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
Low
Sales Value
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
11,500 units of C at a
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
Gross margin $ 68,992
97,674
71,318
$217,326
$158,682
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

Method Example
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

Method Example
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

A1
B1
C1
Total
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
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
48,000
pounds B
12,000
pounds C
Product A
$50,000
Product B
$120,000
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 does not anticipate

subsequent management
decisions.
It uses a
meaningful basis.
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
Product C: Incremental revenue $11,500
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

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

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

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

Method A
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

Method A
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

Method A
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

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

Method B
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

Method B
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

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

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

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

Joint Products and Byproducts

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

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

Why Allocate Joint Costs?

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

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

Approach 1: Market-based Data

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

Allocating Joint Costs Example

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

Sales Value at Splitoff

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

Sales Value at Splitoff

Estimated Net Realizable Value

Estimated Net Realizable Value

What is the estimated net realizable value of each

Estimated Net Realizable Value

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

Estimated Net Realizable Value

Estimated Net Realizable Value

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

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

It does not anticipate

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

Some companies refrain from allocating joint

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

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

Irrelevance of Joint Costs

Irrelevance of Joint Costs

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

Accounting for Byproducts

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

Accounting for Byproducts

Accounting for Byproducts

Accounting for Byproducts

Accounting for Byproducts

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

Accounting for Byproducts

Accounting for Byproducts

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

Journal Entries Method A

Journal Entries Method A

Journal Entries Method A

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

Accounting for Byproducts

Accounting for Byproducts

Accounting for Byproducts

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

Journal Entries Method B