MANAGERIAL

ACCOUNTING
Mon Raval Sevilla, CPA
 Introduction to managerial accounting
Types of costing method pt1
 ABC
 Joint
 Job-order

COURSE Types of costing method pt2

OUTLINE  Process

Types of costing method pt3

 Absorption and variable
 CVP
 Margin of safety
 Variance analysis
 Materials
 Labor
 Fixed and variable overhead

COURSE Materials management

OUTLINE  EOQ
 Safety stocks
 Reorder point
 Order and carrying cost
 Microeconomics
 Demand and supply
 CPI
 Elasticity
 Types of market
COURSE
OUTLINE Working capital management
 Residual income
 Discounted,nondiscounted cash flow
 NPV
 Microeconomics
 Demand and supply
 CPI
 Elasticity
 Types of market

COURSE Working capital management

 Residual income
OUTLINE  Discounted,nondiscounted cash flow
 NPV

Relevant costing
 Make or buy
 Accept or reject
  Many organizations establish joint production processes and
shared facilities to process multiple products and services for
sale.
 While working through the joint process, products are
indistinguishable.
OBJECTIVE  Nevertheless, external financial reporting guidelines require
that these common (fixed) costs be allocated to participating
products.
 This lesson explores four optional allocation methods available
for this purpose.
  Determine the appropriate use of joint product and by-product
costing.
 Demonstrate an understanding of concepts such as split-off
point and separable costs.

OBJECTIVE  Determine the allocation of joint product and by-product costs

using the physical measure method, the sales value at split-off
method, constant gross profit (gross margin) method, and the
net realizable value method; describe the benefits and
limitations of each method.
  Joint products and services share a common value-added joint
JOINT process in the organization.

PRODUCTIO  The way these products and services participate in the joint
process makes them indistinguishable from each other in terms
N PROCESS of how they each consume the joint process costs.
 The following are examples of joint production processes:
 An oil refinery processes crude oil to the point where
distinguishable products begin to emerge, such as gasoline,
motor oil, and kerosene. Each of these products then requires
additional specific processing to be complete.

JOINT  A dairy production plant processes raw milk to the point where
the product separates into pasteurized milk, butter, and cheese.
PRODUCTIO Further processing takes place to finish each type of diary

N PROCESS product.
 The training facility for a large consulting firm provides four
weeks of initial onboarding for all new consultants before
moving on to being trained in the specific technical work they
will perform for the firm's clients.
  It's important to distinguish between joint products and by-
products.
 Joint products are the main purpose for the value-added joint
JOINT process in the organization.

PRODUCTIO  Organizations invest in the joint process to create the main joint
products that are the focus of the organization's profit plan.
N PROCESS  Therefore, the accounting system is designed to allocate the
joint process costs to the main joint projects.
  In addition to the main joint products, many joint production
processes result in “by-products.”
 These by-products will have some commercial value, but the
JOINT value is not significant to the organization.
PRODUCTIO  Since the purpose of the joint process is not to create by-
N PROCESS products, the accounting system doesn't allocate joint process
costs to by-products.
 The following are examples of by-products:
 In the joint process of producing gasoline, motor oil, and
kerosene, oil refinery processes can also result in an asphalt by-
product that can be used as tar or blacktop for paving roads.
 Whey is the liquid remaining after milk has been curdled and

JOINT strained and is a by-product of the manufacture of cheese. It has

several possible commercial uses such as a protein supplement
PRODUCTIO for athletic training or as an animal feed enhancement.

N PROCESS  Available space and staff time in a training facility for a large
consulting firm may be scheduled for lease to outside
organizations. Since the core commercial purpose of the facility
is onboarding new consultants, any extra value created from
using “slack” in the training system is a by-product of the
facility.
  Joint costs are part of the absorption costing system, which
means that these costs are allocated in order to comply with
JOINT external financial reporting rules.

PRODUCTIO  There is no “optimal” method for allocating joint costs. Joint

costs are fixed with respect to the individual activity in each
N PROCESS joint product.
  For the remainder of this lesson we'll use Muddyboys Cement
Company to explore a joint process to manufacture cement
construction products from a single raw material.
SETTING UP  There are two main construction products (Product A and
JOINT COST Product B), and a by-product (Product Z) that come out of the

ALLOCATION joint process.

 The weekly production flow and price/cost data are presented
next slide.
 SETTING UP
JOINT COST
ALLOCATION
  The Muddyboys joint process requires $100,000 in weekly
costs. After moving common materials through the joint
process, an output of production volume can be identified for
each product.
 The split-off point is the point when the joint process is
SETTING UP complete and the products are identifiable. Each of the three

JOINT COST products can be sold at the split-off point. The split-off price is
provided.
ALLOCATION  The main products A and B can be processed further and sold at
a higher price per cubic foot. The price if further processed, as
well as the total cost to process further, is provided for each of
the main products. The by-product Z cannot be processed past
the split-off point for more value.
  Before we work through four traditional methods used to
SETTING UP allocate joint costs, remember the standard two-step model for
JOINT COST assigning costs that was introduced in our first lesson. (ABC)

ALLOCATION
  Three of the four joint cost allocation methods follow this
model quite closely.
 The final method (constant gross margin method) also uses this
SETTING UP basic approach but sets a profit margin target and then works
backwards through the model to determine the joint cost
JOINT COST allocation.
ALLOCATION  Remember that the by-product does not receive any joint cost
allocation.
  The physical units method for allocating joint costs is
straightforward and is based on a simple logic that as more of a
product is produced, it should bear more of the joint process
costs.
 Muddyboys’ joint process generates a total of 100,000 cubic
COST feet of main product composed of 60,000 cubic feet (ft 3) for
Product A and 40,000 cubic feet (ft3) for Product B.
ALLOCATION
The physical units allocation works as follows:
USING
PHYSICAL UNIT  Cost driver rate = Cost pool ÷ Total driver volume = $100,000
÷ 100,000 ft3 = $1.00/ft3
 Product A allocation = $1.00/ft3 × 60,000 ft3 = $60,000;
 Product B allocation = $1.00/ft3 × 40,000 ft3 = $40,000
  The sales value at split-off method is based on the logic that the
joint process adds value to the main products, so the value
established at the point the products are identifiable and ready for
sale should be the basis for the allocation.
 The joint process for Muddyboys generates $72,000 in split-off
COST value for Product A ($1.20 × 60,000 ft3) and $84,000 in split-off
value for Product B ($2.10 × 40,000 ft3) for a total of $156,000.
ALLOCATION
USING SALES The sales value at split-off allocation works as follows:

VALUE AT SPLIT-  Cost driver rate = Cost pool ÷ Total driver volume = $100,000 ÷
$156,000 = $0.641/$1.00
OFF
 Product A allocation = $0.641/$1.00 × $72,000 = $46,154;
 Product B allocation = $0.641/$1.00 × $84,000 = $53,846
 (In order for allocation results to sum up exactly to the $100,000
joint costs, do not round off the cost driver rate.)
  Net realizable value (NRV) is defined in this third allocation
method as the final sales value of the product less any additional
processing and distribution costs necessary to get the product to
the final sales position.
 The logic of the NRV method is that joint costs should be
COST allocated based on the product's ability to pay the costs, defined
ALLOCATION as the product's NRV.

USING NET  One important note is that NRV is not always based on the sales
REALIZABLE value available assuming the product is further processed to the
final extent possible.
VALUE
 In this method we assume that the organization makes an optimal
decision for each product in order to maximize its total value.
 In short, the NRV method is based on allocating joint costs using
the highest value that each product can provide the organization.
  Remember that Product A's sales value at split-off is $72,000
($1.20 × 60,000 ft3). However, its NRV if processed to the end
of its potential is $68,000 ($1.80 × 60,000 ft3 – $40,000
additional costs). Hence, Muddyboys will not further process

COST Product A, and the NRV method will use the $72,000 split-off
value.
ALLOCATION
 On the other hand, the optimal decision for Muddyboys is to
USING NET further process Product B for the higher $3.40 price. This
REALIZABLE decision is based on comparing the split-off value of $84,000
VALUE ($2.10 × 40,000 ft3) with the NRV value of $96,000 ($3.40 ×
40,000 ft3 – $40,000). Hence, the NRV method will use the
$96,000 net realizable value.
  Overall, by making optimal decisions Muddyboys generates a
total value of $168,000 ($72,000 + $96,000) to pay the joint
cost and generate overall profit.
COST The NRV allocation works as follows:
ALLOCATION  Cost driver rate = Cost pool ÷ Total driver volume = $100,000
USING NET ÷ $168,000 = $0.595/$1.00
REALIZABLE  Product A allocation = $0.595/$1.00 × $72,000 = $42,857;
VALUE
 Product B allocation = $0.595/$1.00 × $96,000 = $57,143
  We have yet to handle the Product Z by-product for Muddyboys.
 Remember that it is not the purpose of the joint process to
produce by-products.
 For that reason, we don't allocate joint process costs to by-
products.

ACCOUNTIN  Product Z is generating a small revenue of $3,000 (= $0.15 ×

20,000 ft3).
G FOR BY-  How should this revenue be reported?
PRODUCTS  Regardless of which joint cost allocation method is used for the
main products, Muddyboys has two choices to handle the
reporting of its by-product.
 We'll use the physical units method to demonstrate these two
choices.
  The first reporting choice is to establish a separate product line
in the organization's profit report. This is shown below:
Muddyboys Cement Company - Profit Report(based on physical
units allocation)
ACCOUNTIN  
Sales
Product A Product B
$72,000 $136,000
Product Z Total
$3,000 $211,000
G FOR BY- revenue

PRODUCTS Direct
processing
  (40,000)   (40,000)

cost
Indirect (60,000) (40,000)   (100,000)
joint cost
allocated
Gross profit $12,000 $56,000 $3,000 $71,000
  The second reporting choice is to offset the joint process cost
with the by-product revenue before computing the joint cost
allocation. The result of this approach is shown below:
Muddyboys Cement Company - Profit Report(based on physical

ACCOUNTIN  
units allocation)
Product A Product B Total
G FOR BY- Sales revenue $72,000 $136,000 $208,000

PRODUCTS Direct   (40,000) (40,000)

processing
cost
Indirect joint (58,200) (38,800) (97,000)
cost allocated

Gross profit $13,800 $57,200 $71,000

 SEE WORD FILE.

ACTIVITY