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Published byEleanor Stanley Modified over 9 years ago
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Cost Allocation: Joint Products and By-products
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Joint-Cost Basics Joint costs Joint products Byproduct Splitoff point
Separable costs
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Key terms: Joint products – two or more outputs produced simultaneously by a single manufacturing process using common input Split-off point – the stage of processing where joint products are separated. Joint cost – costs of processing two or more products prior to the split-off point; common cost Byproducts– products that result incidentally from the joint products - Separable cost – cost after the split-off point
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Joint Product Cost Allocation
Consider the following example of an oil refinery. We will assume only two products, gasoline and oil.
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Joint Product Cost Allocation
Input Production Process Split-Off Point Joint Product Costs Oil Gasoline Final Sale Separate Processing Separate Processing Costs Separate Processing Costs
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Joint Products and Byproducts
Main Products Joint Products Byproducts High Low Sales Value
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Relatively low value or quantity when compared to major products
By-Products Joint Input Production Process Split-Off Point Costs By-products Major Product Relatively low value or quantity when compared to major products
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Explain why joint costs should be allocated to individual products.
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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 Allocating Joint Costs
Two basic ways to allocate joint costs to products are: Approach 1: Physical measure Approach 2: Market-based
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Allocating Joint Costs
Approach 1 a. Physical-Units Method b. Net-Realizable- Value Method Joint Product Costs Approach 2 a. Relative- Sales Value Method c. Gross margin Percent method
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Physical-Units Method
Allocation based on a physical measure of the joint products at the split-off point. Allocation based on the relative values of the products at the split-off point. Relative-Sales- Value Method Net-Realizable- Value Method Allocation based on final sales values less separable processing costs. Allocation based on a constant gross margin for all products. Gross margin Percent Method
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Physical-Units Method
240,000 gallons 360,000 gallons Joint Production Process Split-Off Point Oil Gasoline Joint material cost = $275,000 Joint conversion cost = $225,000
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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
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Market-based Data 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
1,000 units of A at a selling price of P100 = P100,000 Joint processing cost is P200,000 1,500 units of B at a selling price of P300 = P450,000 2,000 units of C at a selling price of P200 = P400,00 Splitoff point
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Allocating Joint Costs Example
A B C Total Sales Value P100,000 P450,000 P400,000 P950,000 Allocation of Joint Cost 100 ÷ ,053 450 ÷ ,737 400 ÷ ,210 200,000 Gross margin P 78,947 P355,263 P315,790 P750,000
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Sales Value at Splitoff Method Example
Assume all of the units produced of B and C were sold. 250 units of A (25%) remain in inventory. What is the gross margin percentage of each product?
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Sales Value at Splitoff Method Example
Product A Revenues: 750 units × P P75,000 Cost of goods sold: Joint product costs P21,053 Less ending inventory P21,053 × 25% , ,790 Gross margin P59,210
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Sales Value at Splitoff Method Example
Product A: (P75,000 – P 15,790) ÷ 75,000 = 79% Product B: (P450,000 – P94,737) ÷ P450,000 = 79% Product C: (P400,000 – $84,210) ÷ P400,000 = 79%
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Estimated Net Realizable Value (NRV) Method Example
Assume that MBA-TEP Company can process products A, B, and, C further into A1, B1, and C1. The new sales values after further processing are: A1: 1,000 × P120 = P120,000 B1: 1,500 × P330 = P495,000 C1: 2,000 × $210 = P420,000
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Estimated Net Realizable Value (NRV) Method Example
Additional processing (separable) costs are as follows: A1: P35,000 B1: P50,000 C1: P55,000 What is the estimated net realizable value of each product at the splitoff point?
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Estimated Net Realizable Value (NRV) Method Example
Product A1: P120,000 – P35,000 = P85,000 Product B1: P495,000 – P50,000 = P445,000 Product C1: P420,000 – P55,000 = P365,000 How much of the joint cost is allocated to each product?
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Estimated Net Realizable Value (NRV) Method Example
To A1: 85,000 ÷ 895,000 × P200,000 = P18,994 To B1: 445,000 ÷ 895,000 × P200,000 = P99,441 To C1: 365,000 ÷ 895,000 × P200,000 = P81,564
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Estimated Net Realizable Value (NRV) Method Example
Allocated Separable Inventory joint costs costs costs A1 P 18,994 P 35,000 P 53,994 B , , ,442 C , , ,564 Total P200,000 P140,000 P340,000
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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.
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Constant Gross-Margin Percentage NRV Method
Step 3: Deduct the expected separable costs from the total costs to obtain the joint-cost allocation.
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Constant Gross-Margin Percentage NRV Method
What is the expected final sales value of total production during the accounting period? Product A1: P 120,000 Product B1: ,000 Product C1: ,000 Total P1,035,000
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Constant Gross-Margin Percentage NRV Method
Step 1: Compute the overall gross-margin percentage. Expected final sales value P1,035,000 Deduct joint and separable costs ,000 Gross margin P695,000 Gross margin percentage: P695,000 ÷ P1,035,000 = 67.15%
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Constant Gross-Margin Percentage NRV Method
Step 2: Deduct the gross margin. Sales Gross Cost of Value Margin Goods sold Product A1: P120,000 P 80,580 P 39,421 Product B1: 495, , ,608 Product C1: 420, , ,971 Total P 1,035,000 P695,000 P340,000
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Constant Gross-Margin Percentage NRV Method
Step 3: Deduct separable costs. Cost of Separable Joint costs goods sold costs allocated Product A1: P 39,421 P 35,000 P 4,421 Product B1: 162, , ,608 Product C1: 137, , ,971 Total P340,000 P140,000 P200,000
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Explain why the sales value at splitoff method is preferred
when allocating joint costs.
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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.
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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.
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Avoiding Joint Cost Allocation
Some companies refrain from allocating joint costs and instead carry their inventories at estimated net realizable value.
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Explain why joint costs sell-or-process-further decision.
are irrelevant in a sell-or-process-further decision.
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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 price costs 1,000 A: P100 A1: P120 P35,000 1,500 B: P300 B1: P330 P50,000 2,000 C: P200 C1: P P55,000
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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 P20,000 – Incremental cost P35,000 = (P15,000) Product B: Incremental revenue P45,000 – Incremental cost P50,000 = (P5,000) Product C: Incremental revenue $20,000 – Incremental cost P55,000= (P35,000)
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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 of byproducts until the time of their sale.
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End of Report Thank you
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