# Exercise-2: By-product costing and journal entries

Robert company produces a product known as chemical X. In the production of chemical X, a by-product results which has a market value of \$0.30 per litre at split-off point. The company is able to sell the by-product as is for \$0.30 per litre or process it further and sell for \$0.70 per litre.

If the company opts for additional processing of by product, the following materials, labor and factory overhead costs are required per liter of by-product:

• Materials: \$0.12
• Labor: \$0.20

During the month of March 2019, 190,000 liters of chemical X and 30,000 liters of by-product were produced. The production cost of chemical X at the the point of separation were as follows:

• Materials: \$250,000
• Labor: \$200,000

Required: Make journal entries for by-product when:

1. the by-product is stored without allocating it any cost and later sold to customers at \$0.30 per liter without additional processing and without incurring any cost.
2. the by-product is stored and costed at \$0.30 per liter, reducing the cost of chemical X (i.e., main product) by the amount assigned to it.
3. the by-product is processed further and stored without allocating it any cost prior to separation.
4. the by-product is processed further and stored. The cost prior to separation is allocated to it using the market value method at split-off. The cost of the chemical X (i.e., main product) is reduced by the amount allocated to the by-product. The market value of chemical X is \$3.

## Solution

*Allocation of cost prior to separation (joint cost) using market value method at split-off point:

Total cost prior to separation:
\$250,000 + \$200,000 + \$71,100
= \$521,100

**The cost prior to separation (joint cost) is 90% of total market value at split-off point as computed below:

\$521,000/\$579,000
= 0.9 or 90%

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