A joint production process results in two or more products, which are termed joint

products. The cost of the input and the joint production process is the joint product cost.
The point in the production process where the individual products become separately
identifiable is the split-off point.

There are three methods of allocating joint costs. The first method is the physical
measures of output, where joint costs are “allocated in proportion to each product’s
output measure“ (Schneider, 2012). The advantage of this method is the simple design,
however, there are a few disadvantages. First, the outputs may have different units of
measure, such as one unit is measured in gallons while the other is in tons. Secondly, the
units of measure may not be related to the product revenues.

The second method to review is relative sales value (RSV) where joint costs are allocated
to the approximate sales values at the split-off point (Schneider, 2012). An advantage of
this method is that it considers the concept of product revenue that was missing from the
previous method. A disadvantage stated by Schneider (2012) is that the “sales prices at
the split-off point may not be readily available”.

The final method, net realizable value (NRV) addresses the disadvantages of the previous
methods by using approximations of sales volume at the split-off point. In order to
approximate market value any estimated additional processing or disposal cost are
deducted from the final sales value (Fabozzi, Polimeni, and Drake, 2008, p.709). A
disadvantage to this method is that market values fluctuate while the production
process/cost maybe not.

Depending on the products output measure unit and known market value either method
would prove successful for a firm. Lacking additional details, I would consider the
relative sales value method the best because it incorporates sales value into the
calculation. Furthermore, Fabozzi, Polimeni, and Drake provide the support due to the
direct relationship between cost and known selling prices based on current market values
(2008).

Schneider, A. (2012). Managerial accounting: Decision making for the service and
manufacturing sectors. San Diego, CA: Bridgepoint Education.

The complete CFO handbook; from accounting to accountablity. (2008). Reference and
Research Book News, 23(1) Retreived from ProQuest Central Database.

Example Physical: Consider a factory that used corn to make
ethanol, animal feed, and seeds but seed production accounts for the
majority of the joint cost while ethanol accounts for more revenue. In
this example, ethanol is what influences the factory to spend the cost
on producing animal feed. In summary, since physical output unit of
measurement does not take the revenue of each product.

D. p. Polimeni. The first argument presented was short-term versus long-term. 2012). A. Is there a specific industry you feel the NRV method is more applicable? Schneider. CA: Bridgepoint Education. Essentially. 708). J. This addresses the revenue measurement that is lacking from the physical measures of output method and works from know sales revenues versus assumed values. You provided a very informative post. (2012).ebrary.RSV: Analysts argue since the price of a product is driven by the cost to create the product. USA: Wiley. Fabozzi. Hi Stephanie. S.. variable costs argue absorption managers can manipulate numbers in order to appear better. This will ultimately vary on the firm’s management style and preference. Hoboken. then the revenues made off the product be addressed in allocating joint costs (Fabozzi. & Drake. R. San Diego. Retrieved from http://www. Polimeni and Drake (2008) discussed how the price of a product is driven by the cost to create the product.. the variable cost method focuses on the short-term consequences of actions and costs rather than the long-term (Schneider. P. & Peterson. but does so based on assumptions. Complete CFO Handbook : From Accounting to Accountability. The net realizable value recognizes and addresses this issue. 2012). It seems to me this method relies on forecast that may under or over estimate revenues. I feel it is important to primarily focus on the short-term consequences of accounting decisions. DQ2 For the purpose of the discussion. 2008. whereas absorption costs argue a competent supervisor could easily see that numbers are being manipulated . Polimeni. (2008). thus skewing joint cost allocations. NJ. Essentially. The second argument is unethical behavior by managers. Managerial accounting: Decision making for the service and manufacturing sectors. thus the revenues made off the product should be addressed in allocating joint cost (p. I also favored the RSV approach. I have decided to show support for Variable Costing over absorption costing based on the following arguments. 708). F. Furthermore. Fabozzi.com Hi James The one weakness of the method is the price at split-off may not be available (Schneider.

because based on internal reports the need to make hurried decisions. from an ethical standpoint. Schneider. the internal report is more important than the external for decision making. CA: Bridgepoint . Managerial accounting: Decision making for the service and manufacturing sectors. and alerts management the firm is actually breaking even. an experiment by Schneider (2012) in 2004 revealed 51% of participants would intentionally be unethical to meet pretax income figures.(Schneider. The method allows management to make informed. 2012). less risky decisions that benefit the company rather than manipulating numbers in hopes of having a better future to compensate for assumptions. However. For instance. I am unaware of situations when variable costing could be manipulated to such a degree. San Diego. However. A. (2012). Thus. Variable costing argues dividing the costs allows the use of a contribution margin that is useful for planning and decision-making. Two sets of financials can be confusing. The third argument is variable versus fixed costs. specifically factory overhead. 2012). the internal reports create an overview of the situation. variable costing seems superior. Based on the arguments outlined in the text I am for variable costing. but there is a benefit to using variable costing for internal reporting and decision making. Thus. a firms the tax return can show the company’s costs outweigh revenues resulting in a loss on the year. The final argument is external reports versus internal reports. Absorption costing tends to different requirement for internal and external reporting which can be interpreted as inconsistent (Schneider.

What are your thoughts on this statement? Lalli. Retrieved from ProQuest ebrary. Hi Christina. fixed and variable cost are hard to distinguish. Hoboken. do you think this inadequate data could prevents a firm from establishing minimum product selling prices. I see variable costing as an easier approach to setting up the income statement. including these costs could lead to the wrong decision. Lalli (2011) also argued that fixed costs interfere with decision-making and that “variable costing is a logical extension of a responsibility and flexible budgeting and reporting system” (p. Hi Joi. one of the many deterrents to implementing the variable cost method. Handbook of Budgeting (6th Edition). 216).Replies: DQ2 Hi Babak. You provided a great presentation of the arguments for either costing method. 2011. William R. USA: John Wiley & Sons. To that end. Handbook of Budgeting (6th Edition). W. In this regard. NJ. USA: John Wiley & Sons. My thoughts on Fremgren’s argument are that since absorption costing does not make a distinction between fixed and variable cost. Lalli stated that. (2011). Another factor worth considering is the treatment of fixed production cost with each of these methods. R. Hoboken. USA: John Wiley & Sons. presented by Lalli (2011). making the product cost incomplete? Lalli. fixed costs cannot be recovered and occur regardless of management decisions? I. is that variable costing “excludes fixed factory overhead from the cost of the product” (p. Lalli. Hoboken. NJ. 2011. In my opinion. Handbook of Budgeting (6th Edition). NJ. 196). the variable costing method classifies cost by behavior making it useful for income statement calculations. Thank you for your comments. As you pointed out. Thank you for the example you provided that showed the effects of considering the long term and short term result of a management decision. I too am in favor of variable costing for many of the same reasons you presented. William R. Retrieved from ProQuest ebrary. Robert. I . “Proponents of variable costing argue that fixed cost should be excluded from product cost because they interfere with managerial decision making procedures” (p. Retrieved from ProQuest ebrary. 198). However.

Demand Media. These activities are carried out at the plant level that includes cost to sustain general production processes. Do you agree with Schneider’s concepts? Lalli (2011) stated that. “The income statement for the current reporting period reflects the total cost of the item-. these cost are often difficult to link to production specific activities (Schneider. Retrieved from http://smallbusiness. I think since fixed manufacturing cost contributes revenue only the manufactured goods are sold. . such as assembly. building and plant supervision. such as employee administration. Batch level activities are activities that are performed each time a batch of the product is produced.as GAAP guidelines require”(smallbusiness. A.d. 2012). NJ.chron. Schneider. (2011).) GAAP-Approved Costing Methods. R. 195). also exist and that is facility level activities.including overhead -. (2012).com/gaapapproved-costing-methods-80589.com). Retrieved from ProQuest ebrary. Product level activities are activities that are carried out separately for each product.. Lohrey. (n. Handbook of Budgeting (6th Edition). Unit level activities are repetitive activities that are performed on each unit produced. Hoboken. and in summary find them essential to manufacturing operations. W. Allocating cost to activity levels often promotes informative decision-making and promotes an efficient use of resources. CA: Bridgepoint A fourth level. However. Lalli. “proponents of full (absorption) costing believe that these cost should be included in the cost of the product” (p. product testing or special parts.html These level of activities are designed to trace costing through activities. such as packaging. Hi Babak. Managerial accounting: Decision making for the service and manufacturing sectors.chron.wanted to expand on your third argument regarding factory overhead where you surmise Schneider’s discussion that splitting cost in absorption costing is not easy and the difference is insignificant. the idea is that they should not be expensed until then. Jackie. USA: John Wiley & Sons. San Diego. Therefore. Absorption costing does appear to create a clearer connection in terms of the expenses being reported in the same period as when the revenue is generated.