Professional Documents
Culture Documents
By Products
1. Definitions
a. Joint Cost: the cost of a single process that yield multiple products
simultaneously. Includes DM, DL, and mfg. Ohd up to the split-off point
b. Split-off Point: the point in the process at which the products become
separately identifiable.
c. Separable Costs: those costs incurred beyond the split-off point that are
identifiable with individual products
d. Main Product: the product with the highest sales value relative to other
products beyond split-off
e. Joint Products: other products with a relative high sales value that are
not identifiable as individual products until the split-off point
f. Byproduct: a product beyond the split-off point with a relatively low
sales value in comparison with main and joint products
g. Scrap: products beyond split-off with minimal value (May have a negative
sales value if must be hauled away to a landfill)
b. Methods where there isn’t a market for all of the separable products at
split-off. Therefore, some other method has to be used that
approximates the situation at the split-off point. (The
allocation must relate to the situation at split-off because joint costs cease
to have meaning beyong the splitoff point). There are two methods that
can approximate the situation at split-off.
i. Estimated Net Realizable Value Method (NRV)
The NRV for each product as a % of the total NRV of all products,
is the basis for the allocation.
Est’d NRV = Final sales value of production – Separable Costs
(to get an estimated NRV for all products combined that is
approximately equal to joint costs, you would also need to deduct
selling and admin expenses and gross profit. This is not usually
done in practice just to keep things simple)
A by-product is a product having a relatively low sales value compared with the main
or joint products; by-products can be sold at split-off or processed further; also, if
sales increase, a by-product may be re-classified as a joint product at some point.
There are several methods of accounting for by-products in terms or recognizing when to
record the cost of the by-product. We will recognize the cost of the by-product only
when production is completed.
Steps:
1. Calculate the NRV of the by product (i.e., FSVP – SC, or sometimes if specified,
FSVP – SC – normal GP).
2. Subtract this NRV of the by-product from the total joint cost and set the amount
up as by-product inventory.
3. Allocate the revised joint cost in the usual way to the joint products using one of
the four methods
4. Record any sales of the by-product as follows:
A/R xxx
By product inventory xxx
Note: Because the NRV of the by-product is treated as a reduction in the total
joint cost allocation and because the by-product is given no status as a separate
product, there is no Sales a/c and no COGS a/c for the by-product
itself------only Balance Sheet accounts.
The sales of the by-product are either added to the sales of the other joint products
or deducted from the COGS of the other joint products. These Sales or COGS
adjustments are done on the financial statement and not in the accounting records.
(This procedure assumes that the selling price and inventory cost per unit of the
by-product are both valued at the NRV per unit of the by-product)
RF 03/05