Question

Syarikat Sabah prepares lumber for companies who manufacture furniture.

(a) The main product is finished lumber with a byproduct of wood shavings. The byproduct

is sold to plywood manufacturers. For July, the manufacturing process incurred

RM332,000 in total costs. 80,000 board feet of lumber were produced and sold along

with 6,800 kg of shavings. The finished lumber sold for RM6.00 per board foot and the

shavings sold for RM0.60 a kg. There were no beginning or ending inventories.

Required:

Prepare two statements of financial position as at 31 December 2019 showing the

byproduct as a cost reduction during production, and as a revenue item when sold each.

[10 marks]

(b) Distinguish and briefly discuss the merits [or demerits] between the two principal

methods of accounting for byproducts: the production byproduct method and the sale

byproduct method.

[10 marks]

(c) Identify the revenue or expense amounts necessary to make a sell-or-process-further

decision and the reasons behind them.

[5 marks]

(d) Identify the four methods of allocating joint costs to individual products and the most

preferred method among accountants.

[5 marks]

for question (a) guide step by step

Answer 1

Solution

a)

Methods of accounting of Byproducts:

There are mainly two methods:

1.The production method of accounting: The value of byproduct s recognized at the time of production.

2.Sales method of accounting: The value of byproduct will be taken into consideration at the time of sale.

Statement of financial Position:

Statement of financial position as at 31, December 2019 of Sayrikat Sabah

Particulars	Cost reduction when Produced	Revenue when sold
Sales
Board Feet (80,000*6)	4,80,000	4,80,000
Shavings (0.6*6800)		4080
Total Sales-(A)	4,80,000	4,84,080
Cost of manufacturing
Raw material	3,32,000	3,32,000
Shavings (0.6*6800)	-4080	0
Total Cost of Manufacturing-(B)	3,27,920	3,32,000
Gross Margin-(C=A-B)	1,52,080	1,52,080

b)

Differentiation between two methods:

	Production byproduct method	Sale byproduct method
Recognition	At the time of production	At the time of sale
Offsetting	NRV will be offset against the cost of production	NRV will be included in total sales
Inventory	It is included as part of the inventory	Not included as part of the inventory
Profit	Profit on sale is zero	Profit is equal to sales value

c)

In cost accounting, a sell or process further decision asks whether to sell a product “as is” at the splitoff point, or to process further. The splitoff point is the point when the costs of two or more products can be separately identified. There are two criteria you use to justify further processing (and more costs):

If the product has a sales value at splitoff, maybe it’s better to sell it.

If the incremental revenue from further processing is greater than the incremental cost of further processing, maybe it’s better to continue processing.

Some products simply don’t have a sales value at splitoff. The product’s production isn’t far enough along for it to be sold yet. No customers (or not enough customers) would consider buying the product at splitoff. Think about selling blue jeans without zippers or belt loops; it’s probably not a good idea.

d)

Methods of allocating Joint Costs to individual products

1. When byproduct is sold without further processing:

a) The byproduct is of small value: In this case, it will be treated as a normal loss or directly credited to the Costing Profit and loss account.

b) The byproduct is of considerable value: The net gain/loss is transferred to the Costing Profit and Loss Account

2. When byproduct is consumed: Sometimes byproduct can be used as a raw material. in that case, the cost of former raw material will be credited to the cost of production of the main product.

3. When byproduct requires further processing: At that time sales-Further processing Cost will be credited to the production cost of the main product.