Recognition of Gross Revenue Method–By Products Costing

Recognition of Gross Revenue Method–By Products Costing:

This method is typical non-cost procedure in which the final inventory cost of the main product is overstated to the extent that some of the cost belongs to the by product.

However this shortcoming is somewhat removed in procedure 4 (by product revenue deducted from the production cost), although a sales value rather than a cost is deducted from the production cost of the main product.

  1. By-Product Revenue as Other Income
  2. By-Product Revenue as Additional Sales Revenue
  3. By Product Revenue as a Deduction from the Cost of Goods Sold
  4. By Product Revenue deducted from Production Cost

1.By-Product Revenue as Other Income:

To explain this procedure the following example is presented:

Example:

Sales (Main Product, 10,000 units @ $2) $20,000
Cost of goods sold:
Beginning inventory (1,000 units @ $1.5) $1,500
Total production cost (11,000 units @ $1.5) $16,500
——-
Cost of goods avail able for sale $18,000
Ending inventory (2,000 units @ $1.5) $3,000
——-
$15,000
——–
Gross profit 5,000
Marketing and administrative expenses $2,000
——–
Operating income $3,000
Other income: Revenue from sale of by-product $1,500
——–
Income before income tax $4,500
=====

2. By-Product Revenue as Additional Sales Revenue:

In this case, the income statement above would show the $1,500 revenue from sales of the by product as an addition to sales of the main product. As a result, total sales revenue would be $21,500, and gross profit and operating income would increase accordingly. All other figures would remain the same.

3. By Product Revenue as a Deduction from the Cost of Goods Sold:

In this case, $1,500 revenue from the by product would be deducted from the $15,000 cost of goods sold figure, thereby reducing the cost and increasing the gross profit and operating income. The income before income tax remains at $4,500.

4. By Product Revenue deducted from Production Cost:

In this case, the $1,500 revenue from by-product sales is deducted from the $16,500 total production cost, giving a new production cost of $15,000. This revised cost results in a new average unit cost of $1.3625 for the main product. The final inventory will consequently be $2,725 instead of $3,000. The income statement would appear as follows:

Sales (Main Product, 10,000 units @ $2)

$20,000

Cost of goods sold:
Beginning inventory (1,000 units @ $1.35) $1,350
Total production cost (11,000 units @ $1.5) $16,500
Revenue from sale of by product $1,500
———
Net production cost $15,000
Cost of goods available for sale 12000units @1.3625 average cost
$16350
Ending inventory (2,000 units @ $1.3625) $2,725
——-
$13,625
———-
Gross profit $6,375
Marketing and administrative expenses $2,000
———-
Operating income $4,375
======

The preceding method required no complicated journal entries. The revenue received from by product sales is debited to cash or accounts receivable. In the first three cases, income from sales of by product is credited; in the fourth case, the production cost of the main product is credited.

You may also be interested in other articles from “by products and joint products” chapter

  1. Difficulties in costing by products and joint products
  2. Joint Products and Joint Product Costs
  3. Characteristics of Joint Products and Cost
  4. By Products
  5. Recognition of Gross Revenue
  6. Recognition of Net Revenue
  7. Replacement cost method
  8. Market value method or reversal cost method
  9. The market or sales value method, based on the relative market values of the individual products.
  10. The quantitative or physical unit method, based on some physical measurement unit such as weight, linear measure, or volume.
  11. The average unit cost method.
  12. The weighted average method, based on a predetermined standard or index of production.

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