Transcript CHAPTER 16

CHAPTER 16
Cost Allocation:
Joint Products and Byproducts
Joint Cost Terminology
 Joint Costs – costs of a single production process
that yields multiple products simultaneously
 Splitoff Point – the place in a joint production process
where two or more products become separately
identifiable
 Separable Costs – all costs incurred beyond the
splitoff point that are assignable to each of the nowidentifiable specific products
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Joint Cost Terminology

Categories of Joint Process Outputs:
1.
2.

Outputs with a positive sales value
Outputs with a zero sales value
Product – any output with a positive sales
value, or an output that enables a firm to
avoid incurring costs

Value can be high or low
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Joint Cost Terminology
 Main Product – output of a joint production
process that yields one product with a high
sales value compared to the sales values of
the other outputs
 Joint Products – outputs of a joint production
process that yields two or more products with
a high sales value compared to the sales
values of any other outputs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Joint Cost Terminology
 Byproducts – outputs of a joint production
process that have low sales values compare
to the sales values of the other outputs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Joint Process Flowchart
Steam:
An Output with Zero Sales Value
Joint Product #1
Single Production
Process
Joint Product #2
Byproduct
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Reasons for Allocating Joint Costs
 Required for GAAP and taxation purposes
 Cost values may be used for evaluation
purposes
 Cost-based contracting
 Insurance settlements
 Required by regulators
 Litigation
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Joint Cost Allocation Methods
Physical Measures – allocate using tangible
attributes of the products, such as pounds,
gallons, barrels, etc.
 Market-Based – allocate using marketderived data (dollars):

1.
2.
3.
Sales value at splitoff
Net Realizable Value (NRV)
Constant Gross-Margin percentage NRV
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Physical-Measure Method
 Allocates joint costs to joint products on the
basis of the relative weight, volume, or other
physical measure at the splitoff point of total
production of the products
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Physical-Measure Example
 Consider the following example of two products
arising out of one joint process costing $500
 Assumes 1 gallon of Cream is equal to 1 gallon of
Skim-milk
Joint
Product %
Joint
Costs
Gallons
o+D17f Total VolumeCosts Allocated
Cream
25
25%
$ 500 $ 125
Skim-milk
75
75%
500
375
Total
100
100%
$ 500
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Sales Value at Splitoff Method
 Uses the sales value of the entire production
of the accounting period to calculate
allocation percentage
 Ignores inventories
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Sales Value at Splitoff Example
Cream
Final Sales Value of Production
Cream: 25 gals@ $50/gal
Skim-milk: 75 gals@ $10/gal
Total
Total
$ 1,300
$
800
$ 2,100
Allocation Based on % of
Total Sales (rounded)
Joint Costs ($500) Allocated:
Joint Cost X Allocation %
Skim-milk
61.9%
$
310 $
38.1%
190
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Net Realizable Value Method
 Allocates joint costs to joint products on the
basis of relative NRV of total production of the
joint products
 NRV = Final Sales Value – Separable Costs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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NRV Example
Cream Skim-milk
Final Sales Value of Production
Cream: 25 gals@ $50/gal
Skim-milk: 75 gals@ $10/gal
Total
Total
$ 1,300
$
800
$ 2,100
Less: Separable Costs
900
200
1,100
NRV
400
600
1,000
NRV Weighting:
Product NRV ÷ Total NRV
40%
60%
Joint Costs
500
500
$ 200 $
300
Joint Costs Allocated
NRV Weighting X Joint Costs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Constant Gross Margin NRV Method
 Allocates joint costs to joint products in a way
that the overall gross-margin percentage is
identical for the individual products
 Joint Costs are calculated as a residual
amount
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Constant Gross Margin NRV Method
Example
Cream Skim-milk
Final Sales Value of Production
Cream: 25 gals@ $50/gal
Skim-milk: 75 gals@ $10/gal
Total
Total
$ 1,300
$ 800
$ 2,100
Less: Separable Costs
1,100
NRV
1,000
Joint Costs
500
Gross Profit
$
Gross Profit % of Sales Value (rounded)
23.8%
Cream Skim-milk
Sales Values
500
$ 1,300 $
Total
800 $ 2,100
Less Gross Margin @ 23.8%(rounded)
310
190
500
Total Product Costs
990
610
1600
Less Separable Costs
900
200
1100
90 $
410 $
500
Joint Costs Allocated
$
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Method Selection
 If selling price at splitoff is available, use the Sales
Value at Splitoff Method
 If selling price at splitoff is not available, use the NRV
Method
 If simplicity is the primary consideration, PhysicalMeasures Method or the Constant Gross-Margin
Method could be used
 Despite this, some firms choose not to allocate joint
costs at all
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Sell-or-Process Further Decisions
 In Sell-or-Process Further decisions, joint
costs are irrelevant. Joint products have
been produced, and a prospective decision
must be made: to sell immediately or process
further and sell later
 Joint Costs are sunk
 Separable Costs need to be evaluated for
relevance individually
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Sell-or-Process Further Flowchart
Final
Product
#1
Joint Product #1
Further Processing Dept 1
Single Production
Process
Final
Product
#2
Joint Product #2
Further Processing Dept 2
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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Byproducts
 Two methods for accounting for byproducts
 Production Method – recognizes byproduct
inventory as it is created, and sales and costs
at the time of sale
 Sales Method – recognizes no byproduct
inventory, and recognizes only sales at the
time of sales: byproduct costs are not tracked
separately
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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