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- 1. Prepared By: Muhammad Usman Cost Allocation: Joint product and By-Product Costing
- 2. • This chapter describes the joint production processes and their outputs— joint products and by-products. Several methods are developed to allocate joint costs to joint products. By-products are not usually allocated any of the joint costs. Instead, no cost methods are frequently used to account for by- products. CHAPTER SUMMARY
- 3. JOINT PRODUCTS: When two are more products are produced from the same basic raw material and are of almost equivalent value, it is known as joint product. EXAMPLE: In refining of crude oil, both petrol and diesel is obtained. By PRODUCTS: By product are incidental products resulting from the processing of another product. EXAMPLE: In processing of sugarcane both sugar and molasses is obtained JOINT PRODUCTS AND BY-PRODUCTS SalesValue Low Main Products Joint Products High By Products
- 4. JOINT PRODUCTS AND BY-PRODUCTS • A by-product has a relatively low sales value compared with the sales value of a joint or main product. Revenue from byproducts generally reduces the costs of the joint products. • Some outputs of the joint production process have zero sales value. No journal entries are made to record the processing of such outputs with zero sales value.
- 5. Joint costing When by a process more than one product is produced, the material and conversion cost incurred prior to split of stage is know as joint cost. • SPLIT OFF POINT Split-off point is the juncture in the process when separate identifiable products emerge. • SEPARABLE COST Separable costs are costs incurred beyond the split-off point and are assignable to separate products. WHAT IS JOINT COSTING Joint Costs Product A Separable Costs A Product B Separable Costs B Split-off Point
- 6. Why Allocate Joint Costs? Allocate joint costs to products for: •inventory costing and cost of goods sold calculations. •cost reimbursement under contracts •customer profitability analysis •insurance settlement computations •rate regulation situations
- 7. METHODS OF APPORTIONMENT OF JOINT COST There are the five methods of apportionment of joint cost: •Sale Value at split off point •Reverse cost method •Net realizable value method(NRV) •Physical unit method •Contribution margin method
- 8. What does this method mean: If the product would not have been further processed and sold at split of stage then the sale value it would have realized would from the basis for apportionment of joint cost. For example: Crude oil sold out in the market before further process of refining. Sale value at split off method
- 9. • A method of allocating the joint cost of joint product on basis of estimated profit if there is not given the value of sale at split of point. For example: Sale - profit - admin and selling expense = total factory cost - cost of single product produced REVERSE COST MEHTOD
- 10. • Allocates joint costs to joint products on the basis of relative NRV of total production of the joint products For Example: NRV = Final Sales Value – Separable Costs NET REALIZE VALUE METHOD (NRV)
- 11. • Allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the split off point of total production of the products • 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. PHYSICAL UINT METHOD CONSTANT GROSS MARGIN METHOD
- 12. • To calculate the cost of joint product is difficult but with the help these method the apportionment of joint cost can be made, the most suitable method for the apportionment of joint cost is, Net Realize Value Method(NRV). CONCLUSION
- 13. Thank you very much
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Cost Allocation : Joint Products and Byproducts
Published by Grace Andrews Modified over 4 years ago
Presentation on theme: "Cost Allocation : Joint Products and Byproducts"— Presentation transcript:
Cost Allocation: Joint Products and By-products
© 2009 Pearson Prentice Hall. All rights reserved. Cost Allocation: Joint Products and Byproducts.
Cost Allocation: Joint Products and Byproducts
© John Wiley & Sons, 2005 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 1eSlide # 1 Cost Management Measuring,
CHAPTER 6 INCREMENTAL ANALYSIS Study Objectives
Copyright © 2003 Pearson Education Canada Inc. Slide Chapter 15 Cost Allocation: Joint Products and Byproducts.
© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 21-1 INCREMENTAL ANALYSIS Chapter 21.
Cost Allocation: Service Department Costs and Joint Product Costs
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Chapter Seven.
Contrôle Interne Avancé-HEC Lausanne- 2007/ Thème 5 Cost Allocation: Joint Products and Byproducts.
Copyright © 2015 Pearson Education, Inc. All Rights Reserved. Cost Allocation: Joint Products and Byproducts.
Dr. Varadraj Bapat, IIT Mumbai1 Module 13. Relevant Costs in Decision Making.
Chapter 9 Joint Product and By-Product Costing Key Topics: –Joint processes and common costs Main products and byproducts –Allocation methods –Choosing.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Constant Gross-Margin Percentage NRV Method Step 2: Deduct.
7-1 Joint Product and By- Product Costing Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Allocation: Joint Products and Byproducts Horngren, Foster &
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Allocation: Joint Products and Byproducts Chapter 16.
Don R. Hansen Maryanne M. Mowen
Cost Allocation: Joint Products and Byproducts Chapter 16.
© 2023 SlidePlayer.com Inc. All rights reserved.
Cost Allocation: Joint Products and Byproducts - PowerPoint PPT Presentation
Cost Allocation: Joint Products and Byproducts
It examines methods for allocating costs to jointly-produced products. this chapter also provides another illustration of the different costs for ... – powerpoint ppt presentation.
- This chapter considers when companies produce two or more products simultaneously out of the same process(es).
- It examines methods for allocating costs to jointly-produced products.
- This chapter also provides another illustration of the different costs for different purposes theme that underlies cost accounting.
- Identify the splitoff point(s) in a joint-cost situation
- Distinguish between joint products and by-products
- Explain why joint costs should be allocated to individual products
- Allocate joint costs using several different methods
- Identify the criterion used to support market-based joint cost allocation methods
- Explain why joint costs are irrelevant in a sell-or-process further decision
- Account for by-products using two different methods
- Joint costs are the costs of a single production process that yields multiple products simultaneously.
- Industries abound in which a single production process simultaneously yields two or more products.
- The outputs of a joint production process can be classified into two general categories
- Joint product
- The splitoff point is the juncture in the production process where one or more products in a joint-cost setting become separately identifiable.
- Separable costs are all costs (manufacturing, marketing, distribution, etc.) incurred beyond the splitoff point that are assignable to one or more individual products.
- Joint products have relatively high sales value at the splitoff point.
- Main product is the result of a joint production process that yields only one product with a relatively high sales value.
- By-products are incidental products resulting from the processing of another product.
- A by-product has a relatively low sales value compared with the sales value of a joint or main product.
- Some outputs of the joint production process have zero sales value.
- No journal entries are made in the accounting system to record the processing of such outputs with zero sales value.
- The classification of products as main, joint, or by-product depends on its sales value.
- Products can change from by-products to joint products when their relative sales values increases and changes from joint products to by-products when their relative sales value decreases.
- The purposes for allocating joint costs to products include
- Inventory costing
- Inventory costing and cost-of-goods-sold computations are important for financial accounting purposes, reports to income tax authorities, and internal reporting purposes.
- Cost reimbursement contracts
- Cost allocation is required for cost reimbursement purposes under contracts when only a portion of a business products or services is sold or delivered to a single customer (government agency).
- Insurance settlements
- Insurance settlement computations require cost allocation when damage claims made by businesses with joint products, main products, or by-products are based on cost information.
- Rate regulation
- The allocation of joint costs is required if one or more of the jointly produced products or services are subject to price regulation.
- Joint cost allocation is important in litigation involving one or more joint products.
- The two basic approaches to allocating joint costs are
- Approach 1 Allocate costs using market-based data such as revenues.
- Approach 2 Allocate costs in some physical measure-based data such as weight or volume.
- The sales value at splitoff method
- The estimated net realizable value (NRV) method
- The constant gross-margin percentage NRV method
- Lubbock Company incurred 200,000 of joint costs to produce the following
- Product A 10,000 units, 20,000 pounds
- Product B 10,500 units, 48,000 pounds
- Product C 11,500 units, 12,000 pounds
- The sales value at splitoff method allocates joint costs to joint products on the basis of the relative sales value at the splitoff point of the total production of these products during the accounting period.
- Assume the following sales values per unit A 10.00, B 30.00, and C 20.00
- What is the sales value at splitoff point?
- Product A 10,000 10.00 100,000
- Product B 10,500 30.00 315,000
- Product C 11,500 20.00 230,000
- Total 645,000
- How much of the joint costs are allocated to each product?
- Product A 100,000/645,000 200,000 31,008 Product B 315,000/645,000 200,000 97,674 Product C 230,000/645,000 200,000 71,318 Total 200,000
- What are the joint production costs per unit?
- Product A 31,008 10,000 3.10
- Product B 97,674 10,500 9.30
- Product C 71,318 11,500 6.20
- Assume all of the units produced of B and C were sold.
- 2,500 units of A (25) remain in inventory.
- What is the gross margin percentage of each product?
- Product A Revenues 7,500 units 10.00 75,000
- Cost of goods sold Joint product costs 31,008 Less ending inventory 31,008 25 7,752 23,256
- Gross margin 51,744
- Product A 75,000 23,256 51,744 51,744 75,000 69
- Product B (315,000 97,674) 315,000 69
- Product C (230,000 71,318) 230,000 69
- Note that this method uses the sales value of the entire production of the accounting period.
- Joint costs were incurred on all units produced, not just those sold.
- The sales value at splitoff method produces an identical gross margin percentage for each product.
- In many cases, products are processed further beyond the splitoff point in order to bring them to a marketable form or to increase their value above their selling price at the splitoff point.
- The estimated NRV method allocates joint costs to joint products on the basis of the relative estimated NRV.
- The estimated NRV is the expected final sales value in the ordinary course of business minus the expected separable costs of the total production of these products during the accounting period.
- Assume that Lubbock Company can process products A, B, and C further into A1, B1, and C1.
- The new sales value 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 and C1 51,500
- What is the estimated net realizable value of each product at the splitoff point?
- Product A1 120,000 35,000 85,000 estimated net realizable value
- Product B1 346,500 46,500 300,000 estimated net realizable value
- Product C1 241,500 51,500 190,000 estimated net realizable value
- How much of the joint cost is allocated to each product?
- Estimated Net Realizable Value Weight Product A1 85,000 85/575 Product B1 300,000 300/575 Product C1 190,000 190/575 Total 575,000
- Product A1 85/575 200,000 29,565
- Product B1 300/575 200,000 104,348
- Product C1 190/575 200,000 66,087
- Total 200,000
- Allocated Separable Inventory joint costs costs costs
- A1 29,565 35,000 64,565 B1 104,348 46,500 150,848 C1 66,087 51,500 117,587 Total 200,000 133,000 333,000
- What is the production cost per unit?
- Product A1 64,565 10,000 6.46
- Product B1 150,848 10,500 14.37
- Product C1 117,587 11,500 10.22
- The constant gross-margin percentage NRV method allocates joint costs to joint products in such a way that the overall gross-margin percentage is identical for each of the individual products.
- 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 the final sales values to obtain the total costs that each product should bear.
- Step 3 Deduct the expected separable costs from the total costs to obtain the joint- cost allocation.
- What is the expected final sales value of total production during the accounting period?
- Product A1 120,000 Product B1 346,500 Product C1 241,500 Total 708,000
- Expected final sales value 708,000 Deduct joint and separable costs 333,000 Gross 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 56,441 Product B1 346,500 183,527 162,973 Product C1 241,500 127,913 113,587 Total 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 21,441 Product B1 162,973 46,500 116,473 Product C1 113,587 51,500 62,087 Total 333,000 133,000 200,000
- The 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 the total production of these products during the accounting period.
- Recall that Lubbock Company incurred 200,00 of joint costs to produce A, B, and C products.
- What are the joint costs allocated to each product using the number of pounds produced as the physical measure?
- Product A 20,000/80,000 200,000 50,000
- Product B 48,000/80,000 200,000 120,000
- Product C 12,000/80,000 200,000 30,000
- What is the cost per pound for each product?
- Product A 50,000 20,000 2.50 Product B 120,000 48,000 2.50 Product C 30,000 12,000 2.50
- It is possible to obtain the cost per pound (200,000 80,000 2.50) and use this amount to distribute the joint costs.
- Under the benefits-received criterion, the physical measure method is less preferred than the sales value at splitoff method.
- Because it has no relationship to the revenue-producing power of the individual products.
- Which method of allocating joint costs should be chosen?
- The sales value at splitoff method is widely used where market prices exist at splitoff.
- Why is the sales value at splitoff method widely used?
- It is objective.
- It does not anticipate subsequent management decisions on further processing.
- It uses a meaningful common denominator.
- It is simple.
- The purpose of the joint-cost allocation is important in choosing the allocation method.
- The physical measure method is a more appropriate method to use in rate regulation.
- Some companies refrain from allocating joint costs entirely. Instead, they carry their inventories at estimated NRV.
- Accountants ordinarily criticize carrying inventories at estimated net realizable values.
- Because income is recognized before sales are made.
- Joint costs incurred up to the splitoff point are past (sunk) costs irrelevant to the decision to sell a joint (or main) product at the splitoff point or to process it further.
- Assume that products A, B, and C can be sold at the splitoff point or processed further into A1, B1, and C1.
- Units Selling Selling Additional price price costs
- 10,000 A 10 A1 12 35,000
- 10,500 B 30 B1 33 46,500
- 11,500 C 20 C1 21 51,500
- Should A, B, or C be sold at the splitoff point 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)
- Products A, B, and C should be sold at the splitoff point.
- No techniques for allocating joint-product costs should guide decisions about whether a product should be sold at the splitoff point or processed beyond splitoff.
- Although by-products have much lower sales value than do joint or main products, the presence of by-products can affect the allocation of joint costs.
- By-product accounting methods differ on whether by-products are recognized in the financial statements at the time of production or the time of sale.
- Method A, the production by-product method, recognizes by-products in the financial statements at the time their production is completed.
- Method B, the sale by-products method, delays recognition of by-products until the time of their sale.
- The following data relates to Los Alamos, Inc., a manufacturer of special clothes used by joggers.
- Main Products By-Products (Yards) (Yards) Production 1,000 400 Sales 800 300 Ending inventory 200 100 Sales price 13/yard 1.00/yard No beginning finished goods inventory
- Joint production costs for joint (main) products and by-products Material 2,000 Manufacturing labor 3,000 Manufacturing overhead 4,000 Total production cost 9,000
- Method A Net realizable value assigned to by-products inventory
- What is the value of ending inventory of joint (main) products?
- 9,000 total production cost 400 net realizable value of the by-product 8,600 net production cost for the joint products.
- 200 1,000 8,600 1,720 is the value assigned to the 200 yards in ending inventory.
- What is the cost of goods sold?
- Joint production costs 9,000
- Less by-product revenue 400
- Less main product inventory 1,720
- Cost of goods sold 6,880
- Income Statement (Method A) Revenues (800 yards 13) 10,400
- Gross 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 By-product 100 1.00 100
- Work-in-Process 2,000 Accounts Payable 2,000 To record direct materials purchased and used in production
- Work-in-Process 7,000 Various accounts 7,000 To record conversion costs in the joint process
- By-product Inventory 400 Finished Goods 8,600 Work-in-Process 9,000 To record cost of goods completed
- Cost of Goods Sold 6,880 Finished Goods 6,880 To record the cost of the main product sold
- Cash or Accounts Receivable 10,400 Revenues 10,400 To record the sale of the main product
- Method B The sale by-products method.
- 200 1,000 9,000 1,800
- This method assigns no value to the 400 yards of by-products at the time of production.
- The 300 resulting from the sale of by-products is reported as revenues.
- Income Statement (Method B) Revenues Main product (800 13) 10,400 By-products sold 300 Total revenues 10,700
- Income Statement (Method B) Total revenues 10,700
- Cost of goods sold Joint production costs 9,000 Less main product inventory 1,800 7,200
- Gross margin 3,200
- 3,200 10,700 29.91
- Main product 200 1,000 9,000 1,800 By-product -0-
- Finished Goods 8,600 Work-in-Process 9,000 To record cost of goods completed
- Cost of Goods Sold 7,200 Finished Goods 7,200 To record the cost of the main product sold
- Cash or Accounts Receivable 300 Revenues 300 To record the sale of the by-product
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allocated to individual products. 16 - 9. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster. Why Allocate Joint Costs
Allocating Joint Costs • Monetary Measure – Recognizes the revenue-generating ability of joint products. Monetary Measure Allocation Steps •
4. JOINT PRODUCTS AND BY-PRODUCTS • A by-product has a relatively low sales value compared with the sales value of a joint or main product.
Cost Allocation: Joint Products and Byproducts ... Main Product – output of a joint production process that yields one product with a high sales value
Joint-Cost Basics Joint costs Joint products Byproduct Splitoff point Separable costs.
Learning Objectives 1. Identify the splitoff point(s) in a joint-cost situation 2. Distinguish between joint products and byproducts 3.
Allocate joint costs to products for: inventory costing and cost of goods sold calculations; cost reimbursement under contracts; customer profitability analysis
It examines methods for allocating costs to jointly-produced products. This chapter also provides another illustration of the different costs for ... –
Cost Allocation: Joint Products and Byproducts Chapter 16 1. Basic terms Joint costs – costs of a production process that has multiple products
Allocate joint costs to products using the physical-units and relative-sales-value methods. 12 - 5. Copyright © 2014 Pearson Education, Inc. publishing as