cost allocation: joint products and by-products joint-cost basics joint productsjoint costs...

Cost Allocation:Cost Allocation:

Joint ProductsJoint Productsand By-productsand By-products

Key terms:

– Joint products – two or more outputs produced simultaneously by a single manufacturing process using common input

– Split-off point – the stage of processing where joint products are separated.

– Joint cost – costs of processing two or more products prior to the split-off point; common cost

– Byproducts– products that result incidentally from the joint products

- Separable cost – cost after the split-off point

Consider the following example of an oil

refinery.We will assume only

two products,gasoline and oil.

Joint Product Cost AllocationJoint Product Cost Allocation

SeparateProcessing Costs

FinalSale

SeparateProcessing

FinalSale

SeparateProcessing

SeparateProcessing Costs

JointInput

JointProduction

Process

Split-OffPoint

JointProductCosts Oil

Gasoline

Joint Product Cost AllocationJoint Product Cost Allocation

Joint Products and ByproductsJoint Products and Byproducts

Sales Value

High Low

Main ProductsJoint Products Byproducts

By-ProductsBy-Products

JointInput

JointProduction

Process

Split-OffPoint

JointCosts

By-products

MajorProduct

Relatively lowvalue or quantity

when compared tomajor products

MajorProduct

Explain why joint costs should be

allocated to individual products.

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

Approaches to AllocatingApproaches to AllocatingJoint CostsJoint Costs

Approach 2:Market-based

Approach 1:Physical measure

Two basic ways to allocatejoint costs to products are:

Allocating Joint Allocating Joint CostsCosts

Joint Product Costs

Approach 1

a. Physical-UnitsMethod

b. Net-Realizable- Value Method

c. Gross margin Percent method

Approach 2

a. Relative- Sales- Value Method

Allocation based onthe relative valuesof the products at

the split-off point.

Allocation based on a physical measure of the

joint products at the split-off point.

Allocation based onfinal sales values lessseparable processing

costs.

Relative-Sales-Value Method

Physical-UnitsMethod

Net-Realizable-Value Method

Gross margin Percent Method

Allocation based ona constant gross margin

for all products.

240,000 gallons

360,000 gallons

JointProduction

Process

Split-OffPoint

Oil

Gasoline

Joint material

cost = $275,000

Joint conversioncost = $225,000

Physical-Units MethodPhysical-Units Method

Physical Measure Physical Measure Method ExampleMethod 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

Market-based DataMarket-based Data

Sales value at splitoff method

Estimated net realizable value (NRV) method

Constant gross-margin percentage NRV method

Allocating Joint Costs ExampleAllocating Joint Costs Example

1,000 units of A at aselling price of P100 = P100,000

1,500 units of B at aselling price of P300 = P450,000

2,000 units of C at aselling price of P200 = P400,00

Joint processingcost is P200,000

Splitoff point

Allocating Joint Costs ExampleAllocating Joint Costs Example

A B C TotalSales Value P100,000 P450,000 P400,000 P950,000Allocation ofJoint Cost100 ÷ 950 21,053 450 ÷ 950 94,737400 ÷ 950 84,210

200,000Gross margin P 78,947 P355,263 P315,790 P750,000

Sales Value at SplitoffSales Value at SplitoffMethod ExampleMethod Example

Assume all of the units producedof B and C were sold.

250 units of A (25%)remain in inventory.

What is the gross marginpercentage of each product?


Product A Revenues: 750 units × P100 P75,000Cost of goods sold:

Joint product costs P21,053Less ending inventory

P21,053 × 25% 5,263 15,790Gross margin P59,210


Product A:(P75,000 – P 15,790) ÷ 75,000 = 79%

Product B:(P450,000 – P94,737) ÷ P450,000 = 79%

Product C:(P400,000 – $84,210) ÷ P400,000 = 79%

Estimated Net Realizable ValueEstimated Net Realizable Value(NRV) Method Example(NRV) Method Example

Assume that MBA-TEP Company can processproducts A, B, and, C further into A1, B1, and C1.

The new sales values after further processing are:

A1:1,000 × P120= P120,000

B1:1,500 × P330= P495,000

C1:2,000 × $210= P420,000


Additional processing (separable) costs are as follows:

A1: P35,000 B1: P50,000 C1: P55,000

What is the estimated net realizable value of eachproduct at the splitoff point?


Product A1: P120,000 – P35,000 = P85,000

Product B1: P495,000 – P50,000 = P445,000

Product C1: P420,000 – P55,000 = P365,000

How much of the joint cost is allocatedto each product?


To A1:85,000 ÷ 895,000 × P200,000 = P18,994

To B1:445,000 ÷ 895,000 × P200,000 = P99,441

To C1:365,000 ÷ 895,000 × P200,000 = P81,564


Allocated Separable Inventory joint costs costs costs

A1 P 18,994 P 35,000 P 53,994B1 99,442 50,000 149,442C1 81,564 55,000 136,564Total P200,000 P140,000 P340,000

Constant Gross-MarginConstant Gross-MarginPercentage NRV MethodPercentage 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.


Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.


What is the expected final sales value of totalproduction during the accounting period?

Product A1: P 120,000Product B1: 495,000Product C1: 420,000Total P1,035,000


Step 1:Compute the overall gross-margin percentage.

Expected final sales value P1,035,000Deduct joint and separable costs 340,000Gross margin P695,000

Gross margin percentage:P695,000 ÷ P1,035,000 = 67.15%


Step 2:Deduct the gross margin.

Sales Gross Cost of Value Margin Goods sold

Product A1: P120,000 P 80,580 P 39,421Product B1: 495,000 332,392 162,608Product C1: 420,000 282,030 137,971Total P 1,035,000 P695,000 P340,000


Step 3:Deduct separable costs.

Cost of Separable Joint costs goods sold costs allocated

Product A1: P 39,421 P 35,000 P 4,421Product B1: 162,608 50,000 112,608Product C1: 137,971 55,000 82,971Total P340,000 P140,000 P200,000

Explain why the sales value at

splitoff method is preferred

when allocating joint costs.

Choosing a MethodChoosing 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.

Choosing a MethodChoosing 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.

Avoiding Joint Cost AllocationAvoiding Joint Cost Allocation

Some companies refrain from allocating jointcosts and instead carry their inventories

at estimated net realizable value.

Explain why joint costs

are irrelevant in a

sell-or-process-further decision.

Irrelevance of Joint CostsIrrelevance of Joint Costsfor Decision Makingfor 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 costs1,000 A: P100 A1: P120 P35,0001,500 B: P300 B1: P330 P50,0002,000 C: P200 C1: P210 P55,000

Irrelevance of Joint CostsIrrelevance of Joint Costsfor Decision Makingfor Decision Making

Should A, B, or C be sold at the splitoffpoint or processed further?

Product A: Incremental revenue P20,000– Incremental cost P35,000 = (P15,000)

Product B: Incremental revenue P45,000– Incremental cost P50,000 = (P5,000)

Product C: Incremental revenue $20,000– Incremental cost P55,000= (P35,000)

Accounting for ByproductsAccounting 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.

End of ReportEnd of Report

Thank youThank you

cost allocation: joint products and by-products joint-cost basics joint productsjoint costs...

Documents