1. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Allocation: Joint Products and Byproducts Horngren, Foster & Datar Modified by Charles Bailey

2. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 1 Identify the splitoff point(s) in a joint-cost situation.

3. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Joint productsJoint costs Separable costs Splitoff point Byproduct

4. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Raw milk CreamLiquidSkim

5. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Coal GasBenzylTar

6. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Distinguish joint products from byproducts.

7. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint Products and Byproducts Sales Value High Low Main Products Joint Products Byproducts

8. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Explain why joint costs should be allocated to individual products.

9. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

10. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Allocate joint costs using four different methods.

11. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Approaches to Allocating Joint Costs Approach 2: Physical measure Approach 1: Market based Two basic ways to allocate joint costs to products are:

12. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Approach 1: Market-based Data Sales value at splitoff method Estimated net realizable value (NRV) method Constant gross-margin percentage NRV method We will not cover:

13. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Allocating Joint Costs Example 10,000 units of A at a selling price of $10 = $100,000 10,500 units of B at a selling price of $30 = $315,000 11,500 units of C at a selling price of $20 = $230,00 Joint processing cost is $200,000 Splitoff point

14. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Allocating Joint Costs Example 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

15. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales Value at Splitoff Method Example Assume all of the units produced of B and C were sold. 2,500 units of A (25%) remain in inventory. What is the gross margin percentage of each product?

16. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales Value at Splitoff Method Example Product A Revenues: 7,500 units × $10.00$75,000 Cost of goods sold: Joint product costs$31,008 Less ending inventory $31,008 × 25% 7,752 23,256 Gross margin$51,744

17. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales Value at Splitoff 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%

18. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Estimated Net Realizable Value (NRV) Method Example Assume that Oklahoma 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

19. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Estimated Net Realizable Value (NRV) Method Example Additional processing (separable) costs are as follows: A1: $35,000 B1: $46,500C1: $51,500 What is the estimated net realizable value of each product at the splitoff point?

20. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 allocated to each product?

21. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Estimated Net Realizable Value (NRV) Method Example To A1: 85 ÷ 575 × $200,000 = $29,565 To B1: 300 ÷ 575 × $200,000 = $104,348 To C1: 190 ÷ 575 × $200,000 = $66,087

22. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Estimated Net Realizable Value (NRV) Method Example AllocatedSeparableInventory 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

23. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 (20/60)*$200K

24. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Explain why the sales value at splitoff method is preferred when allocating joint costs.

25. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 6 Joint costs are irrelevant in managerial decisions!

28. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. SellingSelling Additional Units price price costs 10,000A: $10A1: $12$35,000 10,500B: $30B1: $33$46,500 11,500C: $20C1: $21$51,500

29. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 – Incremental cost $46,500 = ($15,000) Product C: Incremental revenue $11,500 – Incremental cost $51,500 = ($40,000)

30. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 7 Accounting for byproducts: A very brief overview omitting bookkeeping details.

31. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts The net sales value of a by product reduces the joint costs to be assigned to the joint or main product(s).

32. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Coal each ton costs $50 Gas NRV=$100 Benzyl NRV=$80 Tar (byproduct) NRV=$10 Now the net joint costs to assign to Gas & Benzyl are ($50-10)=$40/ton

33. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster The End