Cost Banat

7/18/2019 Cost Banat

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Chapter 11 Allocation for Joint Costs and Accounting for By-Products/Scrap

• Joint costs occur before the split-o point in a production process

The primary distinction beteen by-products and scrap is the dierence in sales !alue"

• The point at hich indi!idual products are #rst identi#able in a $oint process isreferred to as the split-o point

• Joint costs include all materials% labor and o!erhead that are incurred before the

split-o point"• To methods of allocating $oint costs to products are physical measure allocation and

monetary allocation"

• A decision that must be made at split-o is to sell a product or process it further"

•Allocating $oint costs based upon a physical measure ignores the re!enue-generating

ability of indi!idual products"

• &onetary allocation measures recogni'e the re!enue generating ability of each

product in a $oint process"• Joint costs are allocated to main products% but not to by-products

• (et reali'able !alue e)uals product sales re!enue at split-o minus any costs

necessary to prepare and dispose of the product"•*f incremental re!enues beyond split-o are less than incremental costs% a product

should be sold at the split-o point"•*f incremental re!enues beyond split-o e+ceed incremental costs% a product should

be processed further"• The net reali'able !alue approach re)uires that the net reali'able !alue of by-products

and scrap be treated as a reduction in $oint costs allocated to primary products"•(et reali'able !alue is considered to be the best measure of the e+pected contribution

of each product to the co!erage of $oint costs"• The net reali'able !alue approach is used to account for scrap and by-products hen

the net reali'able !alue is signi#cant"•,nder the reali'ed !alue approach% no !alue is recogni'ed for by-products or scrap

until they are actually sold"•(ot-for-pro#t entities are re)uired to allocate $oint costs among fund-raising% program%

and administrati!e functions"•

•1" A single process in hich one product cannot be manufactured ithout producing

others is referred to as a $oint process•

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•Costs that are incurred in the manufacture of to or more products from a common

process are referred to as $oint costs•" Costs that are incurred after the split-o point in a production process are referred

to as separate costs•." Three types of products that result from a $oint process are $oint products%

byproducts% scrap•" To incidental products of a $oint process are by-products0 scrap•" The point at hich indi!idual products are #rst identi#able in a $oint process is

referred to as the split-o point•

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•2" To methods of allocating $oint costs to indi!idual products are physical

measurement allocation0 monetary unit allocation

3" Three monetary measures used to allocate $oint costs to products are sales !alue at

split-o0 net reali'able !alue at split-o0 appro+imated net reali'able !alue at split-o

4" Sales re!enue at split-o less disposal costs e)uals net reali'able !alue"

1"*f a company obtains to salable products from the re#ning of one ore% the re#ning

process should be accounted for as a5n6 $oint process"

7"Joint costs are allocated to $oint products to obtain a cost per unit for #nancial

statement purposes"

Joint costs are allocated to hich of the folloing products8 (o by-product% no scrap

Joint cost allocation is useful for product costing

Joint costs are useful for determining in!entory cost for accounting purposes"

9hich of the folloing components of production are allocable as $oint costs hen a

single manufacturing process produces se!eral salable products8 direct material%

direct labor% and o!erhead

:ach of the folloing is a method to allocate $oint costs except a!erage unit cost"

Joint costs are most fre)uently allocated based upon relati!e sales !alue

9hen allocating $oint process cost based on tons of output% all products ill ha!e the

same $oint cost per ton

*f to or more products share a common process before they are separated% the $oint

costs should be assigned in a manner that assigns a proportionate amount of the

total cost to each product on a )uantitati!e basis

Scrap is de#ned as a residual of the production process that has limited sales !alue"

9aste created by a production process is discarded rather than sold"

9hile preparing a salad% you remo!e the core of a head of lettuce" This core ould be

classi#ed as aste

9hich of the folloing is/are synonyms for $oint products8 &ain products or co-products

*n a lumber mill% hich of the folloing ould most li;ely be considered a primary

product8 7 by . studs

<isher Company produces three products from a $oint process" The products can be sold at

split-o or processed further" *n deciding hether to sell at split-o or process

further% management should ignore the $oint cost in ma;ing the decision



By-products are not su=cient alone% in terms of sales !alue% for management to $ustify

underta;ing the $oint process"

9hich of the folloing statements is true regarding by-products or scrap8 Job order

costing systems may ha!e instances here by-products or scrap result from the

production process"

9hich of the folloing has sales !alue8 By-product yes% aste no

,nder an acceptable method of costing by-products% in!entory costs of the by-product are

based on the portion of the $oint production cost allocated to the by-product plus

any subse)uent processing cost"

9hich of the folloing is a false statement about scrap and by-products8 By-products

and scrap are the primary reason that management underta;es the $oint process

The split-o point is the point at hich

output is #rst identi#able as indi!idual products"

$oint costs are allocated to $oint products"

some products may #rst be sold"

A product may be processed beyond the split-o point if management belie!es that

its mar;etability ill be enhanced"

the incremental cost of further processing ill be less than the

incremental re!enue of further processing"

9hich of the folloing ould not be considered a sun; cost8 Building cost

The de#nition of a sun; cost is a cost that cannot be reco!ered regardless of hat

happens"

The net reali'able !alue approach mandates that the (>? of the by-products/scrap be

treated as a reduction of $oint costs"

The net reali'able !alue approach is normally used hen the (>? is e+pected to be

signi#cant

Appro+imated net reali'able !alue at split-o for $oint products is computed as #nalselling price minus further processing and disposal costs"

9hich of the folloing is a commonly used $oint cost allocation method8 appro+imated

sales !alue at split-o method

*ncremental separate costs are de#ned as all costs incurred beteen split-o and the

point of sale"



*ncremental re!enues and costs need to be considered hen using hich allocation

method8 (o physical measure% no sales !alue at split-o

>elati!e sales !alue at split-o is used to allocate $oint cost

<or purposes of allocating $oint costs to $oint products using the relati!e sales !alue at

split-o method% the costs beyond split-o do not aect the allocation of the $oint

costs"

(ot-for-pro#t organi'ations are re)uired by the A*CPA to allocate $oint costs"

SHORT ANSWER

1" Brie@y discuss the four decisions that management must ma;e concerning $oint

processes"

A(S

The four decisions that managers must ma;e regarding $oint processes are as

follos" They must try to determine hat $oint costs% selling costs% and separate

processing costs are e+pected to occur hen certain products are manufactured"

(e+t% management must decide on the best use of resources that are a!ailable"

&anagers must ne+t classify% as $oint products and/or by-products/scrap% the output

of production" The last decision that must be made is hether some or all of the

products ill be processed further or sold at split-o" This decision is made based on

the incremental costs that ould be incurred to process further and the incremental

re!enue if processed further" Joint production costs are irrele!ant to this decision"

*< &oderate BJ 11-

7" Brie@y discuss the si+ steps in the allocation process"

A(S

The si+ steps are as follos

1" Choose the basis on hich to allocate $oint cost"

7" Dist all !alues that comprise the basis"

" Add up all the !alues in the list 5E76"

." etermine the percentage of the total each item in E7 is"



" &ultiply the percentage by the cost being allocated"

" <or !aluation purposes% di!ide the prorated cost by e)ui!alent units

of production"

*< &oderate BJ 11-.

" iscuss brie@y the three monetary measurement techni)ues of $oint cost allocation"

A(S

The sales !alue at split-o method assigns costs based only on the eighted

proportions of the total sales !alues of the $oint products ithout consideration of

disposal costs at the split-o point" To use this method% all products must be salable

at the split-o point" The net reali'able !alue method assigns costs based on the

productFs proportional net reali'able !alue at the split-o point" (et reali'able !alue

is e)ual to product sales re!enue at split-o minus any costs necessary to prepare

and dispose of the product"

Appro+imated net reali'able !alue at split-o method re)uires that a simulated net

reali'able !alue at split-o be calculated" This is e)ual to #nal sales price minus

incremental separate costs" *ncremental separate costs refer to all costs that are

incurred beteen split-o and the point of sale"

*< &oderate BJ 11-.



." Brie@y discuss the restrictions and re)uirements on ser!ice organi'ations and not

for-pro#ts that relate to $oint cost allocation"

A(S

Ser!ice and not-for-pro#t organi'ations incur costs that may be considered $oint in

nature% such as ad!ertising and printing of multipurpose documents" Ser!ice

organi'ations are not re)uired to allocate these costs to the items or;ed on%

deli!ered% or ad!ertised but may choose to do so for a better matching of re!enues

and e+penses" (ot-for-pro#ts are re)uired by the A*CPA to allocate these costs

among the acti!ities of fundraising% accomplishing an organi'ational program% or

conducting an administrati!e function"

*< &oderate BJ 11-

" Brie@y discuss the net reali'able !alue at split-o point method of allocating $oint

costs"

A(S

The net reali'able !alue at split-o method assigns $oint costs based on each

productFs proportional (>? at the split-o point" (>? is e)ual to sales price minus

costs that are necessary to prepare and dispose of the product" To use this method%

all products must be salable at the split-o point"

*< &oderate BJ 11-.

" 9hy is the net reali'able !alue of scrap used to loer estimated o!erhead costs in

setting a predetermined o!erhead rate in a $ob order costing situation in hich

scrap is e+pected on most $obs8

A(S

The net reali'able !alue of scrap is used in this ay because the amount recei!ed

from the sale of scrap is considered to be a reduction of the total cost incurred in

the production process" This process is similar to the treatment of sales !alues of

assets purchased and then sold in a Gbas;etG of goods" The estimated cost of scrap

is used in setting o!erhead rates0 therefore% hen the scrap is sold the amount

recei!ed should be a reduction of total o!erhead"



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