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COST ALLOCATION –
JOINT COST AND BYPRODUCTS

Group Project
RESHMI RAVEENDRAN
(212027)
Joint Cost Terminology
• Joint Costs – Costs of a single production process
that yields multiple products simultaneously.
...
Joint Cost Terminology
• Main Product – Output of a joint production process
that yields one product with a high sales val...
Examples of Joint Cost Situations
Joint Process Overview
Reasons for Allocating Joint Costs
•
•
•
•
•
•

Required for GAAP and taxation purposes
Cost values may be used for evalua...
Distinction and Similarity Between Joint
Products and By-Products
• The distinction between joint products and by-products...
Joint Cost Allocation Methods
•

Market-Based – allocate using market-derived
data (dollars):
1. Net Realizable Value (NRV...
Physical-Measure Method
• Allocates joint costs to joint products on the
basis of the relative weight, volume, or other
ph...
Joint Cost Illustration Data
Joint Cost Illustration Overview
Physical Measures Illustration
Weighted Average Method
• The weighted average method uses the weight factors to include
such diverse elements as amount o...
Sales Value at Splitoff Point Method
• Uses the sales value of the entire production of the
accounting period to calculate...
Joint Cost Illustration Data
Joint Cost Illustration Overview
Sales Value at Splitoff Illustration
Net Realizable Value Method
• Allocates joint costs to joint products on the
basis of relative NRV of total production of ...
Sell-or-Process Further Flowchart
Net Realizable Value Method Overview
Net Realizable Value Method
Illustrated
Net Realizable Value Method
Illustrated
Method Selection
• If selling price at splitoff is available, use the Sales
Value at Splitoff Method
• If selling price at...
Byproducts
• Byproducts have low sales value and some times
their salvage value is not considered.
• Two methods for accou...
Accounting for Byproducts
Neither approach is conceptually correct.
Both technically violate GAAP.
• Method A- Production ...
Byproducts Illustration Overview
The Westlake Corporation processes timber into fine-grade lumber
and wood chips that are used as mulch in gardens and lawn...
Comparative Income Statements for
Accounting for Byproducts
THANKS!!!!!
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Cost allocation joint cost [compatibility mode]

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Transcript of "Cost allocation joint cost [compatibility mode]"

  1. 1. COST ALLOCATION – JOINT COST AND BYPRODUCTS Group Project RESHMI RAVEENDRAN (212027)
  2. 2. Joint Cost Terminology • Joint Costs – Costs of a single production process that yields multiple products simultaneously. • Splitoff Point – The place in a joint production process where two or more products become separately identifiable • Separable Costs – All costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific products
  3. 3. Joint Cost Terminology • Main Product – Output of a joint production process that yields one product with a high sales value compared to the sales values of the other outputs • Joint Products – Outputs of a joint production process that yields two or more products with a high sales value compared to the sales values of any other outputs • Byproducts – Outputs of a joint production process that have low sales values compare to the sales values of the other outputs
  4. 4. Examples of Joint Cost Situations
  5. 5. Joint Process Overview
  6. 6. Reasons for Allocating Joint Costs • • • • • • Required for GAAP and taxation purposes Cost values may be used for evaluation purposes Cost-based Contracting Insurance Settlements Required by regulators Litigation
  7. 7. Distinction and Similarity Between Joint Products and By-Products • The distinction between joint products and by-products rests solely on the relative importance of their sales value. • A by-product is a secondary product whose total sales value is relatively minor in comparison with the sales value of the main product (joint product). • Relationships between joint products and by-products change over time as technology and markets change. • By-products may become more and more important, eventually becoming joint products. • When the relative importance of individual products changes, the products need to be reclassified and the costing procedures need to be changed.
  8. 8. Joint Cost Allocation Methods • Market-Based – allocate using market-derived data (dollars): 1. Net Realizable Value (NRV) • Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc 1. The sales value at Splitoff method 2.The Physical-measure method 3. Weighted average
  9. 9. Physical-Measure Method • Allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the splitoff point of total production of the products
  10. 10. Joint Cost Illustration Data
  11. 11. Joint Cost Illustration Overview
  12. 12. Physical Measures Illustration
  13. 13. Weighted Average Method • The weighted average method uses the weight factors to include such diverse elements as amount of material used, difficulty to manufacture, time consumed, difference in type of labor used, and size of unit. Weighted physical units = Number of units × Weight factor Example: The canning industry uses weight factors to distinguish between can sizes or quality of product. The weighted average method allocates relatively more of the joint cost to the high-grade products because they represent more desirable and profitable products.
  14. 14. Sales Value at Splitoff Point Method • Uses the sales value of the entire production of the accounting period to calculate allocation percentage • The cost-allocation base (total sales value at splitoff) is expressed in terms of a common denominator (the amount of revenues) that is systematically recorded in the accounting system. To use this method, selling prices must exist for all products at the splitoff point
  15. 15. Joint Cost Illustration Data
  16. 16. Joint Cost Illustration Overview
  17. 17. Sales Value at Splitoff Illustration
  18. 18. Net Realizable Value Method • Allocates joint costs to joint products on the basis of relative NRV of total production of the joint products • NRV = Final Sales Value – Separable Costs
  19. 19. Sell-or-Process Further Flowchart
  20. 20. Net Realizable Value Method Overview
  21. 21. Net Realizable Value Method Illustrated
  22. 22. Net Realizable Value Method Illustrated
  23. 23. Method Selection • If selling price at splitoff is available, use the Sales Value at Splitoff Method • If selling price at splitoff is not available, use the NRV method • If simplicity is the primary consideration, Physical-Measures Method. • Despite this, some firms choose not to allocate joint costs at all
  24. 24. Byproducts • Byproducts have low sales value and some times their salvage value is not considered. • Two methods for accounting for byproducts • Production Method – i) Recognizes byproduct inventory as it is created, ii) Byproduct revenues appear in the income statement as Cost reduction for the main product • Sales Method – i) Recognizes only sales at the time of sales, ii) Byproduct revenues appear in the income statement as Separate item of revenue or other income
  25. 25. Accounting for Byproducts Neither approach is conceptually correct. Both technically violate GAAP. • Method A- Production method • Recognizes byproducts revenue at the time their production is completed. • Method B: Sales method Does not recognize byproducts in inventory.
  26. 26. Byproducts Illustration Overview
  27. 27. The Westlake Corporation processes timber into fine-grade lumber and wood chips that are used as mulch in gardens and lawns. Information about these products follows: Fine-Grade lumber (the main product)—sells for $6 per board foot (b.f.) Wood chips (the byproduct)—sells for $1 per cubic foot (c.f.) Data for July 2012 are as follows Beginning production production sales Ending inventory Fine-Grade lumber 0 50,000 40,000 10,000 Wood chips 0 4,000 1,200 2,800
  28. 28. Comparative Income Statements for Accounting for Byproducts
  29. 29. THANKS!!!!!
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