COSTS

PROCESS COSTING SYSTEM

Fundamental Concepts.

This system consists of the accumulation of costs in departments, centers

of costs or processes.

The purpose of this system is to determine how costs will be allocated to the
different production processes, having as main objective the calculation of
unit cost of each product.

This system is applicable in those industries whose finished products

generally require long processes, passing from one department to
another and correspond to uniform or more or less similar products. The
the main emphasis is on the time function and then on the product itself for
determine the unit cost.

Depending on the type of products to be manufactured, the costs go through the different
centers or departments on a permanent basis; for example, in the
flour industry, while at one end of the production is entering
the wheat for the first washing stage, in the drying department, is
it is processing the already washed part; in the grinding department it is being processed
the wheat is already dried and the product is received in the sieving department
coming from the mill, all of this in a permanent sequence until obtaining
flour as a finished product at the other end of production.

Under normal working conditions, in all or almost all departments,

There will be inventories of products in process during the period and the same.
the situation may arise at the end of any period, unless it has been
planned in another way.

The system of processes for various products that are produced in a form
independent from each other, whether from the start of production or from
a point called separation point is referred to as processes
parallels, which are generally sequential in relation to the same product.
That is to say, the production of a department continues into the next one, and so on.
successively until its completion.

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Definition of the term process

It is an important functional division in a factory, where it is carried out
the corresponding production processes. In other words, it is the section of
a company where a specific, specialized, and repetitive job is done. No
Notwithstanding the above, it must be clear that in practice the term process
it can correspond to one of the conceptions:

a) Process: It is when the accumulation and control correspond to the

different stages of production that involve transformations
complete in the physical or chemical characteristics of the materials; it is
to say, the name given to each of the activities carried out by the
company.

b) Operations: When the accumulation and control of costs is carried out

attending to the nature of the operation carried out more than to the
transformation. This applies in an industrial company when the
different stages that the material goes through 'imply small
partial modifications in the physical-chemical structure of the
materials.

Companies that must apply it

Considering that a cost system must be compatible with the

nature and the type of operations carried out by a company must
it should be considered that this system should be used when a product
finish is the result of a more or less continuous and mass operation, in
the need to add to each produced unit, the same
quantity of materials, labor, and other indirect manufacturing costs.
This procedure is commonly used in companies dedicated to
industrial activities, such as paper mills, refineries, oil companies,
of sugar, cellulose, of aspirin, electricity, glassware, aluminum, textile,
ambassadors, chemists, of paints, breweries, of soft drinks, of cereals, etc.

In the specific case of service companies, we could point out as

companies that use this type of process costing system in banking
retailer, cargo and passenger transportation company, service companies
public, stockbrokers, and postal delivery companies.

Methods used in Process Costing

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Basically, there are two methods in process cost allocation.

the Weighted Average Price Method and the First In First Out Method
in Exit.

Weighted Average Price Method (WAPM)

Under this method, the costs of the initial inventory are added to the costs of the
period and the total is divided by the equivalent production to obtain the
average unit costs. The costs associated with the units still in
process lose their identity due to merging, in addition the initial inventory
consider it as if it were from the current period.

FIFO Method (First In, First Out)

In this method, the units of the initial inventory are treated differently.
that the units of the period of the current. It is assumed that the units of the
initial inventory is completed before the units started in this
period, in addition, the costs of the initiated units are separated
completed in this period of the units in process of the initial inventory.

To obtain and assign the cost of the product under a costing system
six steps must be followed:

a) Calculate the total number of available physical units

b) Identify the state of the available physical units by tracking their flow
physical. This step involves identifying the groups to which they should
assign the costs (finished, transferred, or that remain in the
final inventory

c) Determine the number of equivalent units produced either by the

weighted average method or through FIFO.

d) Determine the total available cost, which is the sum of the costs of the
initial inventory and all production costs incurred
incurred during the current period.

e) Calculate the cost per equivalent unit produced for each component
of the cost.

f) Assign the costs to the transferred units and to the units of the
final inventory of work in process.

Objectives of the Process Cost System:

- A process costing system determines how costs will be assigned to the

manufacturing costs incurred during each period.

The cost allocation in a department is just an intermediate step, the

The ultimate goal is to determine the total unit cost in order to determine the
income.

Explain the accounting treatment of normal and abnormal losses.

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Calculate the value of work in progress. Complete production and loss.

abnormal using weighted average and FIFO.

During a certain period some units will be started, but not all.
will be completed at the end of it. Consequently, each department
determine which part of the costs incurred in the department can be
assign to the units in process and what part to the finished ones.

Let's look at an example regarding this:

Let's assume that during the month of April, 2000 units were put into
process in Department A. The costs incurred during the month were
the following:
Materials $2000
Labor $1000
Manufacturing Indirects $500

At the end of the month, 1000 units were completed and transferred to the Department.
B.
The purpose of a process costing system is to determine what part of
the $2000 for materials, $1000 for labor and $500 for costs
manufacturing overhead applies to the 1000 finished units and
transferred and what part applies to the other 1000 units in process. Each
The department will prepare a report on the cost of production.

. NORMAL AND ABNORMAL LOSSES

The certain losses that are inherent in the production process and not
They can be eliminated, these losses occur under operational conditions.
efficient normal missed calls.

There are also some losses that are not expected to occur under conditions.
efficient operations, these losses are not an inherent part of
production process, they are called abnormal missed calls.

Normal and abnormal losses require accounting treatment.

different, the abnormal loss is treated separately as a cost
characteristic outside of the gains and losses at the end of the period.

That is to say, normal losses are a proportion calculated through

from different periods and are absorbed by production, while the
abnormal losses are accounted for separately in the process.

Importance of the cost by processes in decision making

Costs are a very important entity, as they are a tool.
of management in large, medium, and small companies, as far as
it refers to decision making. Costs are used in decision making.
decisions for:
Determine the prices of the products
Allow management to measure work performance, that is, to compare the
real cost of manufacturing a product, of a service or of a function with
a previously determined cost.

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Evaluate and control the inventory. Inventory control refers to maintaining

in stock the adequate quantities of the different products in the
necessary proportions for the sale, since if the quantities result
too reduced, sales may be lost or production may be interrupted; if
on the contrary, the inventory is very high, it turns out that we will have capital of
immobilized work emerging the need to spend them in one way or another.

Conclusion
Costs are essential for any economic activity, as these
they determine the value of the product, which in turn is subdivided and each subdivision
it has its value in the different types of companies. Costs have a great
importance in decision-making for large, medium, and small
companies.
The production process

What is a production process?

The production process is a system of actions dynamically

interrelated focused on the transformation of certain 'input' elements,
referred to as factors, in certain elements "emitted", referred to as products, with
the primary objective of increasing its value, this concept refers to the 'capacity
to meet needs.

Process

Of Production
Factors Products

(+) VALUE

The essential elements of any productive process are:

• The factors or resources: in general, all kinds of goods or services
economic employed for productive purposes;
• The actions: the area in which factors are combined within the framework of
certain operational guidelines, and
• The results or products: in general, any good or service obtained from
a production process.

The theory of production studies these systems, assuming that this notion of
transformation is not limited exclusively to induced technical mutations
about certain material resources, characteristic of industrial activity. The
the concept also encompasses changes in "manner," "time," "place" or
any other kind, caused by factors with similar intent
add value.

Terminology in the Process Costing System

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• Waste or shrinkage: It is the loss of raw material after a process. Not

has no accounting or economic value (e.g.: evaporation in processes
chemicals). They are considered part of the normal cost.

• Waste: They are those produced in relation to the transformation process;

the difference of waste has a recovery value (e.g.: steel shavings in the
metalworking industry) but the raw material is not recovered for the industry
What is it about.

• Recovered raw material: It is what an industry recovers for itself,

being able to use it in the manufacturing of new products.

• Defective production: It is the one that, in some department, for some reason,
It is poorly conceived. It must undergo reprocessing, which involves a cost.
additional, and which should not be loaded either to the original cost or to the selling price;
but it should be charged to the department that generated it. If it has a lot
importance is accounted as a loss or expense of the period.

Characteristics of a process cost system.

Process costing deals with the flow of units through several

operations or departments, with additional costs being added to the
to the extent that they advance.

The unit costs of each department are based on the relationship between the costs.
incurred over a period of time and the units completed in the same
period.

A process cost system has the following characteristics:

Costs are accumulated and recorded by departments or cost centers.

Each department has its own work in progress account in the book.
mayor. This account is charged with the costs of the process incurred in the
department.

3. Equivalent units are used to determine the work in process in

terms of units completed at the end of a period.

4. Unit costs are determined by departments in each period.

5. The finished units and their corresponding costs are transferred to the
next department or finished items. At the moment when the
units leave the last department of the process, the total costs of
periods have been accumulated and can be used to determine the cost
unit cost of finished goods.

6. The total and unit costs of each department are added.

periodically, analyzed and calculated through the use of reports
production.

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The production order system

It is implemented in those industries where production is unitary, that is,

The items are produced in batches according to the nature of the product.

Its characteristics are:

1. Allows gathering separately each of the cost elements for each

production order, either completed or in the process of transformation.

It is possible and practical to lot and subdivide production, according to

with the needs of each company.

3. To start production, it is necessary to issue a manufacturing order, where

The number of products to be worked on is detailed, and a document is prepared.
different account (usually a card or work order sheet), for
each task.

4. Production is generally carried out based on orders placed by the

clients.

5. The furniture, toy, clothing, and electrical goods industries,

office equipment, etc. They apply this system.

There is a more analytical control of costs.

7. The value of the production inventory in a process is the sum of the

amounts recorded on the cards or cost sheets of orders
work pending to determine its manufacture.

Comparison between Production Order Costs and

Processes

Cost Systems by Orders Cost Systems by

Production Processes
Batch production. Continuous production.
Rather varied production. 2) Rather uniform production.
3) Rather Production Conditions3)Production conditions more
flexible. Rigid.
4) Specific Costs. 4) Average Costs.
5) More analytical control. More global control.
6) System aiming towards costs more 6) System tending towards costs
individualized. generalized system more
7) More expensive systems. economic.
Somewhat fluctuating costs. Economic system
8) Somewhat standardized costs.

Considerations on Added Materials and Lost Production

At different moments of the production process, in many processes of

production, variations occur as a consequence of the quantity
transferred (partially finished unit) from the previous process to a process

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subsequently, it is subject to an additional manufacturing activity, originating

increases or losses (units damaged as a result of accidents,
malfunctioning of machines, defective materials or of inferior quality
which will be the subject of a brief comment in the number that affects the cost
unit cost of the products produced.

While the order in which they should be addressed will depend on what happens in each
specific production process, we will start with the increases.
These occur as a consequence that the production process requires that
additional materials are added, which must produce the following two
situations:

a)Increase in the unit cost of the product; this occurs when there is no
substantial variation, that is to say, without increasing the number of units
produced. For example, in the case of shirt manufacturing when they
the buttons are included, the number of shirts does not increase, but the cost does
the same would occur in the case of adding dyes to garments
of dressing, where the cost of produced goods increases.

b)Increase in the number of units; this usually occurs in processes

where production units are measured in terms of weight or volume,
where the materials added will increase production. Please put yourself
the example of a company that produces juices, where a first
department obtains liters of orange juice and a second department
adds sugar and water.

The following concepts are indicated within the lost units:

• Damaged units.- Units that do not meet the standards of

production and are sold for their residual value or discarded. When they
damaged units are found, these are removed from production and not
do not do any additional work with them.
• Defective units.-Units that do not meet the standards of
production that must be further processed in order to be sold
as good units, or as defective merchandise.
• Waste material.- Raw materials that remain in the process of
production, these cannot be reused in production for the same
purpose but it is possible to use them for a production process or
different purposes or to sell themselves to third parties for a nominal value.
• Waste material is that part of the raw materials that remains
after production and that has no additional use or resale value.

PRACTICAL CASE
The industrial company 'ABC S.A.' presents you with the following information
its production process corresponding to the month of November.

Department 1
Units put into production 30000
Units finished and transferred to department 2 25000

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Units in processes 3000

Lost units 2000

Department 2
Units finished and transferred to department 3 22000
Units in process 2000
Lost units 1000

Department 3
Finished and transferred units 50%
Units completed and not transferred 10%
Units in process 30%
Lost units 10%

Degree of progress of the products in process

COSTS DEPARTMENT 1 Dept. 2 DEPARTMENT 3

MATERIAL 100%
FIRST 50% 80% 100%
HAND OF 40% 40% 80%
WORK
C.I.F

The costs extracted from the accounting books are as follows:

DEPARTMENT SUBJECT Hand of C.I.F

OS FIRST WORK
DEPARTMENT $180,000 $6,000 S/. 40,000
The 1 $ 9000 S/. 55000
DEPARTMENT S/. 7200 S/. 63,000
O2
DEPARTMENT
The 3

It is requested:
Calculate the cost of the finished products and transferred to
warehouse.
2. Calculate the cost of the production that remains in process.
3. Calculate the cost of the finished units and not transferred to
warehouse.
4. Seats.

SOLUTION
DEPARTMENT 1

PRODUCTION REPORT
Units placed in 30000
production 25000
Units transferred to department 2 3000
Units in process 2000
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Lost units
30000 30000

EQUIVALENT PRODUCTION SUBJECT HAND OF C.I.F.

FIRST WORK
Finished and transferred units 25000 25000 25000
to apartment 2 3000 1500 1200
Units in process
Lost units
28000 26500 26200

COST OF THE APARTMENT 1

Raw material s/. 180000
Labor s/. 60000
Indirect costs of s/. 40000
manufacturing
. S/. 280000

DETERMINATION OF UNIT COST

M.P. 180000 / 28000 6.42857143
M.O. 60000 / 26500 2.26415094
C.I.F. 40000 / 26200 1.52671756
10.21943993

DETERMINATION OF THE UNITS TRANSFERRED TO DEPT. 2

M.P. 25000 x 6.428571429 160714.29
M.O. 25000 x 2.264150943 56603.77
C.I.F. 25000 x 1.526717557 38167.94
255486.00

DETERMINATION OF UNITS IN PROCESS

M.P. 3000 x 6.428571429 19285.71
M.O. 1500 x 2.264150943 3396.23
C.I.F. 1200 x 1.526717557 1832.06
24514.00

ACCOUNTING ENTRIES

------------------ 1 ----------------- S/. DEBT S/. HAVING

9 COST OF PRODUCTION 280000
2,921 - 1 RAW MATERIAL 180,000
922 - 1 LABOR 60000
923 - 1 C.I.F. 40000
CHARGES ATTRIBUTABLE TO COST ACCOUNTS 280000
7 X/x for the production cost department 1
9
-------------------- 2 ------------------

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9 PRODUCTION COST - DEPT. 2 255486

2,921 - 1 RAW MATERIAL
160714.29
922 - 2 LABOR 56603.77
922 - 3 C.I.F. 38167.94

PRODUCTION COST - DEPT. 2 255486

9,921 - 1 RAW MATERIAL 160714.29
2 922 - 2 LABOR 56603.77
922 - 3 C.I.F. 38167.94
X/x units completed and transferred to
apt. 2

DEPARTMENT 2

EQUIVALENT PRODUCTION HAND OF C.I.F

WORK
Finished and transferred units 22000 22000
to apartment 3 1600 800
Units in process
23600 22800

COST OF THE APARTMENT 2

Towing cost 255486
Cost of the apartment 2
Labor 90000
C.I.F. 55000 145000
ACCUMULATED COST 400486
DEPARTMENT 2

UNIT COST DEPARTMENT 2

M.O. 90000 / 23600 3.81355932
C.I.F. 55000 / 22800 2.41228070
Unit cost department 2 6.22584002
(+) towing cost 10.2193993
Additional cost of lost unit
10219.43993 0.42581000
24000 16.87108995

VALUATION OF THE COMPLETED AND TRANSFERRED UNITS TO

DEPARTMENT 3
Labor 22000 x 3.81359532 = 83898.31
C.I.F. 22000 x 2.41228070 = 53070.18
Towing cost 22000 x 10.21943993 = 224827.68
Lost units 22000 x 0.42581000 = 9367.82
371,163.99

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VALUATION OF UNITS IN PROCESS

Labor 1600 x 3.81359532 = 6101.69
C.I.F. 800 x 2.41228070 = 1929.82
Towing cost 2000 x 10.21943993 = 20438.88
Lost units 2000 x 0.42581000 = 851.62
29322.01

ACCOUNTING ENTRIES SHOULD NEWS

________ 1__________ s/.
92 COST OF PRODUCTION 145,000.00
922.3 M.O
90,000.00
923.3 C.F
55,000.00 145,000.00
79 CHARGES ATTRIBUTABLE TO COSTS ACCOUNT AND
EXPENSES

For the production cost Department 2 371, 163. 99

__________ 2__________
92 PRODUCTION COSTS - DEPT. 3
92.13 M.P 147
320. 93 371,163.00
92.23 M.O 135
785.54
92.33 C.I.F. 88
057.52
92 PRODUCTION COSTS - DEPT. 2
92.13 M.P 147
320. 93
92.23 M.O 135,
785. 54
92.33 C.I.F. 88
057.52
For the transfer according to annex 1

DEPARTMENT 3

EQUIVALENT PRODUCTION M.O CIF

Finished units and transferred to 11,000 11,000
warehouse 2,200 2,200
Finished units and not transferred 6,600 5,280
Units in process -.- -.-
Lost units 19,800 18,480

COST OF THE APARTMENT 3

Towing cost
371,163.99
Cost of the department 3
Labor 72,000
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Indirect Manufacturing Costs 63,000

135,000.00
50
6,163.99

UNIT COST
M.O 72,000 / 19,800 = 3.63636364
CIF 63,000 / 18,480 = 3.40909091
Unit cost department 3 7.04545455
Cost of preliminary work 16.87108995
Additional cost of lost units
37,813.239188 87456555
19,800 25.79111005

VALUATION OF FINISHED UNITS AND TRANSFERRED TO

WAREHOUSE
Labor 11,000 x 3.63636364 =
40,000.00
Manufacturing Overhead Costs 11,000 x 3.40909091 =
37,500.00
Towing cost 11,000 x 16.87108995 =
185,581.99 OF COMPLETED AND UNTRANSFERRED UNITS
VALUATION
Lost
Laborunits 11,000 x 1.87456555
2,200 x 3.6363636420,620.22
=
8,000.00 283
702.21
Manufacturing Overhead Costs 2,200 x 3.40909091 =
7,500.00
Towing cost 2,200 x 16.87108995 =
37,116.40
Lost units 2,200 x 1.87456555 = 4,124.04
56.7
40.44

Valuation of units in process

ACCOUNTING SEATS MUST NEWS
Labor 6,600 x 3.63636364 =
________ 1__________ s/.
24,000.00
92 COST OF PRODUCTION 135,000.00
Indirect Manufacturing Costs 5,280 x 3.40909091 =
922.3 M.O
18,000.00
72,000.00
Towing cost 6,600 x 16.87108995 =
923.3 C.F
111,349.20
63,000.00 135,000.00
Lost units 6,600 x 1.87456555 12,372.14
79 CHARGES ATTRIBUTABLE TO COSTS AND
165
EXPENSES
721.34
For the production cost Department 3 340,442.65

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__________ 2__________
21 FINISHED PRODUCTS 219,557.35
211 Manufactured products
23 PRODUCTS IN PROCESS
231 Products in the manufacturing process
23.1 Apt. 1
24,514.00 560,000.00
23.1 Apartment 2 29
322.01
23.1 Dept. 3
165,721.34
71STORED OR UNSTORED PRODUCTION
711 Variation of finished products
340,442.65
71.11 Manufactured products
713 Variation of products in process
219,557.35
71.31 Products in process of
manufacturing

Annex 1: DETERMINATION OF SEAT 2 IN DEPARTMENT 2

RAW MATERIAL LABOR COSTS TOTAL

INDIRECT
-.- 83,898.31 53,070.18
141, 428. 49, 811. 32 33,587.79
57 2,075.91 1, 399. 55
5,892 135, 785.54 88,057.52 371, 163.
36 99
47, 320.
93

ATACOCHAL S.A

PRODUCTION REPORT IN QUANTITIES FOR THE PERIOD THAT

The month of November ends.

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DETAIL DEPT. 1 DEPT. 2 DEPT. 3
AMOUNTS TO ADJUST
Products in Process (Initial)
Production Setups 0 30,000
Received from Previous Department 25,000 22,000
Increase in Volume Added Materials
TOTAL TO ADJUST 30,000 25,000 22,000

JUSTIFIED AS FOLLOWS
Transferred to the next department 25,000 22,000 11,000
Completed and not Transferred 2, 200
Products in Process Incomplete 3,000 2,000 6,600
Lost Units in Production 2,000 1,000 2, 200
TOTAL JUSTIFIED 30,000 25,000 22,000
Equivalent Units

They are the units that are considered finished in each production process.
regarding the elements of the product cost.

Example:

EQUIVALENT PRODUCTION DEPT. 1 DEPT. 2 DEPT. 3

RAW MATERIAL 28,000 -.- -.-
LABOR 26,500 23,600 19,800
INDIRECT MANUFACTURING COSTS 26, 200 22,800 18, 480
One thousand units are in production:
Finished products 600 units.
400 units of products in process.

Conversion cost

They are the costs related to the transformation of direct materials into
finished products. The conversion costs are direct labor and
the indirect manufacturing costs.

COST ACCOUNTING FOR COPRODUCTS, PRODUCTS

SETS AND SUBPRODUCTS

JOINT COSTS
It is a procedure for controlling and recording the investment made in companies.
whose transformation represents a constant flow in manufacturing
simultaneous of two or more products, with one main product and the others
by-products or that all produced products are from the same
importance, in which case they are called joint, related or
Co-products.
They are joint costs the costs of the input factors that are necessary
to produce and prepare all joint products as a group and not
specifically one of them by itself. For example, the poultry, in which the
chickens provide: wings, legs, breast, gizzards, and offal, etc.

Companies that apply joint costs

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Those whose production is continuous through one or several processes where

main products, by-products or co-products arise.

Companies
Textile cotton, threads, fabrics, etc.
Livestock: beef, pork, mutton, hides, bones, oils, etc.
Winery wines, grapes, raisins.
Soap dish soaps, detergents, oils.

Accounting for joint products

Based on the external financial information and the amount of resources
applied in production, the accountant tries to measure the inventories. But this
quantity cannot be measured in relation to individual joint products, because
that joint costs apply only to the group as a whole; at most,
It is possible to obtain an approximation through a distribution procedure.

Costing of joint products

Understand the allocation of joint costs to joint products, which is
the determination of income and inventories is necessary. The procedures for
costing for joint products does not constitute a separate set of
cost accumulation, but they usually form part of a costing system
by processes.

The following methods are used to allocate joint costs.

1. Method based on the physical unit (produced units, is taken as the basis
the volume
2. Method based on market value (at the point of separation)
3. Method based on the Net Realizable Value

Method Based on the Physical Unit:

The simplest distribution method consists of counting the number of
units of each of the joint products, sum these figures and then
divide the total number of units by the total joint cost to obtain a
average unit cost. According to this method, all products have
the same unit cost.

The Method based on Market Value:

This method uses the selling prices of the products to measure the
relative values of the different joint products.

Method based on Net Realizable Value:

The merits of market price as a basis can be leveraged and its
defects to be avoided if the market value is defined as the net realization in
the break-even point more than as the selling price of the final product
less the necessary costs for the process after the point of splitting and
to sell it and distribute it.
Examples:

Method Based on Physical Unit

Let's assume that a sawmill costs S/. 5,000 to produce 100,000 feet.
made of wood. This wood is inspected and divided into five grades
different qualities, in the following:

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Grade Feet
First quality.......... 10,000
Industrial 20,000
No.
40,000
No.
20,000
2…………………………..
No.
10,000
3..........................
100,000

In this case, the average case of S/. 5,000 divided by 100,000 feet (100
million feet) at S/. 50 per thousand feet, will be used to measure the cost of
each of the five grades of wood.
The main flaw of this method is that it ignores the cost-value relationship.
implicit in the accounting measurements of non-monetary assets. The purpose
of costs is to create values. The use of cost to measure assets is based on the
assuming that a prudent administrator will not incur costs unless
that it is likely that the created value will exceed it. If the value of the group is
greater than the cost of its production, from any part of the joint cost
it can be stated that it is unproductive, and no joint product can
assigning costs that exceed the value of said product.
Let's suppose, for example, that the different grades of wood can
to be sold at the following prices per thousand feet:

Degree Price Average Cost

First quality $ 120 S/. 50
Industrial 90 50
No. 1 75 50
No. 2 60 50
No. 3 30 50

The use of the figure of S/.50 for all grades implies that some of the
Joint costs are more products than others, which is an impossibility.
economic. And when it is applied to lower quality wood, it is obtained
an even more absurd result: an apparent loss in production. If
If this were true, the company could avoid the loss by refraining from
produce wood number 3, as this is not possible without also sacrificing
the remaining grades, the cost figures must be incorrect.
This conclusion is also confirmed in another sense. The bonuses
that are generally to be paid for superior quality inputs
they provide clear evidence that the products do not have the same cost. For
For example, if a certain batch of wood is expected to provide a high yield.
proportion of superior qualities, the lot will obtain a higher price
higher than in cases where inferior qualities prevail. By
consequently, as the value of the product affects the cost of the input, it would seem
reasonable to reflect the differences in values in the distribution of costs

The Method Based on Market Value

Table 1
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(5) (6)
(2) 4
(1) (3) Cost Cost
Price % del
Millar of Value of total assigned
Grade for value
pies market Assigned per thousand
thousand of Total of
produced (1)X(2) (4)x of pies
pies market
$5,000 (5)/(1)
First
10 S/. 120 $1,200 16% $800 $80
Quality
Industrial 20 90 1,800 24 1,200 60
No. 1 40 75 3,000 40 2,000 50
No. 2 20 60 1,200 800 40
No. 3 10 30 300 4 200 20
S/
TOTAL 100 S/. 7,500 100 %
5,000

Figure 1 illustrates this method. The prices in column 2 are the prices.
of the market for joint products at the point of split. Based on
these prices, the market value of the combined products totals S/. 7,500,
as indicated at the bottom of column 3. The percentage of each product in this total
then it is multiplied by the total joint cost of S/. 5,000 to obtain the allocation
of costs in column 5.
Thus, first-grade wood represents 16% of the total market, and therefore it is
assign 16% of the joint costs, that is S/. 800. Dividing this amount by the
The product figure from column 1 gives a unit cost of S/. 80 per thousand.
cost per unit figures can also be determined by multiplying the
market prices of column 2 by the cost-value reason; S/ 5,000 / S/. 7,500 =
0.67
This method effectively assigns all joint costs. Furthermore, the
unit cost can never be higher than the market price, unless the
market prices are so low that they do not cover the total joint costs. But
what is paradoxical, the method does not necessarily guarantee that the assigned cost
it will always be less than the market value, nor that the cost figures will be
proportional to the value. The reason is that the price is not always a measure
effective value. Some products that do not have a market price at the point of
splits can be very valuable once processed; it is possible that the
marketing and distribution are very costly, so their value is very
inferior to its price. When any of these conditions prevail, it must
find another method.

Method based on Net Realizable Value

Let's suppose that our lumber company sells its first-class production.
class and industrial categories without prior processing, but sells all three
remaining categories only after processing each one separately. The wood
first can be sold without additional marketing costs, and the wood
Industrial use requires very little commercial effort. Production and distribution
of the products made with the remaining three categories are costly, but the
net realization is greater than that obtained with unprocessed wood if
I sold it in that condition.

Table 2
Degree (1) (2) (3) (4) (5)

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Value of Costs Cost

Price
Millar of sale of separators in total
for
pies product processing Assigned
thousand of
produced final y (4)x
pies
(1)X(2) marketing S/.5,000
First
10 S/. 120 $1,200 ---- $1,200
Quality
Industrial 20 90 1,800 S/. 40 1,760
No. 1 40 75 3,800 600 3,200
No. 2 20 60 1,600 320 1,280
No. 3 10 30 750 190 560
$
TOTAL 100 $9,150 S/.1,150
8,000

The necessary data appears in Table 2. The selling prices of the

Finished products are indicated in column 2. Column 4 shows the costs.
processing and marketing specials of the different products and the
Column 5 indicates the net realization obtained from each one.
Cost assignments can now be based on these realization figures.
net, as in Table 3. The percentage corresponding to each product in the
net total realization of the five combined products, extracted from the column
3, the total joint cost of S/. 5,000 is applied to determine the amount that
must be assigned to each one, indicated in column 4. These amounts are divided
then for the production of the different joint products to obtain the figures
of unit cost of column 5. Thus, first-class wood accounts for 15% of the
total cost, or S/. 750. That is, S/. 75 per thousand feet.

Table 3
(3) (4) (5)
(2)
(1) Valor of Costs Cost
Price
Millar of sale of separators of total
Degree for
pies product processing Assigned
thousand of
produced final y (4)x
pies
(1)X(2) marketing S/.5,000
First
10 $120 S/. 1,200 ---- $1,200
Quality
Industrial 20 90 1,800 S/. 40 1,760
No. 1 40 75 3,800 600 3,200
No. 2 20 60 1,600 320 1,280
No. 3 10 30 750 190 560
S/.
TOTAL 100 S/. 9,150 $1,150
8,000

CONCLUSION
Applying any of the methods, the total cost and the production cost are the
same amounts, the difference between the methods is the way they are assigned
costs to individual products.

SUBPRODUCTS

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A byproduct is a joint product whose market value is a

indeterminate proportion of the total market value of all products
sets.
When several products emerge from the same production process but
some or several of them have the category of main products, among
so much that others and others are classified as by-products, the latter
they are called by-products. The category of the various products is
It gives a relative value and it remains something arbitrary and subjective to determine.
In each case, which products should be treated as by-products? Is this one?
a matter of judgment that each company must decide for itself. the by-products
they differ from waste in that the former have a relatively higher
value and contribute significantly to the company's profits and
therefore there is a direct interest in its production.
By-products are products of joint processes that have value.
less important sale compared to the value of the products
sets or main ones; some examples are the leftovers in the looms of
fabrics and carpets; food products derived from cotton and cotton pods.

Costing of byproducts
When within a production process two types of products are generated and
we differentiate these as a main product and another as a product
secondary, these are referred to as by-products.
When costs are assigned to by-products, the allocation methods of
Costs are different for employees for joint products and for this reason
consider the following categories to assign these costs.
Category 1: the costs of by-products are recognized when they are sold.
Category 2: the costs of by-products are recognized when they are produced.

Practical case
The industrial company "xxx" S.A. presents the following information regarding the
main product A and by-product B, and in turn is transferred to department 2.

Total production costs

Department 1: $34,200
Department 2: (additional investment byproduct)
MPC - 70
MOD - 35
CIF - 15
S/.120

DETAIL MAIN PRODUCT

A
Units produced 20000 2900
Units sold 16000 2550
Final inventory 4000 350
Unit cost of each main product 'A' = 34200 = s/. 1.71
20000
Estimated administrative and sales expenses
Main product s/. 3300
By-product s/. 550

Actual sales revenue

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Main product (16000 units x S/. 2.60 each) s/. 41600

By-product (2550 units x S/. 0.98 each) $2499
Expected gross utility in the sale of by-products 50%

It is requested:

1. Determine the costs of the by-products applying category 1.

2. Determine the costs of the by-products applying category 2.

SOLUTION

Applying category 1
Category 1: the costs of by-products are recognized when they are sold.
In this category, production costs are not assigned to by-products, because the
by-products are not a priority, that is why the net income obtained, is
it presents in the income statement, as other income, it should be noted
that this method does not assign inventory costs to by-products.
Net income is equal to the revenue from the sale of by-products minus the
additional processing costs incurred plus the expenses of
administration and sales of the by-products.

XXX S.A
Statement of Income and Losses
Sales of main product 'A' s/. 41600
Cost of sales
Production cost s/. 34200
Final inventory (4000 x s/. 1.71) s/. (6840) (27360)
14240
Other income
Sales
Net income from by-products 2499 - (120 + 550)
1829
Gross profit 16069
Administrative and sales expenses main product ( 3300)
Net income s/.
12769

Applying category 2
Category 2: the costs of by-products are recognized when they are produced.
In this category, production costs are assigned to by-products.
for costing purposes, it should be noted that this category applies when the
Net revenues from by-products are significant amounts.
In this category, it is considered that the expected value of the by-products is
they are shown in the income statement as a deduction from the
total costs of the production of the main product produced, that is
the unit cost of producing the main product is reduced because a
part is assigned as cost to the by-products.

Within this category, to assign production costs to the

we consider 2 methods for by-products:

Net realizable value method

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This method consists of the following:

When the total production costs of the main product are determined,
From this amount, the net realizable value of the total by-products is deducted.

"XXX" S.A.
STATEMENT OF GAINS AND LOSSES
Sales of main product 'A' s/.
41600
Cost of sales of the main product:
Total production cost S/. 34200
Net value of the produced by-product (s/. 2842* - (s/. 120 + s/. 550)
( 2172)
Net production cost s/. 32028
Less final inventory main products 4000 x 1601 **
( 6404) (25624)
Gross Profit
15976
Administrative and sales expenses of the main product
( 3300)
Utility 12676

Produced units by-products 2900 x s/ 0.98 per unit = s/2842

Net realizable value.
Unit cost = s/. 32028 / 20000 = s/. 1.601

2. Reversal cost method

In this method, by-products are costed as if they were a product.
main, and if there were a final balance of by-products this cost is presented in the
balance sheet, generally this method is applied when the value of the
By-products are significant amounts.

Sales
Main product $41,600
s/.
Sub products 2842
44442
Less: Cost of sales of the main product and by-products
Production cost
Main product (Annex 1) $32,899
By-products (Annex 2) 1421 s/. 34320
Less: Final Inventory
Main product (4000 x 32899 / 20000 = 1.645) 6580
By-products (350 x (1421 / 2900 = 0.49) 171.50
6751.50 27568.50
GROSS PROFIT $
16873.50
Administrative and Sales Expenses
Main Product s/. 3300
Sub products 550
(3850)
USEFULNESS
13023.50
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In the case, the final balance of by-products presented in the balance sheet
general is s/. 171.50

Annex 1: Main product production cost

Total production costs department 1 s/.

34200
Less: Joint costs applicable to the by-products produced:
Estimated utility from the sale of by-products (total production)
Sales 2900 units at S/. 0.98 $2842
Less: Additional processing cost
Department 2 $120
Expected gross utility from the sale of by-products
50% x s/. 2842 1421 1541
(1301)
Cost of production Main Product
32899

Annex 2: Sub-products production cost

Joint costs applicable to the by-products (annex 1) $1301

Additional processing cost after the separation point
Department 2 120
Production cost of by-products s/. 1421

PRACTICAL CASE

Let's suppose that a process provides three products: X, Y, Z. Product Z must

considered a byproduct, products X, Y are main products. The cost
the total processing of a batch of one thousand liters of products is S/. 934. These are the
performance and market value data.

PRODUCTS YIELDS VALUE OF THE VALUE TOTAL

liters MARKET BY THE MARKET
LITERS
X……………………… 200 S/. 1.90 $380
Y……………………… 500 1.50 750
Z.......................... 300 0.10 30
TOTAL............... 1000 S/. 1160

The first step is to challenge the market value of the cost by-product.
total set:
Joint cost
s/. 934
Less: Value of
By-product (30)
Cost assigned to the main product .............................................. s/. 904

Then, the rest of the joint cost is distributed among the main products. Let's see
a distribution of the relative market values.

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PERCENTAGE COST COST

PRODUCTS DEL TOTAL VALUE ASSIGNED
TOTAL OF THE ASSIGNED BY LITERS
MARKET
X……………………… 33.6 S/. 304 $1.52
Y... 66.4 600 1.20
TOTAL…………….. $100.00 S/. 904

In this case, the joint cost reaches s/. 934, but only s/. 904 of this total is
assign to the main products. The remaining S/. 30 goes to product Z, which
So much does not indicate gain or loss.

CO-PRODUCTS
When several other products of the same or similar kind emanate from the same product.
importance given the value of each of them, these products receive the
name of Coproducts. A process can yield several at the same time.
Coproducts and by-products. Coproducts are the main products and
the byproducts the secondary.
Examples of by-products can be found in the refining of crude oil.
whose derivatives (oils, kerosene, gasoline, etc.) are all in high demand
and contribute to the utility of the company to a similar degree.

PRACTICAL CASE
Let's suppose there are four related products X, Y, Z, W. The cost of the
production before the separation of these related products is s/. 35000 and the
the production cost is s/ 80000; that is A= s/ 30000, B= s/. 25000; C= s/ 15000 and
D = s / 10000.
It is requested:

Allocate costs based on market price.

SOLUTION:
PRICE OF THE PERCENTAGE OF PART OF THE COST
OF THE PROCESS
PRODUCTS PRODUCTION THE PRODUCTION
PRINCIPAL UNTIL
TOTAL THE SEPARATION
X……………………… $30,000 37.50% $13,125.00
Y……………………… 25000 31.25% 10937.50
Z.......................... 15000 18.75% 6562.50
W...…………………… 10000 12.50% 4375.00
S/. 80000 100.00 % S/. 35000.00

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