cost allocation: joint products and by-products... costs example
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16 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost Allocation: Joint Productsand Byproducts
Chapter 16
16 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Identify the splitoff point(s)in a joint-cost situation.
16 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Joint productsJoint costs
Separable costs
Splitoff pointByproduct
16 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Raw milk
Cream Liquid Skim
16 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Coal
Gas Benzyl Tar
16 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2
Distinguish joint productsfrom byproducts.
16 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint Products and Byproducts
Sales Value
High Low
Main ProductsJoint Products Byproducts
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Learning Objective 3
Explain why joint costs should beallocated to individual products.
16 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Allocate joint costs usingfour different methods.
16 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approaches to AllocatingJoint Costs
Approach 2:Physical measure
Approach 1:Market based
Two basic ways to allocatejoint costs to products are:
16 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approach 1: Market-based Data
Sales value at splitoff methodEstimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
16 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs 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
16 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs 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
16 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at SplitoffMethod 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 marginpercentage of each product?
16 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at SplitoffMethod 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
16 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at SplitoffMethod 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%
16 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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?
16 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value(NRV) Method Example
Product A1: $120,000 – $35,000 = $85,000Product B1: $346,500 – $46,500 = $300,000Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocatedto each product?
16 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 percentageand deduct the gross margin from thefinal sales values to obtain the totalcosts that each product should bear.
16 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-MarginPercentage NRV Method
Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.
16 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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%
16 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-MarginPercentage NRV Method
Step 2:Deduct the gross margin. Sales Gross Cost of
Value Margin Goods soldProduct 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)
16 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Explain why the sales value atsplitoff method is preferredwhen allocating joint costs.
16 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the valueof the joint product
immediately.
It does not anticipatesubsequent management
decisions.
It uses ameaningful basis. It is simple.
16 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
The purpose of the joint-cost allocation isimportant in choosing the allocation method.
The physical-measure method is a moreappropriate method to use in rate regulation.
16 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Avoiding Joint Cost Allocation
Some companies refrain from allocating jointcosts and instead carry their inventories
at estimated net realizable value.
16 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6
Explain why joint costsare irrelevant in a
sell-or-process-further decision.
16 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 $46,50011,500 C: $20 C1: $21 $51,500
16 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 $46,500 = ($15,000)
Product C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)
16 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Account for byproductsusing two different methods.
16 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method A:The production method recognizes byproducts
at the time their production is completed.Method B:
The sale method delays recognition ofbyproducts until the time of their sale.
16 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for ByproductsMethod A
Method A: The production methodWhat 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
16 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for ByproductsMethod A
Income Statement (Method A)Revenues: (800 yards × $13) $10,400Cost of goods sold 6,880Gross margin $ 3,520What is the gross margin percentage?
$3,520 ÷ $10,400 = 33.85%
16 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for ByproductsMethod A
What are the inventoriable costs?Main product: 200 ÷ 1,000 × $8,600 = $1,720
Byproduct: 100 × $1.00 = $100
16 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method A
Work in Process 2,000Accounts Payable 2,000
To record direct materials purchased and usedin productionWork in Process 7,000
Various Accounts 7,000To record conversion costs in the joint process
16 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method A
Byproduct Inventory 400Finished Goods 8,600
Work in Process 9,000To record cost of goods completedCost of Goods Sold 6,880
Finished Goods 6,880To record the cost of the main product sold
16 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method A
Cash or Accounts Receivable 10,400Revenues 10,400
To record the sale of the main product
16 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for ByproductsMethod 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 ofbyproducts at the time of production.The $300 resulting from the sale ofbyproducts is reported as revenues.
16 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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 = $1,800
By-product: -0-
16 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method B
Work in Process 2,000Accounts Payable 2,000
To record direct materials purchased and usedin productionWork in Process 7,000
Various Accounts 7,000To record conversion costs in the joint process
16 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method B
Finished Goods 9,000Work in Process 9,000
To record cost of goods completedCost of Goods Sold 7,200
Finished Goods 7,200To record the cost of the main product sold
16 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method B
Cash or Accounts Receivable 10,400Revenues 10,400
To record the sale of the main productCash or Accounts Receivable 300
Revenues 300To record the sale of the byproduct