Cost allocation joint cost [compatibility mode]
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This document discusses joint cost and byproducts accounting. It defines key terms like joint costs, splitoff point, separable costs, main product, joint products, and byproducts. It provides examples of joint cost situations and gives an overview of the joint cost process. It discusses reasons for allocating joint costs and how to distinguish joint products from byproducts. The document then explains several methods for allocating joint costs, including market-based, physical measure, weighted average, and net realizable value methods. It provides an illustration comparing the physical measure and sales value at splitoff point methods. Finally, it covers accounting for byproducts, comparing production and sales methods, and providing an illustration for The Westlake Corporation.
Cost allocation joint cost [compatibility mode]
- 1. COST ALLOCATION – JOINT COST AND BYPRODUCTS Group Project RESHMI RAVEENDRAN (212027)
- 2. 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
- 3. 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 • Byproducts – Outputs of a joint production process that have low sales values compare to the sales values of the other outputs
- 4. Examples of Joint Cost Situations
- 6. Reasons for Allocating Joint Costs • • • • • • Required for GAAP and taxation purposes Cost values may be used for evaluation purposes Cost-based Contracting Insurance Settlements Required by regulators Litigation
- 7. Distinction and Similarity Between Joint Products and By-Products • The distinction between joint products and by-products rests solely on the relative importance of their sales value. • A by-product is a secondary product whose total sales value is relatively minor in comparison with the sales value of the main product (joint product). • Relationships between joint products and by-products change over time as technology and markets change. • By-products may become more and more important, eventually becoming joint products. • When the relative importance of individual products changes, the products need to be reclassified and the costing procedures need to be changed.
- 8. Joint Cost Allocation Methods • Market-Based – allocate using market-derived data (dollars): 1. Net Realizable Value (NRV) • Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc 1. The sales value at Splitoff method 2.The Physical-measure method 3. Weighted average
- 9. 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
- 10. Joint Cost Illustration Data
- 11. Joint Cost Illustration Overview
- 13. Weighted Average Method • The weighted average method uses the weight factors to include such diverse elements as amount of material used, difficulty to manufacture, time consumed, difference in type of labor used, and size of unit. Weighted physical units = Number of units × Weight factor Example: The canning industry uses weight factors to distinguish between can sizes or quality of product. The weighted average method allocates relatively more of the joint cost to the high-grade products because they represent more desirable and profitable products.
- 14. Sales Value at Splitoff Point Method • Uses the sales value of the entire production of the accounting period to calculate allocation percentage • The cost-allocation base (total sales value at splitoff) is expressed in terms of a common denominator (the amount of revenues) that is systematically recorded in the accounting system. To use this method, selling prices must exist for all products at the splitoff point
- 15. Joint Cost Illustration Data
- 16. Joint Cost Illustration Overview
- 17. Sales Value at Splitoff Illustration
- 18. 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
- 20. Net Realizable Value Method Overview
- 21. Net Realizable Value Method Illustrated
- 22. Net Realizable Value Method Illustrated
- 23. 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. • Despite this, some firms choose not to allocate joint costs at all
- 24. Byproducts • Byproducts have low sales value and some times their salvage value is not considered. • Two methods for accounting for byproducts • Production Method – i) Recognizes byproduct inventory as it is created, ii) Byproduct revenues appear in the income statement as Cost reduction for the main product • Sales Method – i) Recognizes only sales at the time of sales, ii) Byproduct revenues appear in the income statement as Separate item of revenue or other income
- 25. Accounting for Byproducts Neither approach is conceptually correct. Both technically violate GAAP. • Method A- Production method • Recognizes byproducts revenue at the time their production is completed. • Method B: Sales method Does not recognize byproducts in inventory.
- 27. The Westlake Corporation processes timber into fine-grade lumber and wood chips that are used as mulch in gardens and lawns. Information about these products follows: Fine-Grade lumber (the main product)—sells for $6 per board foot (b.f.) Wood chips (the byproduct)—sells for $1 per cubic foot (c.f.) Data for July 2012 are as follows Beginning production production sales Ending inventory Fine-Grade lumber 0 50,000 40,000 10,000 Wood chips 0 4,000 1,200 2,800
- 28. Comparative Income Statements for Accounting for Byproducts
- 29. THANKS!!!!!