16 - 1 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost Allocation: Joint Products

and Byproducts
Chapter 16
16 - 2 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Identify the splitoff point(s)
in a joint-cost situation.
16 - 3 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Joint products Joint costs
Separable costs
Splitoff point
Byproduct
16 - 4 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Raw milk
Cream Liquid Skim
16 - 5 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Coal
Gas Benzyl Tar
16 - 6 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2
Distinguish joint products
from byproducts.
16 - 7 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint Products and Byproducts
Sales Value
High
Low
Main Products
Joint Products
Byproducts
16 - 8 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3
Explain why joint costs should be
allocated to individual products.
16 - 9 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 10 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Allocate joint costs using
four different methods.
16 - 11 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approaches to Allocating
Joint Costs
Approach 2:
Physical measure
Approach 1:
Market based
Two basic ways to allocate
joint costs to products are:
16 - 12 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approach 1: Market-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
16 - 13 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs Example
10,000 units of A at a
selling price of $10 = $100,000
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
Joint processing
cost is $200,000
Splitoff point
16 - 14 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 15 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at Splitoff
Method 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 - 16 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at Splitoff
Method 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
16 - 17 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at Splitoff
Method 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%
16 - 18 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 19 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value
(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of each
product at the splitoff point?
16 - 20 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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?
16 - 21 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
16 - 22 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value
(NRV) Method Example
Allocated Separable Inventory
joint costs costs costs
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
16 - 23 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-Margin
Percentage 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.
16 - 24 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.
16 - 25 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-Margin
Percentage 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
16 - 26 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-Margin
Percentage 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%
16 - 27 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-Margin
Percentage NRV Method
Step 2:
Deduct the gross margin.
Sales Gross Cost of
Value Margin Goods sold
Product A1: $120,000 $ 63,559 $ 56,441
Product B1: 346,500 183,527 162,973
Product C1: 241,500 127,913 113,587
Total $708,000 $375,000 $333,000
($1 rounding)
16 - 28 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct separable costs.
Cost of Separable Joint costs
goods sold costs allocated
Product A1: $ 56,441 $ 35,000 $ 21,441
Product B1: 162,973 46,500 116,473
Product C1: 113,587 51,500 62,087
Total $333,000 $133,000 $200,000
16 - 29 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approach 2: Physical
Measure Method Example
$200,000 joint cost
20,000
pounds A
48,000
pounds B
12,000
pounds C
Product A
$50,000
Product B
$120,000
Product C
$30,000
16 - 30 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.
16 - 31 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the value
of the joint product
immediately.
It does not anticipate
subsequent management
decisions.
It uses a
meaningful basis.
It is simple.
16 - 32 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
The purpose of the joint-cost allocation is
important in choosing the allocation method.
The physical-measure method is a more
appropriate method to use in rate regulation.
16 - 33 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Avoiding Joint Cost Allocation
Some companies refrain from allocating joint
costs and instead carry their inventories
at estimated net realizable value.
16 - 34 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6
Explain why joint costs
are irrelevant in a
sell-or-process-further decision.
16 - 35 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Irrelevance of Joint Costs
for Decision Making
Assume that products A, B, and C can be sold
at the splitoff point or processed further
into A1, B1, and C1.
Selling Selling Additional
Units price price costs
10,000 A: $10 A1: $12 $35,000
10,500 B: $30 B1: $33 $46,500
11,500 C: $20 C1: $21 $51,500
16 - 36 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Irrelevance of Joint Costs
for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue $20,000
Incremental cost $35,000 = ($15,000)
Product B: Incremental revenue $31,500
Incremental cost $46,500 = ($15,000)
Product C: Incremental revenue $11,500
Incremental cost $51,500 = ($40,000)
16 - 37 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Account for byproducts
using two different methods.
16 - 38 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method A:
The production method recognizes byproducts
at the time their production is completed.
Method B:
The sale method delays recognition of
byproducts until the time of their sale.
16 - 39 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Example
Main Products Byproducts
(Yards) (Yards)
Production 1,000 400
Sales 800 300
Ending inventory 200 100
Sales price $13/yard $1.00/yard
No beginning finished goods inventory
16 - 40 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Example
Joint production costs for joint
(main) products and byproducts:
Material $2,000
Manufacturing labor 3,000
Manufacturing overhead 4,000
Total production cost $9,000
16 - 41 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method A
Method A: The production method
What is the value of ending inventory
of joint (main) products?
$9,000 total production cost
$400 net realizable value of the byproduct
= $8,600 net production cost for the joint products
16 - 42 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method A
200 1,000 $8,600 = $1,720 is the value
assigned to the 200 yards in ending inventory.
What is the cost of goods sold?
Joint production costs $9,000
Less byproduct revenue 400
Less main product inventory 1,720
Cost of goods sold $6,880
16 - 43 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method A
Income Statement (Method A)
Revenues: (800 yards $13) $10,400
Cost of goods sold 6,880
Gross margin $ 3,520
What is the gross margin percentage?
$3,520 $10,400 = 33.85%
16 - 44 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method A
What are the inventoriable costs?
Main product: 200 1,000 $8,600 = $1,720
Byproduct: 100 $1.00 = $100
16 - 45 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method A
Work in Process 2,000
Accounts Payable 2,000
To record direct materials purchased and used
in production
Work in Process 7,000
Various Accounts 7,000
To record conversion costs in the joint process
16 - 46 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method A
Byproduct Inventory 400
Finished Goods 8,600
Work in Process 9,000
To record cost of goods completed
Cost of Goods Sold 6,880
Finished Goods 6,880
To record the cost of the main product sold
16 - 47 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method A
Cash or Accounts Receivable 10,400
Revenues 10,400
To record the sale of the main product
16 - 48 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method B
Method B: The sale method
What is the value of ending inventory of
joint (main) products?
200 1,000 $9,000 = $1,800
No value is assigned to the 400 yards of
byproducts at the time of production.
The $300 resulting from the sale of
byproducts is reported as revenues.
16 - 49 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method B
Income Statement (Method B)
Revenues: Main product (800 $13) $10,400
Byproducts sold 300
Total revenues $10,700
Cost of goods sold:
Joint production costs 9,000
Less main product inventory 1,800 $ 7,200
Gross margin $ 3,200
16 - 50 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
Method B
What is the gross margin percentage?
$3,200 $10,700 = 29.91%
What are the inventoriable costs?
Main product: 200 1,000 $9,000 = $1,800
By-product: -0-
16 - 51 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method B
Work in Process 2,000
Accounts Payable 2,000
To record direct materials purchased and used
in production
Work in Process 7,000
Various Accounts 7,000
To record conversion costs in the joint process
16 - 52 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method B
Finished Goods 9,000
Work in Process 9,000
To record cost of goods completed
Cost of Goods Sold 7,200
Finished Goods 7,200
To record the cost of the main product sold
16 - 53 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries Method B
Cash or Accounts Receivable 10,400
Revenues 10,400
To record the sale of the main product
Cash or Accounts Receivable 300
Revenues 300
To record the sale of the byproduct
16 - 54 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End of Chapter 16