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Transcript of © 2009 Pearson Prentice Hall. All rights reserved. Cost Allocation: Joint Products and Byproducts.
© 2009 Pearson Prentice Hall. All rights reserved.
Cost Allocation:Joint Products and Byproducts
© 2009 Pearson Prentice Hall. All rights reserved.
Joint Cost TerminologyJoint 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 now-identifiable specific products
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Joint Cost Terminology Categories of Joint Process Outputs:
1. Outputs with a positive sales value2. 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
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Joint Cost TerminologyMain 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
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Joint Cost TerminologyByproducts – outputs of a joint production
process that have low sales values compare to the sales values of the other outputs
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Examples of Joint Cost Situations
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Joint Process Overview
Single Production Process
Joint Product #1
Byproduct
Joint Product #2
Steam: An Output with Zero Sales Value
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Reasons for Allocating Joint CostsRequired for GAAP and taxation purposesCost values may be used for evaluation
purposesCost-based ContractingInsurance SettlementsRequired by regulatorsLitigation
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Joint Cost Allocation Methods Market-Based – allocate using market-
derived data (dollars):1. Sales value at splitoff2. Net Realizable Value (NRV)3. Constant Gross-Margin percentage NRV
Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc
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Sales Value at Splitoff MethodUses the sales value of the entire production
of the accounting period to calculate allocation percentage
Ignores inventories
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Joint Cost Illustration Data
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Joint Cost Illustration Overview
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Sales Value at Splitoff Illustration
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Net Realizable Value MethodAllocates joint costs to joint products on the
basis of relative NRV of total production of the joint products
NRV = Final Sales Value – Separable Costs
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Net Realizable Value Method Overview
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Net Realizable Value Method Illustrated
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Net Realizable Value Method Illustrated
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Constant Gross Margin NRV MethodAllocates joint costs to joint products in an
way that the overall gross-margin percentage is identical for the individual products
Joint Costs are calculated as a residual amount
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Constant Gross Margin NRV Illustrated
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Physical-Measure MethodAllocates 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
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Physical Measures Illustration
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Method SelectionIf selling price at splitoff is available, use
the Sales Value at Splitoff MethodIf selling price at splitoff is not available,
use the NRV methodIf simplicity is the primary consideration,
Physical-Measures Method or the Constant Gross-Margin Method could be used
Despite this, some firms choose not to allocate joint costs at all
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Sell-or-Process Further DecisionsIn 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 sunkSeparable Costs need to be evaluated for
relevance individually
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Sell-or-Process Further Flowchart
Single Production Process
Joint Product #1
Joint Product #2
Further Processing Dept 1
Further Processing Dept 2
Final Product
#1
Final Product
#2
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ByproductsTwo methods for accounting for byproductsProduction 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
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Byproducts Illustration Overview
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Comparative Income Statements for Accounting for Byproducts
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