Joint-Process Costing

Oleh CAHYO PRIYATNO, SE, AK, CPMA, CA1

Chapter Outline
A. Cost Management Challenges There are two questions asked in this chapter. 1. How do cost managers anticipate and resolve potential conflicts between joint-product and process decision making and external reporting? If joint-cost allocations are arbitrary, does that mean they are meaningless?

2. B.

Learning Objectives This chapter has six learning objectives. 1. It teaches how to use cost management information to increase profits from using scarce resources of joint production processes. It demonstrates how to use cost-management data in the sell-or-process further decision. It explains why organizations allocate joint costs. The chapter explains the differences between the joint-cost allocation methods and why one way or the other may be preferred. It shows how to account for by-products. Chapter 9 presents explanations of the net-realizable-value and physical-measures joint cost allocation methods.

2. 3. 4.

5. 6.

C.

In order to understand joint processes and joint products, there are five terms to understand. 1. A joint process is some common set of inputs or activities that result in two or more products. The cost of the inputs/activities must be allocated to the separate products because they represent part of inventory costs for different inventory items. In earlier chapters where job costing was explained, there were many costs that could be traced directly to one unit of product because each job represented a unit of product. Costs that were not directly related to a particular job had to be allocated. In Chapter 8, process costing was described as an appropriate costing method when every unit of product is homogeneous. The types of products that occur in a joint process environment are dissimilar from each other, yet a significant portion of the cost cannot be directly traced to any one of the two or more products being produced.

Global Financial Controller PT. Moga International, Mahasiswa Magister Akuntansi Terapan (MAKSI) Universitas Gajah Mada, Independent Advisor , dan Anggota Utama Ikatan Akuntan Indonesia

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Joint processes create a different type of cost assignment problem. One input or process is used to create two or more types of output. The costs that result from the joint process must be allocated to the joint products because the costs are production costs, which must be inventoried and eventually included as part of cost of goods sold. 2. Joint products are the result of a joint process. That is, two or more outputs result from the common set of inputs. Since the joint process cannot be split into the portions that each product causes separately, allocation of joint costs is used to assign these costs. Joint costs (or joint-process costs) are costs that arise from the common set of inputs. These are the costs that must be allocated among the joint products. Joint costs occur before the joint products emerge as separate, distinguishable products. Joint costs use batch and facility-level resources. The split-off point is the point at which individual products from the joint process emerge and can be identified as unique products. This is the point at which costs can be traced to a particular joint product. Costs occurring after the split-off point do not have to be allocated. It is also at the split-off point that a management decision must be made regarding what should be done with the joint products. Products can be sold at the split-off point, or they can be processed further. Some products are final products at the split-off point and do not require further processing. Other products are intermediate products at the split -off point. Such products can be sold to others, who complete the production process, making it into the final product. These products could also be processed further, to the point at which they are final products. For instance, a chemical company that produces coatings for cookware could make the final product, treated cookware. Alternatively, it could make the intermediate product, the coating for the cookware, and sell this intermediate product to a company that makes the cookware. 5. Further processing costs (also called separate or separable costs) are costs that can be traced directly to one of the joint products. These costs occur after the split-off point. If products are not processed further, either they are already in their final form at this stage, or they are sold as intermediate products that are finalized by other organizations. If the products are processed further, there are costs associated with these additional processing activities.

3.

4.

D.

Managers should look at maximizing overall profitability by choosing the best set of joint products possible. If the mix is not profitable, the project should not even be pursued. Part of the analysis of profitability is the decision to sell intermediate products at the split-of point or process them further. When a product is processed further, it becomes more valuable than a product that is not processed further. Thus, the price of such products should increase. The decision to process further is based on a comparison of the additional revenue, generated by selling the product at a higher price, to the additional cost of processing the product further. If the incremental revenues are greater than the incremental costs, the product should be processed further. In some situations, the intermediary product may have no sellable value and has to be processed further in order to be sellable. Still the question remains. Are we better off to discard the item or process it further and sell it?

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E.

Joint costs are part of product costs, which is the main reason for assigning them to products. Joint cost allocation is necessary for several other reasons. 1. Joint costs are inventory costs and, subsequently, become part of the cost of goods sold. A portion of the joint costs must flow through the accounting system to reflect the recovery of the expense through sales. Joint costs are allocated in response to regulatory requirements that mandate assignment of such costs as a basis for price-setting. Estimation of casualty losses makes joint cost allocation necessary. Performance evaluation may include some joint costs (although caution should be used whenever allocated costs are included in an evaluation). Joint costs should not be used to make profitability decisions for individual joint products.

2.

3. 4.

5.

F.

Distinction must be made between main product(s) and by products which are incidental to the process with little value. Revenues from by products are often regarded as a reduction in cost for producing the main products. There are two ways commonly used to allocate joint costs. 1. The Net Realizable Method assigns joint costs to joint products based on the relative values of the products. For each product, estimated sales revenue minus estimated separate costs for that product equals estimated net realizable value (NRV). Total estimated NRV of all joint products is the allocation base. Product NRV divided by total NRV is multiplied by total joint cost to get the joint cost allocation for each product. a. The income statement for companies with joint products is detailed for managers use, so that it is obvious which products generate profit and by how much. The income statement shows each product separately. Cost of goods sold is split into two-dollar amounts. One is the further processing costs, which are traceable to individual joint products. The other is the amount of joint cost allocated to each product. The presentation of the income statement in this segmented form illustrates an important feature of the NRV method. If a product is profitable before allocation of joint costs, it is at this point that the profitability of the individual joint product should be evaluated.

b.

2.

The Physical Measures Method assigns joint costs based on physical characteristics of the products, like weight, size, or other quantities. The final weight (or length, volume, content, etc.) of each product is determined. Then the total weight of production is determined. The total weight is the allocation base. The weight of one product divided by the total weight is multiplied by the joint cost to get the joint cost allocation for each product. a. As with the NRV method, the income statement details joint products separately

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and splits cost of goods sold into the further processing costs and joint costs. b. A major benefit of using a physical measures method is its simplicity. If products are relatively comparable in their weights, this is a practical approach. If the joint products have very different weights relative to each other, this method is likely to distort product gross margins. However, weight may not be a good determinant for value as well as cost. A major drawback to using the physical measures method is that it bears no relation to the relative profitability of each joint product. Thus, using this method may distort the relative contributions of each joint product.

c.

3.

The flow of costs through the accounting system is based on the use of control accounts for WIP and FGI, similar to job costing. Subsidiary ledgers are maintained for each of the joint products. There are two types of costs added to the subsidiary accounts for particular joint costs. They are the further processing (or separate) costs and the joint cost allocation. When deciding which of the two joint cost allocation methods is best to use, managers should consider the following three points. a. Product decisions should not be based on gross margins, which include the joint cost allocation, unless the product must comply with a regulatory requirement. When possible, joint costs should be allocated in such a way that regulated profits of cost reimbursements are maximized. This is usually only an issue for government contracts or regulated industries. The joint cost allocation procedure should be clearly specified in contractual agreements between the customer and product provider.

4.

b.

c.

G.

By-products are outputs from a joint production process that are minor in quantity or NRV in comparison to main products. A joint process may result in by-products, but joint costs are allocated only to the main products that result from a joint process. By-products do not receive any joint cost allocation. Accounting for revenues and costs of by-products (i.e., NRV) is described below. Accounting for by-products differs from accounting for main products. There are two ways to account for by-products. 1. Treat by-product net realizable value as other revenue. This is a simple method, which allows NRV of by-products to be reported as a single line-item in the income statement. Many companies use this reporting approach because by-product revenues and costs are so small relative to revenues and costs from the main products. Deduct by-product net realizable value from joint costs of main products. This approach, while more accurately reflecting the link between main products and by-products, is more complicated to use. This is especially true if all main products are not sold. Then, NRV of by-products must be split between cost of goods sold and ending inventory of the main

2.

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products.

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H.

What to do with scrap and waste is another concern to deal with in a joint cost environment. Production activities often result in waste, or scrap. Waste and scrap can either be disposed of at a cost, or management can look for ways to dispose of them for a profit. Disposal costs for scraps or revenues from sale of scraps are included as part of the joint-processing costs. Revenues generated from waste or scrap are subtracted from joint costs. Costs of disposing of scrap or waste are added to joint costs. Other methods used for joint cost allocation are relative sales value at split-off method and constant gross margin percentage method. 1. The relative sales value at split off method assumes that the products have a sales value at split off point. This method uses the relative sales value percentages at the split off point and multiplies those values by joint costs to determine the fair share of costs for each product. This method is inapplicable if the product does not have a sales value at the split-off point. 2. Constant gross margin percentage method first subtracts costs beyond split-off point and joint costs from total sales revenue to arrive at the gross margin. The percentage of gross margin is then applied to individual products. Gross margin is subtracted from revenue and additional costs beyond split off point (if any) to arrive at the share of joint costs for each product. a. The gross margin method assumes that the margin from each product is the same percentage. b. Net realizable value method results in gross margin percentages which are equal as a percentage of NRV of each product.

I.

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