Cost accounting chapter 16

Cost Allocation: Joint Products and Byproducts © 2009 Pearson Prentice Hall All rights reserved Joint Cost Terminology Joint Costs – costs of a single production process that yields multiple products simultaneously Splitoff Point – the place in a joint production process where two or more products become separately identifiable Separable Costs – all costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific products © 2009 Pearson Prentice Hall All rights reserved Joint Cost Terminology  Categories of Joint Process Outputs: Outputs with a positive sales value Outputs with a zero sales value  Product – any output with a positive sales value, or an output that enables a firm to avoid incurring costs  Value can be high or low © 2009 Pearson Prentice Hall All rights reserved Joint Cost Terminology Main Product – output of a joint production process that yields one product with a high sales value compared to the sales values of the other outputs Joint Products – outputs of a joint production process that yields two or more products with a high sales value compared to the sales values of any other outputs © 2009 Pearson Prentice Hall All rights reserved Joint Cost Terminology Byproducts – outputs of a joint production process that have low sales values compare to the sales values of the other outputs © 2009 Pearson Prentice Hall All rights reserved Examples of Joint Cost Situations © 2009 Pearson Prentice Hall All rights reserved Joint Process Overview © 2009 Pearson Prentice Hall All rights reserved Reasons for Allocating Joint Costs Required for GAAP and taxation purposes Cost values may be used for evaluation purposes Cost-based Contracting Insurance Settlements Required by regulators Litigation © 2009 Pearson Prentice Hall All rights reserved Joint Cost Allocation Methods  Market-Based – allocate using market- derived data (dollars): Sales value at splitoff Net Realizable Value (NRV) Constant Gross-Margin percentage NRV  Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc © 2009 Pearson Prentice Hall All rights reserved Sales Value at Splitoff Method Uses the sales value of the entire production of the accounting period to calculate allocation percentage Ignores inventories © 2009 Pearson Prentice Hall All rights reserved Net Realizable Value Method Allocates joint costs to joint products on the basis of relative NRV of total production of the joint products NRV = Final Sales Value – Separable Costs © 2009 Pearson Prentice Hall All rights reserved Net Realizable Value Method Overview © 2009 Pearson Prentice Hall All rights reserved Net Realizable Value Method Illustrated © 2009 Pearson Prentice Hall All rights reserved Net Realizable Value Method Illustrated © 2009 Pearson Prentice Hall All rights reserved Constant Gross Margin NRV Method Allocates joint costs to joint products in an way that the overall gross-margin percentage is identical for the individual products Joint Costs are calculated as a residual amount © 2009 Pearson Prentice Hall All rights reserved Constant Gross Margin NRV Illustrated © 2009 Pearson Prentice Hall All rights reserved Physical-Measure Method Allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the splitoff point of total production of the products © 2009 Pearson Prentice Hall All rights reserved Physical Measures Illustration © 2009 Pearson Prentice Hall All rights reserved Method Selection If selling price at splitoff is available, use the Sales Value at Splitoff Method If selling price at splitoff is not available, use the NRV method If simplicity is the primary consideration, Physical-Measures Method or the Constant Gross-Margin Method could be used Despite this, some firms choose not to allocate joint costs at all © 2009 Pearson Prentice Hall All rights reserved Sell-or-Process Further Decisions In Sell-or-Process Further decisions, joint costs are irrelevant Joint products have been produced, and a prospective decision must be made: to sell immediately or process further and sell later Joint Costs are sunk Separable Costs need to be evaluated for relevance individually © 2009 Pearson Prentice Hall All rights reserved Sell-or-Process Further Flowchart © 2009 Pearson Prentice Hall All rights reserved Byproducts Two methods for accounting for byproducts Production Method – recognizes byproduct inventory as it is created, and sales and costs at the time of sale Sales Method – recognizes no byproduct inventory, and recognizes only sales at the time of sales: byproduct costs are not tracked separately © 2009 Pearson Prentice Hall All rights reserved Byproducts Illustration Overview © 2009 Pearson Prentice Hall All rights reserved Comparative Income Statements for Accounting for Byproducts © 2009 Pearson Prentice Hall All rights reserved © 2009 Pearson Prentice Hall All rights reserved ...Joint Cost Terminology Joint Costs – costs of a single production process that yields multiple products simultaneously... Separable Costs – all costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific products © 2009 Pearson Prentice Hall All rights reserved Joint Cost Terminology... purposes Cost values may be used for evaluation purposes Cost- based Contracting Insurance Settlements Required by regulators Litigation © 2009 Pearson Prentice Hall All rights reserved Joint Cost