
B 14,000 units sold for $2.3/unit

What is the cost of one unit of Product A, if the net realisable value method of apportionment is used?

Solution

1. Step 1 - Costs apportioned to product =  Joint costs  -  (By product (Production) x  Selling Price)

   Total cost to apportion are $100,000

2. Step 2 - Total cost to apportion to product = Joint costs x (Total NRV of product / All products NRV)
          
   Product A NRV is: (7,000 x $3.6) = $25,200

   Total NRV is: (7,000 x $3.6)+(14,000 x $2.3) = $57,400

   Cost to apportion to A = 100,000 x ($25,200/$57,400) = $43,902

3. Step 3 - Cost per unit = Total cost apportioned to product / Total number of units produced of product

   43,902/7,000 units = $6.27