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Cost Allocation: Joint Products and Byproducts

Cost Allocation: Joint Products and Byproducts. Chapter 16. Learning Objective 1. Identify the splitoff point(s) in a joint-cost situation. Joint-Cost Basics. Joint costs. Joint products. Byproduct. Splitoff point. Separable costs. Joint-Cost Basics. Raw milk. Cream. Liquid. Skim.

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Cost Allocation: Joint Products and Byproducts

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  1. Cost Allocation: Joint Productsand Byproducts Chapter 16

  2. Learning Objective 1 Identify the splitoff point(s) in a joint-cost situation.

  3. Joint-Cost Basics Joint costs Joint products Byproduct Splitoff point Separable costs

  4. Joint-Cost Basics Raw milk Cream Liquid Skim

  5. Joint-Cost Basics Coal Gas Benzyl Tar

  6. Learning Objective 2 Distinguish joint products from byproducts.

  7. Joint Products and Byproducts Main Products Joint Products Byproducts High Low Sales Value

  8. Learning Objective 3 Explain why joint costs should be allocated to individual products.

  9. 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

  10. Learning Objective 4 Allocate joint costs using four different methods.

  11. Approaches to AllocatingJoint Costs Two basic ways to allocate joint costs to products are: Approach 1: Market based Approach 2: Physical measure

  12. Approach 1: Market-based Data Sales value at splitoff method Estimated net realizable value (NRV) method Constant gross-margin percentage NRV method

  13. Allocating Joint Costs Example 10,000 units of A at a selling price of $10 = $100,000 Joint processing cost is $200,000 10,500 units of B at a selling price of $30 = $315,000 11,500 units of C at a selling price of $20 = $230,00 Splitoff point

  14. Allocating Joint Costs Example A B C Total Sales Value $100,000 $315,000 $230,000 $645,000 Allocation of Joint Cost 100 ÷ 645 31,008 315 ÷ 645 97,674 230 ÷ 645 71,318 200,000 Gross margin $ 68,992 $217,326 $158,682 $445,000

  15. Sales Value at SplitoffMethod Example Assume all of the units produced of B and C were sold. 2,500 units of A (25%) remain in inventory. What is the gross margin percentage of each product?

  16. Sales Value at SplitoffMethod Example Product A Revenues: 7,500 units × $10.00 $75,000 Cost of goods sold: Joint product costs $31,008 Less ending inventory $31,008 × 25% 7,752 23,256 Gross margin $51,744

  17. 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%

  18. Estimated Net Realizable Value(NRV) Method Example Assume that Oklahoma Company can process products 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

  19. Estimated Net Realizable Value(NRV) Method Example Additional processing (separable) costs are as follows: B1: $46,500 C1: $51,500 A1: $35,000 What is the estimated net realizable value of each product at the splitoff point?

  20. 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 allocated to each product?

  21. 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

  22. Estimated Net Realizable Value(NRV) Method Example Allocated Separable Inventory joint costscostscosts A1 $ 29,565 $ 35,000 $ 64,565 B1 104,348 46,500 150,848 C1 66,087 51,500 117,587 Total $200,000 $133,000 $333,000

  23. 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 the final sales values to obtain the total costs that each product should bear.

  24. Constant Gross-MarginPercentage NRV Method Step 3: Deduct the expected separable costs from the total costs to obtain the joint-cost allocation.

  25. Constant Gross-MarginPercentage NRV Method What is the expected final sales value of total production during the accounting period? Product A1: $120,000 Product B1: 346,500 Product C1: 241,500 Total $708,000

  26. Constant Gross-MarginPercentage NRV Method Step 1: Compute the overall gross-margin percentage. Expected final sales value $708,000 Deduct joint and separable costs 333,000 Gross margin $375,000 Gross margin percentage: $375,000 ÷ $708,000 = 52.966%

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