Learning Objective 6 Account for byproducts using two methods
Joint production processes can yield not only joint products and main products but also byproducts. Although their total sales values are relatively low, the byproducts in a joint production process can affect the allocation of joint costs. Moreover, byproducts can be quite profitable for a firm. Wendy’s, the fast-food chain, uses surplus hamburger patties in its “rich and meaty” chili and, because it cooks meat specifically for the chili only 10% of the time, makes great margins even at a price of $0.99 for an eight-ounce serving of chili.
Let’s consider a two-product example of a main product and a byproduct.
The joint manufacturing costs for these products in July 2020 are $250,000, direct materials, $150,000 and conversion costs, $100,000. Both products are sold at the splitoff point without further processing, as Exhibit 17-8 shows.
The details are as follows:
Timber goes for processing at joint costs of $250,000 till it reaches splitoff point.
As timber reached the splitoff point it segregates into the main or joint product—50,000 board feet of fine grade Lumber and 4,000 cubic feet of wood chips which is the byproduct.
We present two methods of byproduct accounting: the production method and the sales method. The production method recognizes byproducts in the financial statements when their production is completed. The sales method recognizes byproducts when they are sold.* Exhibit 17-9 presents the income statement of Westlake Corporation under both methods.
Details of the table that depicts the production method and sales method costs of the company are as follows:
Revenues
Main product: Fine-grade lumber (40,000 board feet times $6 per board feet)
Production method: $240,000
Sales method: $240,000
Byproduct: Wood chips
Production method: Nil
Sales method (1,200 cubic feet times $1 per cubic feet): 1,200
Total revenues
Production method: $240,000
Sales method: $241,200
Cost of goods sold
Total manufacturing costs
Production method: $250,000
Sales method: $250,000
Deduct byproduct revenue and inventory
Production method (4,000 cubic feet times $1 per cubic feet): (4,000) in parentheses
Sales method: Nil
Net manufacturing costs
Production method: 246,000
Sales method: 250,000
Deduct main-product inventory
Production method: (49,200) in parentheses (refer to note a)
Sales method: (50,000) in parentheses (refer to note b)
Total cost of goods sold
Production method: 196,800
Sales method: 200,000
Gross margin
Production method: $43,200
Sales method: $41,200
Gross margin percentage
Production method ($43,200 divided by $240,000): 18%
Sales method ($41,200 divided by $241,200): 17.08%
Inventoriable costs (end of period)
Main product: Fine-grade lumber
Production method: $49,200
Sales method: $50,000
Byproduct: Wood chips (2,800 cubic feet times $1 per cubic feet)
Production method: 2,800
Sales method: 0
Note a: (the quotient of 10,000 and 50,000) multiplied by net manufacturing cost equals (the quotient of 10,000 and 50,000) multiplied by $246,000 which equals $49,200.
Note b: (the quotient of 10,000 and 50,000) multiplied by total manufacturing cost equals (the quotient of 10,000 and 50,000) multiplied by $250,000 which equals $50,000.
Note c: Inventoriable costs of byproduct recorded at selling prices.
This method recognizes the byproduct in the financial statements—the 4,000 cubic feet of wood chips—in the month it is produced, July 2020. The NRV from the byproduct produced offsets the costs of the main product. The following journal entries illustrate the production method:
The table depicts journal entries that illustrate the Byproducts Recognized at Time Production Is Completed production method. The details of the table are as follows:
1. Work in Process: 150,000
Accounts Payable: 150,000
To record the direct materials purchased and used in production during July.
2. Work in Process: 100,000
Various accounts such as Wages Payable and Accumulated Depreciation: 100,000
To record the conversion costs in the production process during July; examples include energy, manufacturing supplies, all manufacturing labor, and plant depreciation.
3. Byproduct Inventory, Wood Chips, 4,000 cubic feet times 1 dollar per cubic feet: 4,000
Finished Goods, Fine-Grade Lumber, 250,000 dollars minus 4,000 dollars: 246,000 dollars
Work in Process, 150,000 dollars plus 100,000 dollars: 250,000 dollars
To record the cost of goods completed during July.
4a. Cost of Goods Sold, the quantity 40,000 board feet divided by 50,000 board feet times 246,000 dollars: 196,800 dollars
Finished Goods, Fine-Grade Lumber, 196,800 dollars
To record the cost of the main product sold during July.
4b. Cash or Accounts Receivable, 40,000 board feet times 6 dollars per board foot: 240,000 dollars
Revenues, Fine-Grade Lumber: 240,000 dollars
To record the cost of the main product sold during July.
5. Cash or Accounts Receivable, 1,200 cubic feet times 1 dollar per cubic foot: 1,200
Byproduct Inventory, Wood Chips: 1,200
To record the sales of the byproduct during July.
The production method reports byproduct inventory of wood chips in the balance sheet at $1 per cubic foot selling price
One variation of this method reports byproduct inventory at its NRV reduced by a normal profit margin, say 20%: When the byproduct inventory is sold in a subsequent period, the income statement will match the selling price, $2,800, with the “cost” reported for the byproduct inventory, $2,240, resulting in a byproduct operating income of .* The deduction for the byproduct inventory in Exhibit 17-9 is so that net manufacturing costs equal . Cost of goods sold equals .