Unit 3-3 Joint Product And By-product Costing
Susan Dai
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Independent Multiple Independent Multiple--Product Production
Raw Material:Steel
Processing
Taurus
Mustang
Processing
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Joint Production Process
Raw Material:
Hog
Processing
Hides
Pork Meat
Split-Off Point
Joint Production Process
Raw Materials
Joint Process
Process (1)
Product B
Product A
Split-Off
Point
Process (2)
Process (3)
Separable Cost:
D. Materials
Direct labor
F.O.H.
Joint Costs:
D. Materials
Direct labor
F.O.H.
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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
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
Joint Cost Terminology ?Byproducts –outputs of a joint production process that have low sales values compare to the sales values of the other outputs
Byproducts
Characteristics
n By-product resulting from scrap, trimmings, and so forth, of the main products in essentially nonjoint-product types of undertakings (e.g., fabric trimmings from clothing
pieces).
n Scrap and other residue from essentially joint-product types of processes (e.g., fat trimmed from beef
carcasses).
n A minor joint product situation (fruit skins and trimmings used as animal feed).
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
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
Joint Cost Allocation Methods ?Physical Measures –allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc.
?Market-Based –allocate using market-derived data (dollars):
1.Sales value at splitoff
https://www.doczj.com/doc/582879989.html, Realizable Value (NRV)
3.Constant Gross-Margin percentage NRV
Allocating Joint
Costs
Allocation based on the relative values of the products at the split-off point. Allocation based on a physical measure of the joint products at the split-off point. Allocation based on final sales values less separable processing
costs.
Relative-Sales-Value Method
Physical-Units
Method
Net-Realizable-Value Method
Allocating Joint Costs ?Physical Measure
–Treat each unit as equally desirable
–Assign same cost to each unit
–Provides an unchanging yardstick of output
–Use for products with unstable selling prices
–Use in rate-regulated industries
–Ignores revenue-generating ability of joint product
Sales Value at Splitoff Method ?Uses the sales value of the entire production of the accounting period to calculate allocation percentage
?Ignores inventories
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
Constant Gross Margin NRV Method ?Allocates joint costs to joint products in a way that the overall gross-margin percentage is identical for the individual products
?Joint Costs are calculated as a residual amount
Constant Gross Margin NRV Method –1st step: overall GP%= (total sales value –total joint cost –total separable cost)/total sales value
–2nd step: COGS of each product = sales value *(1-GP%)
–3rd step: allocated joint cost=COGS of each product-separable cost
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
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
The End