ACCT 402 exam 3

Product department

part of the company that actually makes the product
ex - assembly line that builds cars

Service department

A part of the company that helps the production department do its job but does not make the product itself
ex - maintenance, HR, or IT department

Joint costs and the two types

Joint costs are costs that are shared by more than one department or product
- shared service costs & Joint manufacturing costs

shared service costs - joint costs

costs for departments that help everyone, such as HR, IT, or maintained since multiple departments, the cost has to be divided between them using an allocation method

cannot be directly assigned to any one unit of output & are indirect so need to be allocated

Joint manufacturing costs

costs incurred while making two or more products together before they can be separated. the point where the product becomes separate and identifiable is called the split off point

what is the purpose of cost allocation

to divide shared costs fairly so a company can find accurate product/department costs, motivate good manager decisions and effort, provide the right incentives for managers to make decisions that match with the goals of the company and fairly evaluate managers. the best method is based on cause and effect the department that causes the cost gets charged for it

ethical issues from cost allocation

unethical when a company purposely puts more costs on certain products just to pay less in taxes or charge the government more money

a company might make products sold in a high-tax country look more expensive, which lowers the companies total taxable profit

departmental approach

classifies manufacturing departments into production and service departments

3 phases

1. trace all direct costs and allocate indirect costs to the production and service departments

2. Allocate the service departments costs to the production departments

3. Allocate production department costs to products

departmental approach - phase 2

allocate of service department costs: reciprocal cost flows are recognized?

3 methods

1. direct method - simplest. ignore reciprocal flows

2. the step method - allocated one of the reciprocal flows between service departments

3. the reciprocal method

join production process

when one raw material creates more than one product at the same time

Joint products

products from a joint production process, they have a high sales value

By - products

extra or less important products made from the process, they have a lower sales value than joint products

split off point

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

joint costs include all manufacturing costs incurred prior to the split off point

separable processing costs

costs incurred after split off point

4 methods used to allocate joint product costs

1. physical measures

2. sales values of the products at split off

3. net realizable values (NRV) of the products

4. constant gross margin percentage method

physical measures - joint product costs

uses a physical measure of output such as pounds, gallons, or units to allocate the joint cost to joint products