Presentation on theme: "Cost Allocation: Joint Products and Byproducts"— Presentation transcript:
1Cost Allocation: Joint Products and Byproducts Chapter 16
2Identify the split-off point(s) in a joint-cost situation. Learning Objective 1Identify the split-off point(s)in a joint-cost situation.
3Joint-Cost Basics (E.g. 1) Split-off pointJoint costs are costsIncurred inproducing the raw milkRaw milkSeparable costs are costsincurred in producing theseseparately identifiable productsCreamLiquid Skim
6Joint Products and Byproducts Main Product = 1Joint Products ≥ 2ByproductsHighLowSales Value
7Explain why joint costs should be allocated to individual products. Learning Objective 3Explain why joint costs should beallocated to individual products.
8Why Allocate Joint Costs? to compute inventory cost and cost of goods soldto determine cost reimbursement under contractsfor insurance settlement computationsfor rate regulationfor litigation purposes
9Allocate joint costs using four different methods. Learning Objective 4Allocate joint costs usingfour different methods.
10Approaches to Allocating Joint Costs Two (2) basic ways to allocatejoint costs to products are:Approach 1:Market basedApproach 2:Physical measure
11Approach 1: Market-based Data – 3 methods (1) - Sales value at split-off method(2) - Estimated net realizable value (NRV) method(3) - Constant gross-margin percentage NRV method
12(1) Sales Value at Split-off Method Example 10,000 units of A at aselling price of $10 = $100,000Joint processingcost is $200,00010,500 units of B at aselling price of $30 = $315,00011,500 units of C at aselling price of $20 = $230,00Splitoff point
13(1) Sales Value at Split-off Method Example A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ ,008315 ÷ ,674230 ÷ ,318200,000Gross margin $ 68,992 $217,326 $158,682 $445,000
14(1) Sales Value at Split-off Method Example Assume all of the units producedof B and C were sold.2,500 units of A (25%)remain in inventory.What is the gross margin of product A ?What is the gross margin percentage of each product?
15(1) Sales Value at Split-off Method Example Product A Revenues: 7,500 units × $ $75,000Cost of goods sold:Joint product costs $31,008Less ending inventory$31,008 × 25% , ,256Gross margin $51,744
16(1) Sales Value at Split-off Method Example Product A:($75,000 – $ 23,256) ÷ $75,000 = 69%Product B:($315,000 – $97,674) ÷ $315,000 = 69%Product C:($230,000 – $71,318) ÷ $230,000 = 69%
17(2) Estimated Net Realizable Value (NRV) Method Example Assume that Oklahoma 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= $120,000B1:10,500 × $33.00= $346,500C1:11,500 × $21.00= $241,500
18(2) Estimated Net Realizable Value (NRV) Method Example Additional processing (separable) costs are as follows:A1: $35,000B1: $46,500C1: $51,500What is the estimated net realizable value of eachproduct at the splitoff point?
19(2) Estimated Net Realizable Value (NRV) Method Example Product A1: $120,000 – $35,000 = $85,000Product B1: $346,500 – $46,500 = $300,000Product C1: $241,500 – $51,500 = $190,000How much of the joint cost is allocatedto each product?
20(2) Estimated Net Realizable Value (NRV) Method Example To A1:85 ÷ 575 × $200,000 = $29,565To B1:300 ÷ 575 × $200,000 = $104,348To C1:190 ÷ 575 × $200,000 = $66,087
21(2) Estimated Net Realizable Value (NRV) Method Example Allocated Separable Inventoryjoint costs costs costsA1 $ 29,565 $ 35,000 $ 64,565B , , ,848C , , ,587Total $200,000 $133,000 $333,000
22(3) 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 percentageand deduct the gross margin from thefinal sales values to obtain the totalcosts that each product should bear.
23(3) Constant Gross-Margin Percentage NRV Method Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.
24(3) Constant Gross-Margin Percentage NRV Method What is the expected final sales value of totalproduction during the accounting period?Product A1: $120,000Product B1: ,500Product C1: ,500Total $708,000
25(3) Constant Gross-Margin Percentage NRV Method Step 1:Compute the overall gross-margin percentage.Expected final sales value $708,000Deduct joint and separable costs ,000Gross margin $375,000Gross margin percentage:$375,000 ÷ $708,000 = %
29Explain why the sales value at splitoff method is preferred Learning Objective 5Explain why the sales value atsplitoff method is preferredwhen allocating joint costs.
30Choosing a Method It measures the value of the joint product Why is the sales value at split-off method widely used?It measures the valueof the joint productimmediately.It does not anticipatesubsequent managementdecisions.It uses ameaningful basis.It is simple.
31Choosing a Method The NRV method should be used when there is not enough information about individualselling prices at split-off point.The physical-measure method is a moreappropriate method to use in rate regulation.
32Avoiding Joint Cost Allocation Some companies refrain from allocating jointcosts and instead carry their inventoriesat estimated net realizable value.
34Irrelevance of Joint Costs for Decision Making Assume that products A, B, and C can be soldat the splitoff point or processed furtherinto A1, B1, and C1.Selling Selling AdditionalUnits price price costs10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $26,50011,500 C: $20 C1: $21 $51,500
35Irrelevance of Joint Costs for 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 $26,500 = $5,000Product C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)
36Irrelevance of Joint Costs for 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)Split-offProduct B: Incremental revenue $31,500– Incremental cost $26,500 = $5,000Processed furtherProduct C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)Split-off
37Account for byproducts using two different methods. Learning Objective 7Account for byproductsusing two different methods.
38Accounting for Byproducts Method A:The production method recognizes byproductsat the time their production is completed.(Conceptually, this is the correct method)Method B:The sale method delays recognition ofbyproducts until the time of their sale.(used when dollar amount of byproducts are immaterial)
39Accounting for Byproducts Example Main Products Byproducts(Yards) (Yards)Production 1,SalesEnding inventorySales price $13/yard $1.00/yardNo beginning finished goods inventory
40Accounting for Byproducts Example Joint production costs for joint(main) products and byproducts:Material $2,000Manufacturing labor 3,000Manufacturing overhead 4,000Total production cost $9,000
41Accounting for Byproducts Method A Method A: The production methodWhat is the value of ending inventoryof joint (main) products?$9,000 total production cost– $400 net realizable value of the byproduct= $8,600 net production cost for the joint products
42Accounting for Byproducts Method A 200 ÷ 1,000 × $8,600 = $1,720 is the valueassigned to the 200 yards in ending inventory.What is the cost of goods sold?Joint production costs $9,000Less byproduct revenueLess main product inventory ,720Cost of goods sold $6,880
43Accounting for Byproducts Method A Income Statement (Method A)Revenues: (800 yards × $13) $10,400Cost of goods sold ,880Gross margin $ 3,520What is the gross margin percentage?$3,520 ÷ $10,400 = 33.85%
44Accounting for Byproducts Method A What are the inventoriable costs?Main product: 200 ÷ 1,000 × $8,600 = $1,720Byproduct: 100 × $1.00 = $100
45Journal Entries Method A Work in Process ,000Accounts Payable ,000To record direct materials purchased and usedin productionWork in Process ,000Various Accounts ,000To record conversion costs in the joint process
46Journal Entries Method A Byproduct InventoryFinished Goods 8,600Work in Process ,000To record cost of goods completedCost of Goods Sold 6,880Finished Goods ,880To record the cost of the main product sold
47Journal Entries Method A Cash or Accounts Receivable 10,400Revenues ,400To record the sale of the main product
48Accounting for Byproducts Method B Method B: The sale methodWhat is the value of ending inventory ofjoint (main) products?200 ÷ 1,000 × $9,000 = $1,800No value is assigned to the 400 yards ofbyproducts at the time of production.The $300 resulting from the sale ofbyproducts is reported as revenues.
49Accounting for Byproducts Method B Income Statement (Method B)Revenues: Main product (800 × $13) $10,400Byproducts soldTotal revenues $10,700Cost of goods sold:Joint production costs 9,000Less main product inventory 1,800 $ 7,200Gross margin $ 3,200
50Accounting for Byproducts Method B What is the gross margin percentage?$3,200 ÷ $10,700 = 29.91%What are the inventoriable costs?Main product: 200 ÷ 1,000 × $9,000 = $1,800By-product: -0-
51Journal Entries Method B Work in Process 2,000Accounts Payable ,000To record direct materials purchased and usedin productionWork in Process 7,000Various Accounts ,000To record conversion costs in the joint process
52Journal Entries Method B Finished Goods 9,000Work in Process ,000To record cost of goods completedCost of Goods Sold 7,200Finished Goods ,200To record the cost of the main product sold
53Journal Entries Method B Cash or Accounts Receivable 10,400Revenues ,400To record the sale of the main productCash or Accounts ReceivableRevenuesTo record the sale of the byproduct