cost allocation: joint products and byproducts
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Cost Allocation: Joint Products and Byproducts. Chapter 16. 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. Joint-Cost Basics. - PowerPoint PPT PresentationTRANSCRIPT
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 SplitoffNRVConstant Gross Margin %Physical Measure
•Accounting for Byproducts
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Joint-Cost Basics
Joint productsJoint costs
Separable costs
Splitoff pointByproduct
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Joint-Cost Basics
Coal
Gas Benzyl Tar
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Joint-Cost Basics
Timber (logs)
2x4s 1x8 clear Bark
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Joint Products and Byproducts
Sales Value
High Low
Main ProductsJoint Products Byproducts
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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
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Approaches to AllocatingJoint Costs
Approach 2:Physical measure
Approach 1:Market based
Two basic ways to allocatejoint costs to products are:
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Approach 1: Market-based Data (3 ways)
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
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Allocating Joint Costs Example
10,000 units of A at aselling price of $10 = $100,000
10,500 units of B at aselling price of $30 = $315,000
11,500 units of C at aselling price of $20 = $230,00
Joint processingcost is $200,000
Splitoff point
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Allocating Joint Costs Example(Sales-Value-at-Splitoff method)
A B C TotalSales Value $100,000 $315,000 $230,000 $645,000
Allocation ofJoint Cost:100 ÷ 645 31,008 315 ÷ 645 97,674230 ÷ 645 71,318
200,000Gross margin $ 68,992 $217,326 $158,682 $445,000
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Estimated Net Realizable Value (NRV) Method Example
Assume that the Company can processproducts 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
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Estimated Net Realizable Value (NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of eachproduct at the splitoff point?
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Estimated Net Realizable Value (NRV) Method Example
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 allocatedto each product?
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Estimated Net Realizable Value (NRV) Method Example
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
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Estimated Net Realizable Value (NRV) Method Example
Allocated Separable Inventory joint costs costs costs
A1 $ 29,565 $ 35,000 $ 64,565B1 104,348 46,500 150,848C1 66,087 51,500 117,587Total $200,000 $133,000 $333,000
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Constant Gross-MarginPercentage 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 thefinal sales values to obtain the totalcosts that each product should bear.
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Constant Gross-MarginPercentage NRV Method
Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.
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Constant Gross-MarginPercentage NRV Method
What is the expected final sales value of totalproduction during the accounting period?
Product A1: $120,000Product B1: 346,500Product C1: 241,500Total $708,000
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Constant Gross-MarginPercentage NRV Method
Step 1:Compute the overall gross-margin percentage.
Expected final sales value $708,000Deduct joint and separable costs 333,000Gross margin $375,000
Gross margin percentage:$375,000 ÷ $708,000 = 52.966%
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Constant Gross-MarginPercentage NRV Method
Step 2:Deduct the gross margin.
Sales Gross Cost of Value Margin Goods sold
Product A1: $120,000 $ 63,559 $ 56,441Product B1: 346,500 183,527 162,973Product C1: 241,500 127,913 113,587Total $708,000 $375,000 $333,000($1 rounding)
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Constant Gross-MarginPercentage NRV Method
Step 3:Deduct separable costs.
Cost of Separable Joint costs goods sold costs allocated
Product A1: $ 56,441 $ 35,000 $ 21,441Product B1: 162,973 46,500 116,473Product C1: 113,587 51,500 62,087Total $333,000 $133,000 $200,000
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Constant GM % NRV method
Something that causes most students to “pause” can happen when using this method to allocate joint costs, what is it????
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Approach 2: PhysicalMeasure Method Example
$200,000 joint cost
20,000pounds A
48,000pounds B
12,000pounds C
Product A$50,000
Product B$120,000
Product C$30,000
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Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the valueof the joint product
immediately.
It does not anticipatesubsequent management
decisions.
It uses ameaningful basis.
It is simple.
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Choosing a Method
The purpose of the joint-cost allocation isimportant in choosing the allocation method.
The physical-measure method is a moreappropriate method to use in rate regulation.
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Avoiding Joint Cost Allocation
Some companies refrain from allocating jointcosts and instead carry their inventories
at estimated net realizable value.(This is the “ceiling” of LCM rule.
What is the “floor?”)
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Irrelevance of Joint Costsfor Decision Making
Assume that products A, B, and C can be soldat the splitoff point or processed further
into A1, B1, and C1.
Selling Selling Additional Units price (1) price (2) costs10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $46,50011,500 C: $20 C1: $21 $51,500(1) value at splitoff; (2) value after processing further.
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Irrelevance of Joint Costsfor Decision Making
Should A, B, or C be sold at the splitoffpoint 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)
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Accounting for Byproducts
Method A:The production method recognizes byproducts
at the time their production is completed.
Method B:The sale method delays recognition ofbyproducts until the time of their sale.
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Accounting for Byproducts
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.
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Accounting for Byproducts
Byproducts have low sales value. Cost-benefit analysis often times leads to the
use of the most expedient method.
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Accounting for Byproducts
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?
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Accounting for Byproducts
Byproduct revenues appear in the income statement as either:
Cost reduction for the main product, or Separate item of revenue or other income.
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End of Chapter 16