Cost Allocation: Joint Products and Byproducts: 2009 Foster School of Business Cost Accounting L.Ducharme

2009 Foster School of Business Cost Accounting L.
DuCharme
1
Cost Allocation:
Joint Products and
Byproducts
Chapter 16
2009 Foster School of Business Cost Accounting L.DuCharme
2
Joint Costing Overview
Terminology
Joint cost examples
Joint versus Byproducts
Ways to allocate:
Sales-value at Splitoff
NRV
Constant Gross Margin %
Physical Measure
Accounting for Byproducts

3
Joint-Cost Basics
Joint products Joint costs
Separable costs
Splitoff point
Byproduct
4
Joint-Cost Basics
Coal
Gas Benzyl Tar
5
Joint-Cost Basics
Timber (logs)
2x4s 1x8 clear Bark
6
Joint Products and Byproducts
Sales Value
High
Low
Main Products
Joint Products
Byproducts
7
Why Allocate Joint Costs?
to compute inventory cost and cost of goods sold
to determine cost reimbursement under contracts
for insurance settlement computations
for rate regulation
for litigation purposes
8
Approaches to Allocating
Joint Costs
Approach 2:
Physical measure
Approach 1:
Market based
Two basic ways to allocate
joint costs to products are:
9
Approach 1: Market-based Data
(3 ways)
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
10
Allocating Joint Costs Example
10,000 units of A at a
selling price of $10 = $100,000
10,500 units of B at a
11,500 units of C at a
Joint processing
cost is $200,000
Splitoff point
11
Allocating Joint Costs Example
(Sales-Value-at-Splitoff method)
A B C Total
Sales Value $100,000 $315,000 $230,000 $645,000

Allocation of
Joint Cost:
100 645 31,008
315 645 97,674
230 645 71,318
200,000
Gross margin $ 68,992 $217,326 $158,682 $445,000
12
Estimated Net Realizable Value
(NRV) Method Example
Assume that the Company can process
products 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
13
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of each
product at the splitoff point?
14
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 allocated
to each product?
15
Joint cost allocated To A1:
85 575 $200,000 = $ 29,565
To B1:
300 575 $200,000 = $104,348
To C1:
190 575 $200,000 = $ 66,087
16
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
17
Constant 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 the
final sales values to obtain the total
costs that each product should bear.
18
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.
19
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
20
Step 1:
Compute the overall gross-margin percentage.
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%
21
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)
22
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
23
Constant GM % NRV method
Something that causes most students to
pause can happen when using this method
to allocate joint costs, what is it????
24
Approach 2: Physical
Measure Method Example
$200,000 joint cost
20,000
pounds A
48,000
pounds B
12,000
pounds C
Product A
$50,000
Product B
$120,000
Product C
$30,000
25
Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the value
of the joint product
immediately.
It does not anticipate
subsequent management
decisions.
It uses a
meaningful basis.
It is simple.
26
Choosing a Method
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.
27
Avoiding Joint Cost Allocation
Some companies refrain from allocating joint
costs and instead carry their inventories
at estimated net realizable value.
(This is the ceiling of LCM rule.
What is the floor?)
28
Irrelevance of Joint Costs
for Decision Making
Assume that products A, B, and C can be sold
at the splitoff point or processed further
into A1, B1, and C1.
Selling Selling Additional
Units price (1) price (2) 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
(1) value at splitoff; (2) value after processing further.
29
Irrelevance of Joint Costs
for Decision Making
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
Product C: Incremental revenue $11,500
30
Method A:
The production method recognizes byproducts
at the time their production is completed.
Method B:
The sale method delays recognition of
byproducts until the time of their sale.
31
Neither approach is conceptually correct.
Both technically violate GAAP.
Method A:
Recognizes byproducts revenue
at the time their production is completed.
Method B:
Does not recognize byproducts in inventory.
32
Byproducts have low sales value.
Cost-benefit analysis often times leads to the
use of the most expedient method.
33
An alternative approach that would follow
GAAP would be to treat byproducts as if
they were joint products (i.e., use the same
joint cost allocation method for all products.
This is not common practice, why?
34
Byproduct revenues appear in the income
statement as either:

Cost reduction for the main product, or
Separate item of revenue or other income.
35
End of Chapter 16

Cost Allocation: Joint Products and Byproducts: 2009 Foster School of Business Cost Accounting L.Ducharme

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