CHAPTER 16 Cost Allocation: Joint Products and Byproducts
Joint Cost Terminology • Joint costs—costs of a single production process that yields multiple products simultaneously • Splitoff point—the place in a joint production process where two or more products become separately identifiable • Separable costs—all costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific products
Joint Cost Terminology • Categories of joint process outputs: • Outputs with a positive sales value • Outputs with a zero sales value • Product—any output with a positive sales value, or an output that enables a firm to avoid incurring costs • Value can be high or low
Joint Cost Terminology • Main product—output of a joint production process that yields one product with a high sales value compared to the sales values of the other outputs • Joint products—outputs of a joint production process that yields two or more products with a high sales value compared to the sales values of any other outputs
Joint Cost Terminology • Byproducts—outputs of a joint production process that have low sales values compare to the sales values of the other outputs
Reasons for Allocating Joint Costs • Required for GAAP and taxation purposes • Computation of inventoriable costs and cost of goods sold for financial accounting and tax reporting • Internal analysis of divisional profitability • Cost-based contracting • Insurance settlements • Required for rate and price regulations • Litigation
Joint Cost Allocation Methods • Market-based—allocate using market-derived data (dollars): • Sales value at splitoff • Net realizable value (NRV) • Constant gross-margin percentage NRV • Physical measures—allocate using tangible attributes of the products, such as pounds, gallons, barrels, and so on
Sales Value at Splitoff Method • Uses the sales value of the entire production of the accounting period to calculate allocation percentage • Ignores inventories
Net Realizable Value Method • Allocates joint costs to joint products on the basis of relative NRV of total production of the joint products • NRV = Final Sales Value – Separable Costs
Constant Gross Margin NRV Method • Allocates joint costs to joint products in a way that the overall gross-margin percentage is identical for the individual products. • Joint costs are calculated as a residual amount.
Physical-Measure Method • Allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the splitoff point of total production of the products
Method Selection • If selling price at splitoff is available, use the sales value at splitoff method. • If selling price at splitoff is not available, use the NRV method. • If simplicity is the primary consideration, physical-measures method or the constant gross-margin method could be used. • Despite this, some firms choose not to allocate joint costs at all.
Sell-or-Process Further Decisions • In sell-or-process further decisions, joint costs are irrelevant. Joint products have been produced, and a prospective decision must be made: to sell immediately or process further and sell later. • Joint costs are sunk costs. • Don’t assume all separable costs in joint-cost allocations are always incremental costs. • Some separable costs may be fixed costs. • Separable costs need to be evaluated for relevance individually .
Byproducts • Two methods for accounting for byproducts • Production method—recognizes byproduct inventory as it is created, and sales and costs at the time of sale • Sales method—recognizes no byproduct inventory, and recognizes only sales at the time of sales: byproduct costs are not tracked separately