16 - 1 cost allocation: joint products and byproducts chapter 16
TRANSCRIPT
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Cost Allocation: Joint Productsand Byproducts
Cost Allocation: Joint Productsand Byproducts
Chapter 16
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Learning Objective 1Learning Objective 1
Identify the split-off point(s)
in a joint-cost situation.
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Joint-Cost Basics (E.g. 1)Joint-Cost Basics (E.g. 1)
Raw milk
Cream Liquid Skim
Joint costs are costsIncurred in
producing the raw milk
Separable costs are costs incurred in producing these
separately identifiable products
Split-off point
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Joint-Cost Basics (E.g. 2)Joint-Cost Basics (E.g. 2)
Coal
Gas Benzyl Tar
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Learning Objective 2Learning Objective 2
Distinguish joint products
from byproducts.
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Joint Products and ByproductsJoint Products and Byproducts
Sales Value
High Low
Main Product = 1Joint Products ≥ 2 Byproducts
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Learning Objective 3Learning Objective 3
Explain why joint costs should be
allocated to individual products.
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Why Allocate Joint Costs?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
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Learning Objective 4Learning Objective 4
Allocate joint costs using
four different methods.
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Approaches to AllocatingJoint Costs
Approaches to AllocatingJoint Costs
Approach 2:Physical measure
Approach 1:Market based
Two (2) basic ways to allocatejoint costs to products are:
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Approach 1: Market-based Data – 3 methods
Approach 1: Market-based Data – 3 methods
(1) - Sales value at split-off method
(2) - Estimated net realizable value (NRV) method
(3) - Constant gross-margin percentage NRV method
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(1) Sales Value at Split-offMethod Example
(1) Sales Value at Split-offMethod Example
10,000 units of A at aselling price of $10 = $100,000
10,500 units of B at aselling price of $30 = $315,000
11,500 units of C at aselling price of $20 = $230,00
Joint processingcost is $200,000
Splitoff point
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(1) Sales Value at Split-offMethod Example
(1) Sales Value at Split-offMethod Example
A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ 645 31,008 315 ÷ 645 97,674230 ÷ 645 71,318
200,000Gross margin $ 68,992 $217,326 $158,682 $445,000
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(1) Sales Value at Split-offMethod Example
(1) Sales Value at Split-offMethod Example
Assume all of the units producedof B and C were sold.
2,500 units of A (25%)remain in inventory.
What is the gross margin of product A ?What is the gross margin percentage of each product?
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(1) Sales Value at Split-offMethod Example
(1) Sales Value at Split-offMethod Example
Product A Revenues: 7,500 units × $10.00 $75,000Cost of goods sold:
Joint product costs $31,008Less ending inventory
$31,008 × 25% 7,752 23,256Gross margin $51,744
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(1) Sales Value at Split-offMethod Example
(1) Sales Value at Split-offMethod 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%
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(2) Estimated Net Realizable Value(NRV) Method Example
(2) Estimated Net Realizable Value(NRV) Method Example
Assume that Oklahoma Company can processproducts A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:10,000 × $12.00
= $120,000
B1:10,500 × $33.00
= $346,500
C1:11,500 × $21.00
= $241,500
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(2) Estimated Net Realizable Value(NRV) Method Example
(2) Estimated Net Realizable Value(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of eachproduct at the splitoff point?
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(2) Estimated Net Realizable Value(NRV) Method Example
(2) 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 allocatedto each product?
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(2) Estimated Net Realizable Value(NRV) Method Example
(2) 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
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(2) Estimated Net Realizable Value(NRV) Method Example
(2) Estimated Net Realizable Value(NRV) Method Example
Allocated Separable Inventory joint costs costs costs
A1 $ 29,565 $ 35,000 $ 64,565B1 104,348 46,500 150,848C1 66,087 51,500 117,587Total $200,000 $133,000 $333,000
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(3) Constant Gross-MarginPercentage NRV Method
(3) Constant Gross-MarginPercentage 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 thefinal sales values to obtain the totalcosts that each product should bear.
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(3) Constant Gross-MarginPercentage NRV Method
(3) Constant Gross-MarginPercentage NRV Method
Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.
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(3) Constant Gross-MarginPercentage NRV Method
(3) Constant Gross-MarginPercentage NRV Method
What is the expected final sales value of totalproduction during the accounting period?
Product A1: $120,000Product B1: 346,500Product C1: 241,500Total $708,000
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(3) Constant Gross-MarginPercentage NRV Method
(3) Constant Gross-MarginPercentage NRV Method
Step 1:Compute the overall gross-margin percentage.
Expected final sales value $708,000Deduct joint and separable costs 333,000Gross margin $375,000
Gross margin percentage:$375,000 ÷ $708,000 = 52.966%
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(3) Constant Gross-MarginPercentage NRV Method
(3) Constant Gross-MarginPercentage NRV Method
Step 2:Deduct the gross margin.
Sales Gross Cost of Value Margin Goods sold
Product A1: $120,000 $ 63,559 $ 56,441Product B1: 346,500 183,527 162,973Product C1: 241,500 127,913 113,587Total $708,000 $375,000 $333,000($1 rounding)
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(3) Constant Gross-MarginPercentage NRV Method
(3) Constant Gross-MarginPercentage NRV Method
Step 3:Deduct separable costs.
Cost of Separable Joint costs goods sold costs allocated
Product A1: $ 56,441 $ 35,000 $ 21,441Product B1: 162,973 46,500 116,473Product C1: 113,587 51,500 62,087Total $333,000 $133,000 $200,000
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Approach 2: PhysicalMeasure Method Example
Approach 2: PhysicalMeasure Method Example
$200,000 joint cost
20,000pounds A
48,000pounds B
12,000pounds C
Product A$50,000
Product B$120,000
Product C$30,000
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Learning Objective 5Learning Objective 5
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.
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Choosing a MethodChoosing a Method
Why is the sales value at split-off method widely used?
It measures the valueof the joint product
immediately.
It does not anticipatesubsequent management
decisions.
It uses ameaningful basis.
It is simple.
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Choosing a MethodChoosing a Method
The physical-measure method is a moreappropriate method to use in rate regulation.
The NRV method should be used when there isnot enough information about individual
selling prices at split-off point.
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Avoiding Joint Cost AllocationAvoiding Joint Cost Allocation
Some companies refrain from allocating jointcosts and instead carry their inventories
at estimated net realizable value.
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Learning Objective 6Learning Objective 6
Explain why joint costs
are irrelevant in a
sell-or-process-further decision.
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Irrelevance of Joint Costsfor Decision Making
Irrelevance of Joint Costsfor Decision Making
Assume that products A, B, and C can be soldat the splitoff point or processed further
into A1, B1, and C1.
Selling Selling Additional Units price price costs10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $26,50011,500 C: $20 C1: $21 $51,500
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Irrelevance of Joint Costsfor Decision Making
Irrelevance of Joint Costsfor Decision Making
Should A, B, or C be sold at the splitoffpoint or processed further?
Product A: Incremental revenue $20,000– Incremental cost $35,000 = ($15,000)
Product B: Incremental revenue $31,500– Incremental cost $26,500 = $5,000
Product C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)
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Irrelevance of Joint Costsfor Decision Making
Irrelevance of Joint Costsfor Decision Making
Should A, B, or C be sold at the splitoffpoint or processed further?
Product A: Incremental revenue $20,000– Incremental cost $35,000 = ($15,000)
Product B: Incremental revenue $31,500– Incremental cost $26,500 = $5,000
Product C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)
Split-off
Processed further
Split-off
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Learning Objective 7Learning Objective 7
Account for byproducts
using two different methods.
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Accounting for ByproductsAccounting for Byproducts
Method A:The production method recognizes byproducts
at the time their production is completed. (Conceptually, this is the correct method)
Method B:The sale method delays recognition of
byproducts until the time of their sale. (used when dollar amount of byproducts are immaterial)
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Accounting for ByproductsExample
Accounting for ByproductsExample
Main Products Byproducts (Yards) (Yards)
Production 1,000 400Sales 800 300Ending inventory 200 100Sales price $13/yard $1.00/yardNo beginning finished goods inventory
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Accounting for ByproductsExample
Accounting for ByproductsExample
Joint production costs for joint(main) products and byproducts:
Material $2,000Manufacturing labor 3,000Manufacturing overhead 4,000Total production cost $9,000
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Accounting for ByproductsMethod A
Accounting for ByproductsMethod A
Method A: The production method
What is the value of ending inventoryof joint (main) products?
$9,000 total production cost– $400 net realizable value of the byproduct
= $8,600 net production cost for the joint products
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Accounting for ByproductsMethod A
Accounting for ByproductsMethod A
200 ÷ 1,000 × $8,600 = $1,720 is the valueassigned to the 200 yards in ending inventory.
What is the cost of goods sold?
Joint production costs $9,000Less byproduct revenue 400Less main product inventory 1,720Cost of goods sold $6,880
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Accounting for ByproductsMethod A
Accounting for ByproductsMethod A
Income Statement (Method A)
Revenues: (800 yards × $13) $10,400Cost of goods sold 6,880Gross margin $ 3,520
What is the gross margin percentage?
$3,520 ÷ $10,400 = 33.85%
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Accounting for ByproductsMethod A
Accounting for ByproductsMethod A
What are the inventoriable costs?
Main product: 200 ÷ 1,000 × $8,600 = $1,720
Byproduct: 100 × $1.00 = $100
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Journal Entries Method AJournal Entries Method A
Work in Process 2,000Accounts Payable 2,000
To record direct materials purchased and usedin production
Work in Process 7,000Various Accounts 7,000
To record conversion costs in the joint process
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Journal Entries Method AJournal Entries Method A
Byproduct Inventory 400Finished Goods 8,600
Work in Process 9,000To record cost of goods completed
Cost of Goods Sold 6,880Finished Goods 6,880
To record the cost of the main product sold
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Journal Entries Method AJournal Entries Method A
Cash or Accounts Receivable 10,400Revenues 10,400
To record the sale of the main product
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Accounting for ByproductsMethod B
Accounting for ByproductsMethod B
Method B: The sale method
What is the value of ending inventory ofjoint (main) products?
200 ÷ 1,000 × $9,000 = $1,800
No value is assigned to the 400 yards ofbyproducts at the time of production.The $300 resulting from the sale ofbyproducts is reported as revenues.
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Accounting for ByproductsMethod B
Accounting for ByproductsMethod B
Income Statement (Method B)
Revenues: Main product (800 × $13) $10,400Byproducts sold 300Total revenues $10,700Cost of goods sold:
Joint production costs 9,000Less main product inventory 1,800 $ 7,200
Gross margin $ 3,200
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Accounting for ByproductsMethod B
Accounting for ByproductsMethod 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 = $1,800By-product: -0-
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Journal Entries Method BJournal Entries Method B
Work in Process 2,000Accounts Payable 2,000
To record direct materials purchased and usedin production
Work in Process 7,000Various Accounts 7,000
To record conversion costs in the joint process
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Journal Entries Method BJournal Entries Method B
Finished Goods 9,000Work in Process 9,000
To record cost of goods completed
Cost of Goods Sold 7,200Finished Goods 7,200
To record the cost of the main product sold
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Journal Entries Method BJournal Entries Method B
Cash or Accounts Receivable 10,400Revenues 10,400
To record the sale of the main product
Cash or Accounts Receivable 300Revenues 300
To record the sale of the byproduct
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End of Chapter 16End of Chapter 16