cost allocation: joint products and byproducts chapter 16

Cost Allocation: Joint Productsand Byproducts

Cost Allocation: Joint Productsand Byproducts

Chapter 16

Learning Objective 1Learning Objective 1

Identify the splitoff point(s)

in a joint-cost situation.

A Better PictureA Better PictureA Better PictureA Better Picture

Joint-Cost BasicsJoint-Cost Basics

Joint productsJoint costs

Separable costs

Splitoff pointByproduct

Joint ProcessesJoint Processes

JOINT PROCESS

COMMON IMPUT

SPLIT-OFF POINT

Point at which joint-products

appear

FINAL PRODUCTOne that is ready for

sale without further

processing

Simultaneouslyconverts a commoninput into several

outcomes

INTERMEDIATE PRODUCTA product that requires further processing before it is salable to the public

JOINT COSTSCosts to operate joint processes

INTERMEDIATE

PRODUCT A

INTERMEDIATE

PRODUCT B

FINALPRODUCT A

FINALPRODUCT B


Raw milk

Cream Liquid Skim


Coal

Gas Benzyl Tar


Distinguish joint products

from byproducts.

Joint Products and ByproductsJoint Products and Byproducts

Sales Value

High Low

Main ProductsJoint Products Byproducts


Explain why joint costs should be

allocated to individual products.

Why Allocate Joint Costs?Why Allocate Joint Costs?

OrganizationsAllocate Joint Costsfor Many Reasons

MeasuringPerformance

Estimating Casualty Losses

Determining and Responding

to RegulatoryRates

Specifying and Resolving

Contractual Interests andObligations

Valuing Inventories

for Financialand Tax

Reporting

Valuing Costof Goods Soldfor Financial

and Tax Reporting


Allocate joint costs using

four different methods.

Approaches to AllocatingJoint Costs

Approaches to AllocatingJoint Costs

Approach 2:Physical measure

Approach 1:Market based

Two basic ways to allocatejoint costs to products are:

Approach 1: Market-based DataApproach 1: Market-based Data

Sales value at splitoff method

Estimated net realizable value (NRV) method

Constant gross-margin percentage NRV method

Allocating Joint Costs ExampleAllocating Joint Costs Example

10,000 units of A at aselling price of $10 = $100,000

10,500 units of B at aselling price of $30 = $315,000

11,500 units of C at aselling price of $20 = $230,00

Joint processingcost is $200,000

Splitoff point

Sales Value at SplitoffMethod Example


A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ 645 31,008 315 ÷ 645 97,674230 ÷ 645 71,318

200,000Gross margin $ 68,992 $217,326 $158,682 $445,000



Assume all of the units producedof B and C were sold.

2,500 units of A (25%)remain in inventory.

What is the gross marginpercentage of each product?



Product A Revenues: 7,500 units × $10.00 $75,000Cost of goods sold:

Joint product costs $31,008Less ending inventory

$31,008 × 25% 7,752 23,256Gross margin $51,744



Product A:($75,000 – $ 23,256) ÷ $75,000 = 69%

Product B:($315,000 – $97,674) ÷ $315,000 = 69%

Product C:($230,000 – $71,318) ÷ $230,000 = 69%

Estimated Net Realizable Value(NRV) Method Example


Assume that Oklahoma Company can processproducts A, B, and, C further into A1, B1, and C1.

The new sales values after further processing are:

A1:10,000 × $12.00

= $120,000

B1:10,500 × $33.00

= $346,500

C1:11,500 × $21.00

= $241,500



Additional processing (separable) costs are as follows:

A1: $35,000 B1: $46,500 C1: $51,500

What is the estimated net realizable value of eachproduct at the splitoff point?



Product A1: $120,000 – $35,000 = $85,000

Product B1: $346,500 – $46,500 = $300,000

Product C1: $241,500 – $51,500 = $190,000

How much of the joint cost is allocatedto each product?



To A1:85 ÷ 575 × $200,000 = $29,565

To B1:300 ÷ 575 × $200,000 = $104,348

To C1:190 ÷ 575 × $200,000 = $66,087



Allocated Separable Inventory joint costs costs costs

A1 $ 29,565 $ 35,000 $ 64,565B1 104,348 46,500 150,848C1 66,087 51,500 117,587Total $200,000 $133,000 $333,000

Constant Gross-MarginPercentage NRV MethodConstant Gross-Margin

Percentage NRV Method

This method entails three steps:

Step 1:Compute the overall gross-margin percentage.

Step 2:Use the overall gross-margin percentage

and deduct the gross margin from thefinal sales values to obtain the totalcosts that each product should bear.



Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.



What is the expected final sales value of totalproduction during the accounting period?

Product A1: $120,000Product B1: 346,500Product C1: 241,500Total $708,000



Step 1:Compute the overall gross-margin percentage.

Expected final sales value $708,000Deduct joint and separable costs 333,000Gross margin $375,000

Gross margin percentage:$375,000 ÷ $708,000 = 52.966%



Step 2:Deduct the gross margin.

Sales Gross Cost of Value Margin Goods sold

Product A1: $120,000 $ 63,559 $ 56,441Product B1: 346,500 183,527 162,973Product C1: 241,500 127,913 113,587Total $708,000 $375,000 $333,000($1 rounding)



Step 3:Deduct separable costs.

Cost of Separable Joint costs goods sold costs allocated

Product A1: $ 56,441 $ 35,000 $ 21,441Product B1: 162,973 46,500 116,473Product C1: 113,587 51,500 62,087Total $333,000 $133,000 $200,000

Approach 2: PhysicalMeasure Method Example

Approach 2: PhysicalMeasure Method Example

$200,000 joint cost

20,000pounds A

48,000pounds B

12,000pounds C

Product A$50,000

Product B$120,000

Product C$30,000


Explain why the sales value at

splitoff method is preferred

when allocating joint costs.

Choosing a MethodChoosing a Method

Why is the sales value at splitoff method widely used?

It measures the valueof the joint product

immediately.

It does not anticipatesubsequent management

decisions.

It uses ameaningful basis.

It is simple.

Choosing a MethodChoosing a Method

The purpose of the joint-cost allocation isimportant in choosing the allocation method.

The physical-measure method is a moreappropriate method to use in rate regulation.

Avoiding Joint Cost AllocationAvoiding Joint Cost Allocation

Some companies refrain from allocating jointcosts and instead carry their inventories

at estimated net realizable value.


Explain why joint costs

are irrelevant in a

sell-or-process-further decision.

Sell or Process FurtherSell or Process Further

Joint costs ofprocessing tosplit-off point

$$$$

Split-offpoint

Jointproducts

Raw materials

Irrelevance of Joint Costsfor Decision Making


Assume that products A, B, and C can be soldat the splitoff point or processed further

into A1, B1, and C1.

Selling Selling Additional Units price price costs10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $46,50011,500 C: $20 C1: $21 $51,500



Should A, B, or C be sold at the splitoffpoint or processed further?

Product A: Incremental revenue $20,000– Incremental cost $35,000 = ($15,000)

Product B: Incremental revenue $31,500– Incremental cost $46,500 = ($15,000)

Product C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)

Sell or Process Further ExampleSell or Process Further ExampleNW Sawmill cuts logs from which unfinished lumber and scrap (sawdust, chips, bark) are the immediate joint products. The unfinished lumber can be sold “as is” or processed further into finished lumber. The scrap can also be sold “as is” to gardening supply wholesalers or processed further into presto-logs. Data concerning these joint products: Per Log Lumber Scraps Sales value at split-off point $140 $40 Sales value after processing 270 50 Allocated joint product costs 176 24 Cost of further processing 50 20

NW Sawmill cuts logs from which unfinished lumber and scrap (sawdust, chips, bark) are the immediate joint products. The unfinished lumber can be sold “as is” or processed further into finished lumber. The scrap can also be sold “as is” to gardening supply wholesalers or processed further into presto-logs. Data concerning these joint products: Per Log Lumber Scraps Sales value at split-off point $140 $40 Sales value after processing 270 50 Allocated joint product costs 176 24 Cost of further processing 50 20

Per Log Lumber Scraps Sales value after processing $270 $50 Sales value at split-off point 140 40 Incremental Revenue $130 $10 Cost of further processing 50 20 Profit (loss) from further processing

$80 ($10)

Per Log Lumber Scraps Sales value after processing $270 $50 Sales value at split-off point 140 40 Incremental Revenue $130 $10 Cost of further processing 50 20 Profit (loss) from further processing

$80 ($10)


Account for byproducts

using two different methods.

B: Consider by-product

NRV as other revenue

A: Deduct by-product NRV from costsof main products

By-products are minor products and alternative methods are not likely to have a material effect on the financial statements for internal or external reporting.

Whether to sell the by-product at split-off or process it further usually depends on the highest NPR

obtainable, just as for a main product.

Two standardmethods

By-Product Accounting: the BasicsBy-Product Accounting: the Basics

Accounting for ByproductsAccounting for Byproducts

Method A:The production method recognizes byproducts

at the time their production is completed.

Method B:The sale method delays recognition ofbyproducts until the time of their sale.

Accounting for ByproductsExample


Main Products Byproducts (Yards) (Yards)

Production 1,000 400Sales 800 300Ending inventory 200 100Sales price $13/yard $1.00/yardNo beginning finished goods inventory



Joint production costs for joint(main) products and byproducts:

Material $2,000Manufacturing labor 3,000Manufacturing overhead 4,000Total production cost $9,000

Accounting for ByproductsMethod A


Method A: The production method

What is the value of ending inventoryof joint (main) products?

$9,000 total production cost– $400 net realizable value of the byproduct

= $8,600 net production cost for the joint products



200 ÷ 1,000 × $8,600 = $1,720 is the valueassigned to the 200 yards in ending inventory.

What is the cost of goods sold?

Joint production costs $9,000Less byproduct revenue 400Less main product inventory 1,720Cost of goods sold $6,880



Income Statement (Method A)

Revenues: (800 yards × $13) $10,400Cost of goods sold 6,880Gross margin $ 3,520

What is the gross margin percentage?

$3,520 ÷ $10,400 = 33.85%



What are the inventoriable costs?

Main product: 200 ÷ 1,000 × $8,600 = $1,720

Byproduct: 100 × $1.00 = $100

Journal Entries Method AJournal Entries Method A

Work in Process 2,000Accounts Payable 2,000

To record direct materials purchased and usedin production

Work in Process 7,000Various Accounts 7,000

To record conversion costs in the joint process


Byproduct Inventory 400Finished Goods 8,600

Work in Process 9,000To record cost of goods completed

Cost of Goods Sold 6,880Finished Goods 6,880

To record the cost of the main product sold


Cash or Accounts Receivable 10,400Revenues 10,400

To record the sale of the main productCash or Accounts Receivable 300 Byproduct Inventory 300To record the sale of the byproduct

Accounting for ByproductsMethod B


Method B: The sale method

What is the value of ending inventory ofjoint (main) products?

200 ÷ 1,000 × $9,000 = $1,800

No value is assigned to the 400 yards ofbyproducts at the time of production.The $300 resulting from the sale ofbyproducts is reported as revenues.



Income Statement (Method B)

Revenues: Main product (800 × $13) $10,400Byproducts sold 300Total revenues $10,700Cost of goods sold:

Joint production costs 9,000Less main product inventory 1,800 $ 7,200

Gross margin $ 3,200



What is the gross margin percentage?

$3,200 ÷ $10,700 = 29.91%

What are the inventoriable costs?

Main product: 200 ÷ 1,000 × $9,000 = $1,800By-product: -0-

Journal Entries Method BJournal Entries Method B

Work in Process 2,000Accounts Payable 2,000

To record direct materials purchased and usedin production

Work in Process 7,000Various Accounts 7,000

To record conversion costs in the joint process


Finished Goods 9,000Work in Process 9,000

To record cost of goods completed

Cost of Goods Sold 7,200Finished Goods 7,200

To record the cost of the main product sold


Cash or Accounts Receivable 10,400Revenues 10,400

To record the sale of the main product

Cash or Accounts Receivable 300Revenues 300

To record the sale of the byproduct

End of Chapter 16End of Chapter 16

cost allocation: joint products and byproducts chapter 16

Documents

joint product costs

joint costs approach

joint processing cost

public joint costs costs

allocation of joint

jointcost situation

allocating joint costs

splitoff point slide