Chapter 11 Allocation of Joint Costs and Accounting for By-Products

1. Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn Chapter 11 Allocation of Joint Costs and Accounting for By-Products

2. Learning Objectives (1of 1) • Classify joint process outputs • Identify when output becomes a joint product • Allocate joint costs to products • Describe how to handle by-products and scrap

3. Terms • Joint process - single process in which one product cannot be manufactured without producing others • Extractive industries • Agriculture industries • Food industries • Chemical industries

4. Terms A joint process produces (1) Joint products - primary outputs of a joint process; substantial revenue-generating ability (2) By-products – incidental output of a joint process with a higher sales value than scrap but less than joint products (3) Scrap –incidental output of a joint process with a low sales value (4) Waste - residual output with no sales value

6. Terms • Joint costs – material, labor, and overhead incurred during a joint process • Allocate to primary products of a joint process using • Physical measures • Monetary measures • Interpret costs allocated to joint products carefully; product profitability is determined largely by the allocation method

7. Problem • Caster Company uses a joint process to produce two products-widgets and wonders. The joint cost was $400,000. The company produced 3,000 widgets and 5,000 wonders. Widgets sell for $50 per unit and wonders sell for $90 per unit. The cost to dispose of the widgets is $10 per unit and the cost to dispose of the wonders is $14 per unit.

8. Problem Continued • 1. What is the joint cost allocated to widgets and wonders using the sales value at split-off method? • 2. What is the joint cost allocated to widgets and wonders using the net realizable value method?

9. Terms • Split-off point - when joint products are first identifiable as individual products • At split-off, joint costs are allocated to joint products

10. Management Decisions To Process or Not to Process? • Will revenues exceed total costs? • What is the opportunity cost? • How to classify outputs? • Sell at split-off or process further?

11. Two Ways to Allocate Joint Costs • Physical measure • Common physical characteristic • Monetary measure Each method may allocate a different cost to joint products

12. Allocating Joint Costs • Physical Measure • Tons of meat, bone and hide • Linear board feet in lumber milling • Barrels of oil in petroleum refining • Number of computer chips in semiconductors • Use for products with unstable selling prices

13. Allocating Joint Costs Monetary Measure Choices • Sales value at split-off • Net realizable value at split-off • Approximated net realizable value at split-off

14. Problems • Parker Company uses a joint process to produce two chemicals---AC22 and SD14. The company produced 10,000 gallons of AC22 and 30,000 gallons of SD14. AC22 sells for $10 per gallon, and SD14 sells for $12 per gallon. The joint cost was $80,000. Compute the joint cost allocated to each product using physical measure allocation.

15. Problems • Pillow Company produces two chemicals---XB57 and JG42. The joint cost was $1,200,000. The company produced 20,000 barrels of XB57 and 25,000 barrels of JG42. Product XB57 sells for $40 per barrel, and Product JG42 sells for $48 per barrel. The cost to dispose of XB57 is $8 per barrel and the cost to dispose of JG42 is $14 per barrel. Compute sales value at split-off and net realizable value method.

16. Monetary Measure Allocation • Approximated net realizable value at split-off • Assumes that incremental revenue from further processing is equal to or greater than the incremental costs of further processing and selling

17. Problem • Collins Company produces X59 and Z47. The company produced 10,000 units of X59 and 8,000 units of Z47. Product X59 sells for $86 per unit after further processing costs of $6 per unit and disposal costs of $20 per unit. Product Z47 at the split-off point sells for $50 per unit and disposal costs are $10 per unity. The joint cost was $640,000. Compute the joint cost allocated to each product using the approximated net realizable value method.

18. Joints Costs Service Organizations • Joint costs include • Advertising for multiple products • Printing for multipurpose documents • Events held for multiple purposes • Not required to allocate joint costs • Allocation base • Physical (number of locations) • Monetary (sales volume)

19. Accounting for By-Products and Scrap By-products, scrap, and waste may provide substantial revenue Companies are devoting time, attention, and creativity to developing innovative revenue sources from by-products, scrap, and waste

20. Accounting for By-Products and Scrap • Sales value of by-products/scrap is recorded using • Net Realizable Value Method or • Realized Value Method • Choose method based on • magnitude of net realizable value • need for additional processing after split-off

21. Net Realizable ValueBy-Products and Scrap • Indirect method • Net realizable value reduces cost of goods sold for joint products • Conservative; joint cost is reduced when the product/scrap is sold • Direct method • Net realizable value reduces work in process for joint products • Joint cost is reduced when by-product/scrap is produced

22. Net Realizable Value (NRV)By-Products and Scrap • NRV is the traditional method, not necessarily best method • By-products have either no assignable costs or costs equal to their net sales value • Difficult for management to • monitor production and further processing of by-products • make effective decisions for by-products

23. Realized ValueBy-Products and Scrap • By-product/scrap value is recognized when items sold • First option • Proceeds recorded as Other Revenue • Costs of additional processing or disposal added to costs of primary products • Provides little information to management as it does not match revenues and expenses

24. Realized ValueBy-Products and Scrap • By-product/scrap value is recognized when items sold • Second option • Proceeds less related costs shown as Other Income • Matches revenues and related expenses for storage, further processing, transportation, and disposal costs • Highlights the revenue enhancement provided by managing the costs and revenues related to by-products/scrap • Allows for better control and improved performance

25. Realized ValueBy-Products and Scrap • Other Options (clerically efficient ) • Proceeds added to gross margin • Proceeds reduce cost of goods manufactured • Proceeds reduce cost of goods sold

26. Job Order CostingBy-Products or Scrap • Use net realizable value or realized value approach • If most jobs create by-products or scrap • Proceeds reduce the manufacturing overhead account • The journal entry using the realized value approach is: Cash Manufacturing Overhead

27. Job Order CostingBy-Products or Scrap • If only specific jobs create by-products or scrap • Proceeds reduce work in process for the specific job • The journal entries using the net realizable value approach are: Scrap Inventory Work in Process Cash Scrap Inventory

28. Joint Costs Not-For-Profit Organizations • Joint costs related to • fundraising • accomplishing an organizational program • conducting an administrative function • Joint costs must be allocated • Clearly show the amount spent for various activities - especially fundraisers