Sec D 1 Joint Product and By-Product Costing Flashcards
6Joint costs are useful for
A. Setting the selling price of a product.
B. Determining whether to continue producing an item.
C. Evaluating management by means of a responsibility reporting system.
D. Determining inventory cost for accounting purposes.
Answer (D) is correct.
Joint costs are useful for inventory costing when two or more identifiable products emerge from a
common production process. The joint costs of production must be allocated on some basis, such as
relative sales value
7In joint-product costing and analysis, which one of the following costs is relevant when deciding the
point at which a product should be sold to maximize profits?
A. Separable costs after the split-off point.
B. Joint costs to the split-off point.
C. Sales salaries for the period when the units were produced.
D. Purchase costs of the materials required for the joint products.
Answer (A) is correct.
Joint products are created from processing a common input. Joint costs are incurred prior to the splitoff
point and cannot be identified with a particular joint product. As a result, joint costs are irrelevant
to the timing of sale. However, separable costs incurred after the split-off point are relevant because, if
incremental revenues exceed the separable costs, products should be processed further, not sold at the
split-off point.
10The principal disadvantage of using the physical quantity method of allocating joint costs is that
A. Costs assigned to inventories may have no relationship to value.
B. Physical quantities may be difficult to measure.
C. Additional processing costs affect the allocation base.
D. Joint costs, by definition, should not be separated on a unit basis.
Answer (A) is correct.
Joint costs are most often assigned on the basis of relative sales values or net realizable values. Basing
allocations on physical quantities, such as pounds, gallons, etc., is usually not desirable because the costs assigned may have no relationship to value. When large items have low selling prices and small
items have high selling prices, the large items might always sell at a loss when physical quantities are
used to allocate joint costs.
16The assignment of raw material costs to the major end products resulting from refining a barrel of
crude oil is best described as
A. Indirect costing.
B. Joint costing.
C. Differential costing.
D. Incremental costing.
Answer (B) is correct.
Joint products are common products created from processing a single input (e.g., gasoline, diesel fuel,
and kerosene). Joint products have common costs until they reach the split-off point. Joint costing
assigns common costs to joint products.
19A company produces three main joint products and one by-product. The by-product’s relative sales
value is quite low compared with that of the main products. The preferable accounting for the by-product’s net
realizable value is as
A. An addition to the revenues of the other products allocated on the basis of their respective net realizable
values.
B. Revenue in the period it is sold.
C. A reduction in the common cost to be allocated to the three main products.
D. A separate net realizable value upon which to allocate some of the common costs.
Answer (C) is correct.
Because of the relatively small sales value, a cost-effective allocation method is used for by-products.
The net realizable value of by-products is usually deducted from the cost of the main products.
20The primary purpose for allocating common costs to joint products is to determine
A. The selling price of a by-product.
B. Whether one of the joint products should be discontinued.
C. The variance between budgeted and actual common costs.
D. The inventory cost of joint products for financial reporting.
Answer (D) is correct.
Joint products must be valued for external financial reporting purposes based on the full (absorption)
cost of the product. Any common costs attributable to the joint production process must therefore be
allocated on a systematic and rational basis.
21The distinction between joint products and by-products is largely dependent on
A. Historical costs.
B. Prime costs.
C. Market value.
D. Salvage value.
Answer (C) is correct.
A by-product is one of relatively small total value. The first question that must be answered in regard
to by-products is: Do the benefits of further processing and bringing them to market exceed the costs;
that is, is the incremental revenue worth the effort? Market price determines this. The same can
essentially be said for the main products of the production process.
22In a production process where joint products are produced, the primary factor that will distinguish a
joint product from a by-product is the
A. Relative total sales value of the products.
B. Relative total volume of the products.
C. Relative ease of selling the products.
D. Accounting method used to allocate joint costs.
Answer (A) is correct.
If production results in joint products, the primary factor that distinguishes a joint product from a byproduct
is the relative total sales value of the products.
23All of the following are methods of allocating joint costs to joint products except
A. Physical quantities method.
B. Net realizable value method.
C. Separable production cost method.
D. Gross market value method.
Answer (C) is correct.
No “separable production cost method” is recognized for allocating joint costs. The nature of the
problem is such that all costs are joint and cannot be separated.
28A company manufactures several products that originate in a joint process and are separated at a
split-off point. Which one of the following methods of joint-cost allocation would allocate the same unit cost to each
separable product?
A. Net realizable value method.
B. Sales value at split-off method.
C. Physical quantity method.
D. Constant gross margin percentage method.
Answer (C) is correct.
The physical quantity (unit) method is the simplest; it allocates joint production costs to each product
based on their relative proportions of the measure selected. Using this method results in a an identical
unit cost for each separable product.
29If all of the joint products are sold at the split-off point and an overall profit is made on all of the
products, which one of the following joint costing methods will result in the same gross margin percentage on each
joint product?
A. Sales value at split-off method.
B. Physical measures method using sales volume.
C. Physical measures method using production volume.
D. Physical measures method using weight.
Answer (A) is correct.
The sales value at split-off method is based on the relative sales values of the separate costs at split-off.
Gross margin percentage is calculated as the difference between sales price and cost divided by sales
price. Since each joint product receives the amount of separate cost proportional to its sales value, the
gross margin percentage calculation will be the same. For instance, if there are two products whose
sales prices are $40 and $60, respectively, the joint product costs allocated will also be in a 2:3 ratio,
e.g., $10 and $15.
1. The first product will have a gross margin percentage of the following:
2. ($40 – $10) ÷ $40 = 75%
3. The second product will also have a gross margin percentage of the following:
4. ($60 – $15) ÷ $60 = 75%
