The revenue from the sale of by-product and scrap can either be credited to the process account or directly to the profit and loss account. Disposal costs of scrap or waste are normally debited to the process account.

Example 1: There are three joint products and scrap. Company A manufactures three products, X, Y and Z, in a single process using common resources.

Inputs into the process for a month were:

Direct material: 40,000 kg at a total cost of £90,000

Direct labour: £120,000

Factory overheads are absorbed at a rate of 130 per cent of direct labour cost. There is a normal loss of 10 per cent of input — this can be sold as scrap for £1.50 per kg with the proceeds being credited to the process account.

The outputs from the process for the month were:

Product X: 20,000 kg (which can be sold for £12.00 per kg)

Product Y: 10,000 kg (which can be sold for £18.24 per kg)

Product Z: 6,000 kg (which can be sold for £9.60 per kg)

Required: a) Calculate separately the joint product cost for each of Products X, Y and Z based on: i) the relative weight of output; ii) the relative revenue arising from the sale of the products.

b) Product Y can be converted by means of a further process into Product Y2. The selling price of Product Y2 would be £30 per kg. Conversion cost would amount to £10 per kg input and there would be a loss in process equivalent to 5 per cent of the material input.

Required: Calculate the effect on profit if all the output of Product Y is converted to Product Y2.

Solution (a)(i): Evaluation of joint products based on comparative weight of output:

Stage 1: Calculate the total cost of the process:

Direct materials (as given) — £90,000

Direct labour (as given) — £120,000

Factory overhead (at 130 per cent of labour cost) — £156,000

Less scrap proceeds (4,000 x £1.50) — £(6,000)

Total net process cost — £360,000

A common error that can occur in this situation is to forget to credit the value of the scrap proceeds to the process.

Stage 2: Calculate total saleable output in kg: 20,000 + 10,000 + 6,000 = 36,000 (Note: 4,000 kg were scrapped and do not need to be considered when apportioning the total cost to Products X, Y and Z).

A common error that can occur in this situation is to apportion cost to products as a proportion of 40,000 kg.

Stage 3: Calculate the proportion of the total weight relating to each individual product and multiply this by the total process cost:

Product X = (20,000 ÷ 36,000) x £360,000 = £200,000

Product Y = (10,000 ÷ 36,000) x £360,000 = £100,000

Product Z = (6,000 ÷ 36,000) x £360,000 = £60,000

Total joint cost as above — £360,000

A common error that can occur in this situation is to apportion cost to the scrap.

Solution (a)(ii): Evaluation of joint products based on comparative revenue from sale of products:

Stage 1: Calculate total revenue from sale of products:

Product X = 20,000 x £12.00 = £240,000

Product Y = 10,000 x £18.24 = £182,400

Product Z = 6,000 x £9.60 = £57,600

Total revenue — £480,000

Stage 2: Calculate the proportion of the total revenue relating to each individual product and multiply this by the total process cost:

Product X = (240,000 ÷ 480,000) x £360,000 = £180,000

Product Y = (182,400 ÷ 480,000) x £360,000 = £136,800

Product Z = (57,600 ÷ 480,000) x £360,000 = £43,200

Total joint cost as above — £360,000

A common error that can occur in this situation is to apportion cost based on relative selling price per unit of product instead of total revenue per product.

Other considerations

Scrap: If the scrap in the above scenario had no saleable value, then the total cost to be apportioned would be £366,000 rather than £360,000 — meaning that total cost to be apportioned in both cases would be greater:

Solution (a)(i): Evaluation of joint products based on comparative weight of output (assuming scrap had no value):

Product X = (20,000 ÷ 36,000) x £366,000 = £203,333

Product Y = (10,000 ÷ 36,000) x £366,000 = £101,667

Product Z = (6,000 ÷ 36,000) x £366,000 = £61,000

Total joint cost as above — £366,000

Solution (a)(ii): Evaluation of joint products based on comparative revenue from sale of products (assuming scrap had no value).

Product X = (240,000 ÷ 480,000) x £366,000 = £183,000

Product Y = (182,400 ÷ 480,000) x £366,000 = £139,080

Product Z = (57,600 ÷ 480,000) x £366,000 = £43,920

Total joint cost as above — £366,000

Solution b: Effect on profit of further processing decisions: If further processing takes place then the following will occur:

1) The revenue from sale of Y2 will be (10,000 x 0.95 x £30) = £285,000

2) The revenue from Y will not occur and be lost = £(182,400)

3) Further processing costs will be incurred (10,000 x £10) = (100,000)

Net effect on profit would be a gain of — £2,600

Common errors that can occur in this situation are:

to forget to deduct the revenue from the sale of the product in its original form

to forget to allow for the process loss when calculating the revenue from the converted product.

(Edited extracts from student accountant, an ACCA publication. wwwaccaglobal.com)

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