Cost Allocation: Joint Products and Byproducts

Cost Allocation: Joint Products and Byproducts Chapter 16
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
16 - 1
Learning Objective 1
Identify the splitoff point(s) in a joint-cost situation.
16 - 2
Joint-Cost Basics
Joint costs Joint products
Byproduct
Splitoff point
Separable costs
16 - 3
Joint-Cost Basics
Raw milk
Cream
Liquid
Skim
16 - 4
Joint-Cost Basics
Coal
Gas
Benzyl
Tar
16 - 5
Distinguish joint products from byproducts.
16 - 6
Joint Products and Byproducts

Main Products Joint Products Byproducts
High Sales Value
Low
16 - 7
Explain why joint costs should be allocated to individual products.
16 - 8
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
16 - 9
Allocate joint costs using four different methods.
16 - 10
Approaches to Allocating Joint Costs

Two basic ways to allocate joint costs to products are:
Approach 1: Market based
Approach 2: Physical measure

16 - 11
Approach 1: Market-based Data

Sales value at splitoff method Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
16 - 12
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
16 - 13
Allocating Joint Costs Example

Sales Value Allocation of Joint Cost 100 645 315 645 230 645 A $100,000 B $315,000 C $230,000 Total $645,000
31,008
97,674 71,318 $217,326 $158,682
Gross margin $ 68,992
200,000 $445,000
16 - 14
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 - 15

Product A Revenues: 7,500 units $10.00 Cost of goods sold: Joint product costs $31,008 Less ending inventory $31,008 25% 7,752 Gross margin $75,000
23,256 $51,744
16 - 16

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%
16 - 17
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: B1: C1: 10,000 $12.00 10,500 $33.00 11,500 $21.00 = $120,000 = $346,500 = $241,500
16 - 18

Additional processing (separable) costs are as follows:
A1: $35,000
B1: $46,500
C1: $51,500
What is the estimated net realizable value of each product at the splitoff point?
16 - 19

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?
16 - 20

To A1: 85 575 $200,000 = $29,565 To B1: 300 575 $200,000 = $104,348 To C1: 190 575 $200,000 = $66,087
16 - 21

Allocated joint costs $ 29,565 104,348 66,087 $200,000 Separable costs $ 35,000 46,500 51,500 $133,000 Inventory costs $ 64,565 150,848 117,587 $333,000
A1 B1 C1 Total
16 - 22
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.
16 - 23

Step 3: Deduct the expected separable costs from the total costs to obtain the joint-cost allocation.
16 - 24

What is the expected final sales value of total production during the accounting period? Product A1: $120,000 Product B1: 346,500 Product C1: 241,500 Total $708,000
16 - 25

Step 1: Compute the overall gross-margin percentage. Expected final sales value $708,000 Deduct joint and separable costs 333,000 Gross margin $375,000 Gross margin percentage: $375,000 $708,000 = 52.966%
16 - 26

Step 2: Deduct the gross margin. Sales Gross Cost of Value Margin Goods sold Product A1: $120,000 $ 63,559 $ 56,441 Product B1: 346,500 183,527 162,973 Product C1: 241,500 127,913 113,587 Total $708,000 $375,000 $333,000
($1 rounding)
16 - 27

Step 3: Deduct separable costs. Cost of Separable Joint costs goods sold costs allocated Product A1: $ 56,441 $ 35,000 $ 21,441 Product B1: 162,973 46,500 116,473 Product C1: 113,587 51,500 62,087 Total $333,000 $133,000 $200,000
16 - 28
Approach 2: Physical Measure Method Example

$200,000 joint cost 20,000 pounds A Product A $50,000 48,000 pounds B Product B $120,000 12,000 pounds C Product C $30,000
16 - 29
Explain why the sales value at splitoff method is preferred when allocating joint costs.
16 - 30
Choosing a Method
Why is the sales value at splitoff method widely used? It measures the value of the joint product immediately.
It uses a meaningful basis.
It does not anticipate subsequent management decisions.

It is simple.
16 - 31
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.
16 - 32
Avoiding Joint Cost Allocation
Some companies refrain from allocating joint costs and instead carry their inventories at estimated net realizable value.
16 - 33
Explain why joint costs are irrelevant in a sell-or-process-further decision.
16 - 34
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 10,000 A: $10 A1: $12 $35,000 10,500 B: $30 B1: $33 $46,500 11,500 C: $20 C1: $21 $51,500
16 - 35
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)
16 - 36
Account for byproducts using two different methods.
16 - 37
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.
16 - 38
Accounting for Byproducts Example

Main Products Byproducts (Yards) (Yards) Production 1,000 400 Sales 800 300 Ending inventory 200 100 Sales price $13/yard $1.00/yard No beginning finished goods inventory
16 - 39
Accounting for Byproducts Example

Joint production costs for joint (main) products and byproducts: Material $2,000 Manufacturing labor 3,000 Manufacturing overhead 4,000 Total production cost $9,000
16 - 40
Accounting for Byproducts Method A

Method A: The production method What is the value of ending inventory of joint (main) products? $9,000 total production cost $400 net realizable value of the byproduct = $8,600 net production cost for the joint products
16 - 41

200 1,000 $8,600 = $1,720 is the value assigned to the 200 yards in ending inventory. What is the cost of goods sold? Joint production costs Less byproduct revenue Less main product inventory Cost of goods sold $9,000 400 1,720 $6,880
16 - 42

Income Statement (Method A) Revenues: (800 yards $13) $10,400 Cost of goods sold 6,880 Gross margin $ 3,520 What is the gross margin percentage?
$3,520 $10,400 = 33.85%

16 - 43

What are the inventoriable costs? Main product: 200 1,000 $8,600 = $1,720
Byproduct: 100 $1.00 = $100
16 - 44
Journal Entries Method A

Work in Process 2,000 Accounts Payable 2,000 To record direct materials purchased and used in production Work in Process 7,000 Various Accounts 7,000 To record conversion costs in the joint process
16 - 45

Byproduct Inventory 400 Finished Goods 8,600 Work in Process 9,000 To record cost of goods completed Cost of Goods Sold 6,880 Finished Goods 6,880 To record the cost of the main product sold
16 - 46

Cash or Accounts Receivable 10,400 Revenues 10,400 To record the sale of the main product
16 - 47
Accounting for Byproducts Method B

Method B: The sale method What is the value of ending inventory of joint (main) products? 200 1,000 $9,000 = $1,800 No value is assigned to the 400 yards of byproducts at the time of production. The $300 resulting from the sale of byproducts is reported as revenues.
16 - 48

Income Statement (Method B)
Revenues: Main product (800 $13) Byproducts sold Total revenues Cost of goods sold: Joint production costs 9,000 Less main product inventory 1,800 Gross margin
$10,400 300 $10,700
$ 7,200 $ 3,200
16 - 49

What is the gross margin percentage? $3,200 $10,700 = 29.91%
What are the inventoriable costs?

Main product: 200 1,000 $9,000 = $1,800 By-product: -0-
16 - 50
Journal Entries Method B

Work in Process 2,000 Accounts Payable 2,000 To record direct materials purchased and used in production Work in Process 7,000 Various Accounts 7,000 To record conversion costs in the joint process
16 - 51

Finished Goods 9,000 Work in Process 9,000 To record cost of goods completed Cost of Goods Sold 7,200 Finished Goods 7,200 To record the cost of the main product sold
16 - 52

Cash or Accounts Receivable 10,400 Revenues 10,400 To record the sale of the main product Cash or Accounts Receivable 300 Revenues 300 To record the sale of the byproduct
16 - 53
End of Chapter 16
16 - 54

Cost Allocation: Joint Products and Byproducts

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Cost Allocation: Joint Products and Byproducts Chapter 16

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

Identify the splitoff point(s) in a joint-cost situation.

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

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

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

Distinguish joint products from byproducts.

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

Joint Products and Byproducts

High Sales Value

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

Explain why joint costs should be allocated to individual products.

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

Why Allocate Joint Costs?

for insurance settlement computations

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

Allocate joint costs using four different methods.

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

Approaches to Allocating Joint Costs

Approach 1: Market based

Approach 2: Physical measure

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

Approach 1: Market-based Data

Constant gross-margin percentage NRV method

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

Allocating Joint Costs Example

Joint processing cost is $200,000

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

Allocating Joint Costs Example

Gross margin $ 68,992

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

Sales Value at Splitoff Method Example

Sales Value at Splitoff Method Example

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

Sales Value at Splitoff Method Example

Estimated Net Realizable Value (NRV) Method Example

Estimated Net Realizable Value (NRV) Method Example

Estimated Net Realizable Value (NRV) Method Example

Product C1: $241,500 $51,500 = $190,000

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

Estimated Net Realizable Value (NRV) Method Example

Estimated Net Realizable Value (NRV) Method Example

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

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

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

Constant Gross-Margin Percentage NRV Method

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

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

Approach 2: Physical Measure Method Example

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

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

It does not anticipate subsequent management decisions.

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

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

Avoiding Joint Cost Allocation

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

Explain why joint costs are irrelevant in a sell-or-process-further decision.

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

Irrelevance of Joint Costs for Decision Making

Irrelevance of Joint Costs for Decision Making