joint products
DESCRIPTION
Joint Products. Allocation of Costs to Joint Products. 30 lb.s of loin. 20 lb.s of belly. 50 lb.s of other meat products. 250 lb.s. Common Costs. Separable Costs. Split-off Point. Allocation of Costs to Joint Products. Questions: 1. How much does it cost to produce 1 lb of loin? - PowerPoint PPT PresentationTRANSCRIPT
Joint ProductsJoint Products
Allocation of Costs to Joint Products
CommonCosts
Split-offPoint
SeparableCosts
30 lb.s of loin
20 lb.s of belly
50 lb.s of other meat products
250 lb.s
Allocation of Costs to Joint Products
Questions:
1. How much does it cost to produce
1 lb of loin?
2. How much does it cost to produce
1 lb of bacon?
2. Why is this information useful?
Allocation of Costs toJoint Products
Common Costs: $100
Split-off Point
100 lb.s of meat (excluding bone)
1 lb of belly sells for $1.20
1 lb of loin sells for $1.50
30 lb.s loin 20 lb.s belly
50 lb.s of everything else sells for $1/lb on average
Allocation of Costs to Joint Products
Non-Financial
- Physical Measure
Financial
- Sales Value at Split-off Point - Net Realizable Value
Allocation of Costs toJoint Products
Common Costs: $100
Split-off Point
100 lb.s of meat (excluding bone)
30 lb.s loin 20 lb.s belly
50 lb.s of other product
Allocation using Physical Measure
$100 to bring to slaughter
÷ 100 lb.s of marketable meat
= $1.00 per lb.
At $1 per lb., loin appears very profitable, since it sells for $1.50 per lb.
$1 per lb. for each cut of meat: pork, belly, etc.
Allocation of Costs toJoint Products
Non-Financial Measures
- Physical Measure
Financial Measures
- Sales Value at Split-off Point - Net Realizable Value
Allocation of Costs toJoint Products
Common Costs: $100
Split-off Point
100 lb.s of meat (excluding bone)
1 lb of belly sells for $1.20
1 lb of loin sells for $1.50
30 lb.s loin 20 lb.s belly
50 lb.s of everything else sells for $1/lb on average
Allocation using Sales Value at Split-off
Total sales value at split-off: loin: 30 lb.s x $1.50 = $45 belly: 20 lb.s x $1.20 = $24 Everything else: 50 lb.s x $1.00 = $50 Total sales value = $119Allocate $100 common costs: 45/119 or 38% to loin: $38 24/119 or 20% to belly: $20 50/119 or 42% to other stuff $42
Allocation using Sales Value at Split-off
From the previous slide: 45/119 or 38% to loin: $38 24/119 or 20% to belly: $20 50/119 or 42% to other stuff $42
Cost per pound: Loin: $38 ÷ 30 lb.s = $1.26 per lb. Belly: $20 ÷ 20 lb.s = $1.00 per lb. Other: $42 ÷ 50 lb.s = $0.84 per lb.
Allocation using Sales Value at Split-off
Cost per pound (from previous slide): Loin: $38 ÷ 30 lb.s = $1.26 per lb. Belly: $20 ÷ 20 lb.s = $1.00 per lb. Other: $42 ÷ 50 lb.s = $0.84 per lb.
With a sales price of $1.50 per lb., loin still looks profitable, but not as profitable as before, when common costs were allocated using weight.
The belly is also profitable, since it sells for $1.20.
Allocation of Costs toJoint Products
Non-Financial
- Physical Measure
Financial
- Sales Value at Split-off Point - Net Realizable Value
Allocation of Costs toJoint Products
Common Costs: $100
Split-off Point
100 lb.s of meat (excluding bone)
1 lb of belly sells for $1.20
20 lb.s belly
“value added”
1 lb of belly cured to make 1 lb of bacon
branded product
Allocation of Costs toJoint Products
Common Costs: $100
Split-off Point
1 lb of belly sells for $1.20
20 lb.s belly
1 lb of bacon sells for $2.20
Additional processing costs: $0.50 per lb.
Separable Costs:
Allocation using Net Realizable Value
Net Realizable Value: loin: 30 lb.s x $1.50 = $45 belly: 20 lb.s x ($2.20 - $0.50) = $34 Everything else: 50 lb.s x $1.00 = $50 Total sales value =$129Allocate $100 common costs: 45/129 or 35% to loin: $35 34/129 or 26% to belly: $26 50/129 or 39% to other stuff $39
Allocation using Net Realizable Value
From the previous slide: 45/129 or 35% to loin: $35 34/129 or 26% to belly: $26 50/129 or 39% to other stuff $39
Cost per pound: Loin: $35 ÷ 30 lb.s = $1.17 per lb. Belly: $26 ÷ 20 lb.s = $1.30 per lb. Other: $39 ÷ 50 lb.s = $0.78 per lb.
Allocation using Net Realizable Value
Cost per pound (from previous slide): Loin: $35 ÷ 30 lb.s = $1.17 per lb. Belly: $26 ÷ 20 lb.s = $1.30 per lb. Other: $39 ÷ 50 lb.s = $0.78 per lb.
Belly sells for $1.20 per lb., but costs $1.30 per lb to produce!?
If the belly is cured into bacon, the total cost is $1.80 per lb ($1.30 common + $0.50 separable), and sells for $2.20, so it is profitable after all.
Allocation of Costs toJoint Products
Summary of the three methods:
Allocation based on
Physical measure:
Sales value at split-off:
Net realizable value:
loin belly other
$1.00 $1.00 $1.00
$1.26 $1.00 $0.84
$1.17 $1.30 $0.78
Allocation of Costs toJoint Products
2. Why is this information useful?
Managerial Decision-making:
Which products to make.
What price to charge for those products.
Whether to stay in business.
Financial reporting:
Calculate ending inventory and C.O.G.S.
Here are some possibilities:
Allocation of Costs toJoint Products
• Which products to make.• What price to charge for
those products.• Whether to stay in business.• Financial reporting:
calculation of ending inventory and C.O.G.S.
• No
2. Why is this information useful?
• No
• No
• Yes
Allocation of Costs toJoint Products
WARNING:
Any method for assigning joint costs is used mainly for product costing. It is almost always useless for control or decision-making purposes.