Chapter 17: Cost Allocation - Joint Products and Byproducts

What is a Joint Production Process?

When a manufacturing plant yields more than one product from a common resource input

What are Joint Products?

Products from a join production process that have relatively substantial sales values

What are By-Products?

Products whose total sales values are minor in comparison to the sales value of the joint products

What are Joint Costs?

Include all manufacturing costs incurred prior to the split-off point

What is the Split-Off Point?

The point in a joint production process at which individual products can be identified for the first time

What are costs incurred after the split-off point called?

Additional Processing Costs or Separable Costs

What are the Joint Cost Allocation Methods?

• Physical Measure Method

• Sales Value at Split-Off Method

• Net Realizable Value Method

What is the Physical Measure Method?

Uses physical measures (e.g., pounds) of volume produced at the split off point to allocate the joint costs

What is the Sales Value at Split-Off Method?

Allocates joint cost based on each product’s proportionate share of sales value at split-off

What is the Net Realizable Value Method?

Allocates joint cost based on hypothetical market price (eventual market value of new product minus processing costs beyond split-off)

What are the steps for solving for Joint Cost Allocation using the Physical Measure Method?

1. Note the amount of each item (e.g., feet, tons, etc.)

2. Calculate the % of Units based on the amount of each item

3. Multiply the % of Units by the Total Joint Costs to get Joint Cost Allocation

What are the steps for solving for Joint Cost Allocation using the Sales Value at Split-Off Method?

1. Note the amount of each item (e.g., feet, tons, etc.)

2. Note the Price at Split-Off (e.g., per item feet)

3. Amount of each item * Price at Split-Off = Sales Value at Split-Off

4. Calculate the % based on the Sales Value at Split-Off

5. % * Total Joint Costs = Joint Cost Allocation

What are the steps to find Join Cost Allocation using the NRV Method?

1. Final Mkt Price - Est. Further Costs = NRV per Unit

2. NRV per Unit * # Units = Total NRV

3. Calculate the % based on the Total NRV

4. One Production Run (or Total Joint Costs)* % = Joint Cost Allocation

Which method is generally preferred?

Sales Value at Split-Off

Why is the Sales Value at Split-Off generally preferred?

• Generating revenues is the reason why companies incur joint product costs in the first place

• No need to anticipate subsequent management decisions regarding processing costs after split-off

• Uses a common basis

• Simple method

When is the NRV Method used?

When sales value at split-off is not readily available

When is the physical measure preferred?

In regulatory environments (cost-plus)

What are the two methods of By-Product Costing?

• Sales Method

• Production Method

What is the Sales Method of By-Product Costing?

• Only recognize by-products when sold

• Recognize them as other revenue

• Inventory never recorded on the financial statements

What is the Production Method of By-Product Costing?

• Records by-products as inventory at net realizable values (i.e., by-product is recognized as a reduction in the primary good’s FG inventory account when produced)

Why is the Sales Method used?

It is simpler and the dollar amounts are immaterial, so it can be accounted for this way

What is the Production Method consistent with?

The matching concept

What is a cautionary note on the Sales Method?

It allows managers to stockpile inventory and give income a boost when main product sales are lower

What is the set up to solve for Gross Margin in By-Product Costing?

Revenue of Product A

+ Revenue of Product B

= Total Revenue

Total Mfg Costs

- NRV of the By Product

= Net Mfg Costs

- Remaining FG Inventory

= COGS

Total Revenue

- COGS

= Gross Margin

How do you find Remaining FG Inventory?

(End Inventory/Production) * Total Mfg Costs

Under the Sales Method, why is the ending value of By-Product Inventory zero?

It is never reported on the financial statements