How to approach it
- Allocate shared overhead between departments on the stated driver (e.g. labour hours = labour cost ÷ rate).
- Department 1 joint cost = materials + labour + overhead − by-product proceeds.
- NRV at split-off for each joint product; the one processed further uses final value less further costs.
- Allocate joint cost, then build department 2 cost: transferred-in joint product, other inputs, labour, overhead.
- Cost per kg of each final product × closing kg.
Key rules to apply
- By-product net realisable value is usually credited to the joint process.
- Products used inside department 2 are transferred at their allocated joint cost per kg.
- Normal losses have no cost of their own; they raise the cost per good kg.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Allocating joint cost on quantities instead of NRV (examiners' point).
- Valuing the final product at the joint cost of its input only, ignoring department 2 costs.
- Allocating overhead on wage rates instead of hours worked.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q7 without copying it.
Original practice question
Joint products with a by-product and further processing
Department 1 processes inputs costing Rs 6,000,000 with conversion costs of Rs 2,000,000. Output: J 40,000 kg (sells at Rs 150/kg at split-off), K 45,000 kg (no market; processed further), by-product B 10,000 kg (sold for Rs 300,000), and 5,000 kg normal loss. Department 2 turns all of K into 45,000 kg of L at a further Rs 1,800,000; L sells at Rs 200/kg. Closing inventories: J 5,000 kg, L 9,000 kg.
Required: Value closing inventories of J and L.
Worked solution
| Working | Rs |
|---|---|
| Net joint cost: 8,000,000 − 300,000 | 7,700,000 |
| NRV of J: 40,000 × 150 | 6,000,000 |
| NRV of K: 45,000 × 200 − 1,800,000 | 7,200,000 |
| J share: 7.7m × 6.0 ÷ 13.2 | 3,500,000 (Rs 87.50/kg) |
| K share: 7.7m × 7.2 ÷ 13.2 | 4,200,000 |
| L cost: 4,200,000 + 1,800,000 | 6,000,000 (Rs 133.33/kg) |
Answer: J: 5,000 × 87.50 = Rs 437,500. L: 9,000 × 133.33 = Rs 1,200,000.