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11ch16

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  • 1. Cost Allocation: Joint Products and Byproducts Chapter 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 1
  • 2. Learning Objective 1 Identify the splitoff point(s) in a joint-cost situation.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 2
  • 3. Joint-Cost Basics Joint costs Joint products Byproduct Splitoff point Separable costs©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 3
  • 4. Joint-Cost Basics Raw milk Cream Liquid Skim©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 4
  • 5. Joint-Cost Basics Coal Gas Benzyl Tar©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 5
  • 6. Learning Objective 2 Distinguish joint products from byproducts.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 6
  • 7. Joint Products and Byproducts Main Products Joint Products Byproducts High Low Sales Value©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 7
  • 8. Learning Objective 3 Explain why joint costs should be allocated to individual products.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 8
  • 9. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 9
  • 10. Learning Objective 4 Allocate joint costs using four different methods.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 10
  • 11. Approaches to Allocating Joint Costs Two basic ways to allocate joint costs to products are: Approach 1: Approach 2: Market based Physical measure©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 11
  • 12. Approach 1: Market-based Data Sales value at splitoff method Estimated net realizable value (NRV) method Constant gross-margin percentage NRV method©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 12
  • 13. Allocating Joint Costs Example 10,000 units of A at a selling price of $10 = $100,000 Joint processing cost is $200,000 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 Splitoff point©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 13
  • 14. Allocating Joint Costs Example A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ 645 31,008315 ÷ 645 97,674230 ÷ 645 71,318 200,000Gross margin $ 68,992 $217,326 $158,682 $445,000©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 14
  • 15. 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?©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 15
  • 16. Sales Value at Splitoff Method ExampleProduct A Revenues: 7,500 units × $10.00 $75,000Cost of goods sold: Joint product costs $31,008 Less ending inventory $31,008 × 25% 7,752 23,256Gross margin $51,744©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 16
  • 17. Sales Value at Splitoff 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%©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 17
  • 18. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 18
  • 19. Estimated Net Realizable Value (NRV) Method ExampleAdditional 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?©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 19
  • 20. Estimated Net Realizable Value (NRV) Method Example 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?©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 20
  • 21. Estimated Net Realizable Value (NRV) Method Example To A1: 85 ÷ 575 × $200,000 = $29,565 To B1: 300 ÷ 575 × $200,000 = $104,348 To C1: 190 ÷ 575 × $200,000 = $66,087©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 21
  • 22. Estimated Net Realizable Value (NRV) Method Example Allocated Separable Inventory joint costs costs costs A1 $ 29,565 $ 35,000 $ 64,565 B1 104,348 46,500 150,848 C1 66,087 51,500 117,587 Total $200,000 $133,000 $333,000©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 22
  • 23. 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.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 23
  • 24. Constant Gross-Margin Percentage NRV Method Step 3: Deduct the expected separable costs from the total costs to obtain the joint-cost allocation.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 24
  • 25. Constant Gross-Margin Percentage NRV Method 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 25
  • 26. Constant Gross-Margin Percentage NRV Method 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%©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 26
  • 27. Constant Gross-Margin Percentage NRV Method 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)©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 27
  • 28. Constant Gross-Margin Percentage NRV Method 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 28
  • 29. Approach 2: Physical Measure Method Example $200,000 joint cost 20,000 48,000 12,000 pounds A pounds B pounds C Product A Product B Product C $50,000 $120,000 $30,000©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 29
  • 30. Learning Objective 5 Explain why the sales value at splitoff method is preferred when allocating joint costs.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 30
  • 31. Choosing a MethodWhy is the sales value at splitoff method widely used? It measures the value It does not anticipate of the joint product subsequent management immediately. decisions. It uses a It is simple. meaningful basis.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 31
  • 32. 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.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 32
  • 33. Avoiding Joint Cost Allocation Some companies refrain from allocating joint costs and instead carry their inventories at estimated net realizable value.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 33
  • 34. Learning Objective 6 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 16 - 34
  • 35. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 35
  • 36. 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)©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 36
  • 37. Learning Objective 7 Account for byproducts using two different methods.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 37
  • 38. 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.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 38
  • 39. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 39
  • 40. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 40
  • 41. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 41
  • 42. Accounting for Byproducts 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 $9,000 Less byproduct revenue 400 Less main product inventory 1,720 Cost of goods sold $6,880©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 42
  • 43. Accounting for Byproducts 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%©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 43
  • 44. Accounting for Byproducts Method A What are the inventoriable costs? Main product: 200 ÷ 1,000 × $8,600 = $1,720 Byproduct: 100 × $1.00 = $100©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 44
  • 45. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 45
  • 46. Journal Entries Method A 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 46
  • 47. Journal Entries Method A Cash or Accounts Receivable 10,400 Revenues 10,400 To record the sale of the main product©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 47
  • 48. 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.©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 48
  • 49. Accounting for Byproducts Method B Income Statement (Method B) Revenues: Main product (800 × $13) $10,400 Byproducts sold 300 Total revenues $10,700 Cost of goods sold: Joint production costs 9,000 Less main product inventory 1,800 $ 7,200 Gross margin $ 3,200©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 49
  • 50. Accounting for Byproducts 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-©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 50
  • 51. 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 51
  • 52. Journal Entries Method B 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 52
  • 53. Journal Entries Method B 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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 53
  • 54. End of Chapter 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 54

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