Chapter 16final

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Chapter 16final

  1. 1. Cost Allocation: Joint Products and Byproducts
  2. 2. Joint Cost Terminology <ul><li>Joint Costs – costs of a single production process that yields multiple products simultaneously. </li></ul><ul><li>Splitoff Point – the place in a joint production process where two or more products become separately identifiable </li></ul><ul><li>Separable Costs – all costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific products </li></ul>
  3. 3. Joint Cost Terminology <ul><li>Categories of Joint Process Outputs: </li></ul><ul><ul><li>Outputs with a positive sales value </li></ul></ul><ul><ul><li>Outputs with a zero sales value </li></ul></ul><ul><li>Product – any output with a positive sales value, or an output that enables a firm to avoid incurring costs </li></ul><ul><ul><li>Value can be high or low </li></ul></ul>
  4. 4. Joint Cost Terminology <ul><li>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 </li></ul><ul><li>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 </li></ul>
  5. 5. Joint Cost Terminology <ul><li>Byproducts – outputs of a joint production process that have low sales values compare to the sales values of the other outputs </li></ul>
  6. 6. Examples of Joint Cost Situations
  7. 7. Joint Process Overview
  8. 8. Reasons for Allocating Joint Costs <ul><li>Required for GAAP and taxation purposes </li></ul><ul><li>Cost values may be used for evaluation purposes </li></ul><ul><li>Cost-based Contracting </li></ul><ul><li>Insurance Settlements </li></ul><ul><li>Required by regulators </li></ul><ul><li>Litigation </li></ul>
  9. 9. Joint Cost Allocation Methods <ul><li>Market-Based – allocate using market-derived data (dollars): </li></ul><ul><ul><li>Sales value at splitoff </li></ul></ul><ul><ul><li>Net Realizable Value (NRV) </li></ul></ul><ul><ul><li>Constant Gross-Margin percentage NRV </li></ul></ul><ul><li>Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc </li></ul>
  10. 10. Sales Value at Splitoff Method <ul><li>Uses the sales value of the entire production of the accounting period to calculate allocation percentage </li></ul><ul><li>Ignores inventories </li></ul>
  11. 11. Joint Cost Illustration Data
  12. 12. Joint Cost Illustration Overview
  13. 13. Sales Value at Splitoff Illustration
  14. 14. Net Realizable Value Method <ul><li>Allocates joint costs to joint products on the basis of relative NRV of total production of the joint products </li></ul><ul><li>NRV = Final Sales Value – Separable Costs </li></ul>
  15. 15. Net Realizable Value Method Overview
  16. 16. Net Realizable Value Method Illustrated
  17. 17. Net Realizable Value Method Illustrated
  18. 18. Constant Gross Margin NRV Method <ul><li>Allocates joint costs to joint products in an way that the overall gross-margin percentage is identical for the individual products </li></ul><ul><li>Joint Costs are calculated as a residual amount </li></ul>
  19. 19. Constant Gross Margin NRV Illustrated
  20. 20. Physical-Measure Method <ul><li>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 </li></ul>
  21. 21. Physical Measures Illustration
  22. 22. Method Selection <ul><li>If selling price at splitoff is available, use the Sales Value at Splitoff Method </li></ul><ul><li>If selling price at splitoff is not available, use the NRV method </li></ul><ul><li>If simplicity is the primary consideration, Physical-Measures Method or the Constant Gross-Margin Method could be used </li></ul><ul><li>Despite this, some firms choose not to allocate joint costs at all </li></ul>
  23. 23. Sell-or-Process Further Decisions <ul><li>In Sell-or-Process Further decisions, joint costs are irrelevant. Joint products have been produced, and a prospective decision must be made: to sell immediately or process further and sell later. </li></ul><ul><li>Joint Costs are sunk </li></ul><ul><li>Separable Costs need to be evaluated for relevance individually </li></ul>
  24. 24. Sell-or-Process Further Flowchart
  25. 25. Byproducts <ul><li>Two methods for accounting for byproducts </li></ul><ul><li>Production Method – recognizes byproduct inventory as it is created, and sales and costs at the time of sale </li></ul><ul><li>Sales Method – recognizes no byproduct inventory, and recognizes only sales at the time of sales: byproduct costs are not tracked separately </li></ul>
  26. 26. Byproducts Illustration Overview
  27. 27. Comparative Income Statements for Accounting for Byproducts

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