 Hello and welcome to the session in which you would look at joint product costing and buy product. This topic is covered on the CPA exam, cost accounting as well as managerial accounting. Whether you are an accounting students or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course. I am a useful addition to your CPA review course. I explain the material differently, helping you understand your CPA review course which will help you pass the CPA exam. I can add 10 to 15 points by providing you alternative explanation, alternative resources that's going to help you pass the exam. Your risk to try me is one month of subscription. Try it. Give it a try. If you feel it's helping you, you keep it. If not, you cancel. That's your risk. Your potential return is actually passing the exam. Are you willing to take that risk for a lifetime investment? And if not for anything, take a look at my website to find out how well or not well your university is doing on the CPA exam. I do have resources for other college courses as well as CPA sections. If you haven't connected with me on LinkedIn, please do so. Connect with me on YouTube by subscribing, liking this recording. Connect with me on Instagram, Facebook, Twitter and please follow me on Reddit. So let's start to talk about joint product costing and buy product. The first thing we're going to learn is technical terms. Some terms that's going to explain this concept. Then we will work an example to show you how the computation actually gets done. Starting with the joint input. So joint product costing is when we have an input, some sort of a resource that we are using and it's going to produce many different products. So we're going to start with an input. And that input for our purposes, it's going to be the crude oil. So we extract crude oil from the ground as a natural resource. That's our input. That's our joint input. Sorry. And this joint input, it's going to incur common production process cost. But it's going to yield. It's going to produce multiple product, multiple output from this one common source. So we're going to have one input crude oil and we're going to have many product. Well, so we have a joint cost with common process, common production process. And at some point, we're going to start to split off. In other words, we're going to start to have different product. We're going to start to, we're going to turn the crude oil into actual oil, gasoline, chemical, kerosene, so on and so forth. So we have something called the split off point. The split off point, the split off point is where the product with individual identity started to emerge. So it's no longer crude oil. It has been refined. Now it's gasoline. It's no longer crude oil. It's becoming chemical, so on and so forth. So joint product, our product from the joint production process that has relatively substantial sales value. So these are our joint, our joint product. Okay. Now, then what we do here, we can sell them. For example, we can sell the gasoline at the gas station. Oil, for example, we can do separate processing, further processing, then sell chemicals. We can do separate processing and sell. We call those separable product costs. So sometimes what we have to do is we have to process these items, these individual product a little bit further, or we can sell it. I'll talk about this later on, but those are the basic terminology. Now, the key in this session is how to allocate this joint cost. Remember, we have a joint cost, common production process, how much to allocate to oil, how much to allocate to gasoline, and how much to allocate to the chemical. We're going to learn about three methods. We're going to use the first method, physical measures, when that's available. We can use the sales value of product at the split off point. That's the second method. And we can use the net realizable value, which is the third method. And we're going to work an example illustrating those three methods. So that's the heart of the lecture. Basically, how do we allocate the cost here, this joint cost to the several product, to the joint product? That's the issue that we have to deal with. And as I said, sometime we're going to have separable product cost and separable processing, which we will account for those separately, because those belong to a specific product. For example, if we added a little bit of processing on the chemical product to turn it into a plastic or to turn it into some other product, we might have to incur a separate cost, but that cost will be accounted for separately. We also might have something called a byproduct. What is the byproduct? Is the product whose total sales value are minor in comparison to the sales value of the joint product. Now for the oil, I'm going to assume this is going to be asphalt. Okay, what is the asphalt? Well, it's what we lay on the roads to drive our cars on the highways on the roads, the black asphalt. I'm going to assume that this is a byproduct because really the asphalt is coming from the crude oil. It's what's left, what we cannot produce into oil, gasoline, chemical and kerosene. That's what's the left over. Now the asphalt, I'm not technical 100% whether it's considered byproduct or not, but I'm going to consider it byproduct for the sake of illustration. So don't email me saying no asphalt is considered a product on its own. It could be. But usually it's the last thing from the crude oil. Therefore it's byproduct. We might have to sell it separately or we might have to process it further. Okay, but usually the sales, the sales value is minor relative to the other ones. So this is how I am considering it a byproduct. So the best way to illustrate these concepts is to actually work an example. And specifically, we're going to be assuming we're going to have a joint input. Tuners, basically, we're going to be either catching them, buying them, whatever there is, but this is going to be our joint input. So specifically, we're going to start by having 14,000 pounds of unprocessed tuna. And this is what you saw in this picture. It's unprocessed. And the cost is $16,000. This is how much we paid. We're going to process these tuners and we're going to produce the following three products at split off point. We're going to have 2,000 pound of tuna filet. We're going to have 8,000 pound of canned tuna. And we're going to have 4,000 pound of tuna filet. That's basically byproduct scrap, not tuna filet, byproduct scrap. Basically, there's not much we can do with this. It's not that useful, basically. This is the byproduct in this process. And we're going to sell at the selling point after the split off, we're going to sell the tuna filet, 220 per pound. We're going to sell the canned tuna, $1.65 per pound. Obviously, the tuna filet is more expensive than the canned tuna. And obviously, the third product does not have a selling value because we consider it scrap. This is what we're considering it now. Or a byproduct and it's scrap, waste, whatever. It's like some of the meat really we could not use. Now, remember we have three methods that we can account for this cost. So simply put, how are we going to take this $16,000 here and allocate the cost to the tuna, allocate the cost to the tuna filet, to the canned tuna. And we're not going to allocate anything for now to the byproduct. One way to do it is to use the physical measure. You remember I told you and here the physical measure when available, what's available here per pound, we're going to try to do that. So what's going to happen is this. We're going to have 2000 pounds of tuna filet, 10,000 pound of canned tuna. So total we have 10,000 pounds. We're not going to count the scrap because there is no value in it. Now we find the proportion. It seems 20%, 2000 divided by 10, 20% of the tuna was consumed by the tuna filet and 80% was consumed by the canned tuna, 8,000 divided by 10,000. Now we're going to take the 20% multiplied by 16,000, 80% multiplied by 16,000. So we're going to allocate 3,200 to the tuna filet from the cost and 12,800 to the canned tuna. In total notice it's the 16,000 that I'm trying to allocate. Now the cost per pound now is $1.60. The cost per pound for the tuna for the tuna is $1.60. This is what we are assuming the cost per pound for each one. And hopefully this makes sense. What we did is we took the size. What we're doing here is we are using the size, the size as a factor, the size as a factor in allocating the cost. And you might argue, yes, the size is a factor. And by the way, how did we come up with $1.60? It's 3,200 divided by 2,000, 12,800 divided by 800. Now what are the pros and the cons of this method? The pros is it's easy to use and it's subtractive. We said we use the weight, the weight of the input. That's the pros. The cons is this method ignores the revenue producing capability. For example, if you notice the tuna, although the tuna filet, although we only consume 2,000 pound, but the price of the revenue is higher than the canned tuna, and each product may have its own unique physical measure. Just because you are bigger, it doesn't mean I should give you more cost. You may not be consuming more technical cost. But the point is this is one way to allocate the $16,000, which is a joint cost to the various product. Now we're going to look at another method. Using the same example that we used earlier, now we're going to be using a different method. We're going to be using the sales method, the sales at split off. What we're going to do, we're going to say, okay, we produce 2,000 pound times $2.20. The sales revenue is 4,400, 8,000 pound of canned tuna times 165,13,200. This is the sales value. Now what we're going to do, we're going to find the proportion based on the sales value. So rather than the weight that they consume, rather than 2,000 divided by 10, 8,000 divided by 10, their unit and pound, we're going to take the sales value 4,400 divided by 17,600, 3,000, 13,200 divided by 17,600. So the proportion is 25% of the cost should go to the tuna filet and 75% should go to the canned tuna. Now we're going to take 16,000 times 25%, 75% times 16,000. We're going to allocate 4,000 to the tuna filet and 12,000 to the canned tuna. Simply put, the cost per pound. Now what we are saying, 4,000 divided by 2,000 pound. The cost per pound is $2. 12,000 divided by 8,000. The cost per pound is $1.50. Basically the same thing. At the end of the day, we allocated the 16,000. Just we allocated differently based on the sales value, not the weight. What are the pros of this method? Again, it's easy to use. It looks at the revenue producing ability. Now I like this because the more revenue, the more cost you should absorb. The cons of it is changes in prices. Now these prices, we're assuming 220. What if the prices of tuna jumped up substantially or did they drop? So the prices changes all the time. And the sales at split off may not be available, may not be available easily. So that's another cons of this. As you're using the price, the price could change. The price may not be available. The price could fluctuate for various reasons. Now let's take a look at the third method, which is net realizable value. This method is used when the joint product cannot be sold at split off. Simply put, we have to process further. And what is NRV? The NRV is the estimated sales at split off. That's one way to look at it if we can sell it at split off. But technically, it's the selling cost sometime you have to do additional processing beyond the split off from the estimated sales value. So if there is no... So it could be estimated sales value minus zero. If there is nothing, if there is anything, you subtract the additional cost. This is how you come up with NRV, net realizable value. Now let's change the scenario a little bit. Remember, we can sell the tuna fillet at 220. We can sell the canned tuna at 165. We don't need any further processing. Remember, we had 4,000 pounds that was considered scrap. This is what we can do. Of that 4,000 pound, we can produce 3,000 pound. These are scrap and use it for cat foods for 3,000 pound. And 1,000 pound, there is nothing really we can do with it. But to do so, we're going to have to incur an additional $850 in further processing to turn that scrap into cat food. Then we can sell the 1 pound of cat food for $1.75. So this is what we did. Now we're going to learn how to compute the allocation using the net realizable value. There we go. First, we compute the selling. So 2,000 pound times 220 for the tuna fillet, 8,000 pounds times 165 for the canned tuna and 3,000 times 165. So this is the sales value for the three product. Then we're going to deduct additional processing costs. Remember, this is the NRV. Is this minus additional cost? Okay, so we're going to compute the NRV. And this is the NRV. 4,400 minus 0 is 4,400. 13,200 minus 0 is 13,200. 50 to 50 minus 850 equals 4,400. Now we came up with the NRV. This is what we're looking for. Now we're going to find the proportion of the NRV. Now the proportion is based on the NRV, not based on the physical measure, not based on the sales value. It's based on the NRV. And what's the NRV? It's the sales value minus additional processing because there's something we could not sell at the split off like the scrap. Therefore, we're going to take 4,400 divided by 22,000. 13,200 divided by 22,000. 4,400 divided by 22,000. And we're going to find the various percentages. We're going to take the various percentages multiplied by 16,000, each one of them. And we're going to allocate to the tuna, 3,200, to the tuna fillet, to the can tuna 9,600, into the cat food 3,200. Again, this is based on the NRV, net realizable value. Now what is the total cost? Remember on the exam, they might trick you, they might say ask you for the total cost. For the tuna fillet, 3,200, for the can tuna 9,600. Remember to add the 850. Remember to add the 850 for the total cost. So you allocate the 3,200 based on NRV, but you still have 850 to allocate the cost. Now you might be asked about the cost per pound. The cost per pound is simple. The total cost, what was allocated, divided by how many pounds you used. Total cost, how many pounds you used. Total cost, divided by how many pounds you used. And this is basically the NRV, NRV. So at the split off, we have to decide, you know, once we are at the split off, we have to decide whether we're going to sell the product as is or we might have to do some additional processing. Okay, so the company will have to decide. Now how do they make that decision? How do they make that decision? Simply put, here's what you have to do. You have to compare the additional cost to the increase in sales value. So let's assume you're going to have to spend an additional $1,000 in cost and the only thing you can get is 750, additional 750. Would you do it? You don't do it. But if you might spend $1,000 additional cost and be able to sell it for 1,500, so the revenue is higher, then you will do so. So you would only do so when the additional revenue, when the additional revenue is higher than the additional cost. If the additional revenue is higher, you will go for it. Simply put, if the additional cost is less, you don't do it. Okay, so if the increase in sales value is less than the cost, then you don't do it. If the increase in sales value is greater than the additional cost, then you will do further processing because it makes sense, it's more profitable for you. This topic is covered on the CPA exam. You want to make sure you are comfortable with it. On my website, farhatlectures.com, I do have additional resources for you for this topic. Again, I don't replace your CPA review course. I'm a useful addition. That's all what I am. Look, you are investing, you are making a lifetime investment. Don't shortchange yourself. Check out farhatlectures.com. Good luck, study hard, and of course, stay safe.