Joint products are those items resulting from a joint process that have the greatest relative sales value of all outputs.. Management decides whether a joint process output is a joint pr
Trang 1Cost Allocation for Joint Products and By-ProductsQuestions
1 A joint production process is one that yields more than one
principal product simultaneously By definition, a given joint process yields more than one output, so managers get several outputs In some cases, management may decide to
“tune” the process to produce more of the most desirable
product But management must always decide the best use of the remaining outputs For example, in the natural resources industries, it is common for both oil and natural gas to be extracted from an oil field, multiple types of ores to be extracted simultaneously from mines and for multiple meat products to be obtained from processing hogs and cattle
2 Joint products are those items resulting from a joint process
that have the greatest relative sales value of all outputs By-products are of insufficient sales value to justify
undertaking the joint process Scrap has little, if any, sales value Thus, the distinction among the three product groups is their relative sales value Joint products have the highest value followed by by-products
3 Management decides whether a joint process output is a joint
product, a by-product, or scrap based on judgment Output from a joint process is subjectively classified according to management's assessment of the relative sales value of each type The classification of outputs of a joint process is usually decided before the process is undertaken However, inunusual cases, the actual outputs of the joint process may notresult as planned In such cases, management may classify them differently than originally intended
4 Joint products gain separate identity at the split-off point
They may or may not be processed further outside the joint process after the split-off point It is also possible that there may be several subsequent split-off points after the original one within a joint process In other words, a joint process may continue to refine outputs after the original split-off point
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Trang 25 Separate costs can be distinctly traced to one joint product
or another; joint costs cannot be This difference is due to the fact that joint costs are incurred prior to the split-off point and separate costs are incurred after the split-off point
6 Joint processing costs are allocated only to the joint
products, not to by-products or scrap Joint process cost is not allocated to scrap or to by-products because the purpose
of engaging in the joint process is to produce the joint
products, not the scrap or by-products Thus, the costs
resulting from the joint process are best matched with the primary revenues from the products obtained from that process.(Additionally, the revenues from scrap or by-product may not
be great enough to cover any costs which might potentially be assigned to them.) Under some accounting treatments using thenet realizable approach to accounting for by-products and scrap, joint process costs are reduced by the value of the by-products or scrap Thus, in those cases, all of the joint process costs initially incurred are not allocated to the joint products
7 The three decision points are (1) before the joint process is
undertaken, (2) at the split-off point, and (3) after the split-off point The criterion for proceeding at any point iswhether the anticipated incremental revenues will exceed the anticipated incremental costs
8 Cost allocation refers to the assignment of an indirect cost
to a cost object using some reasonable method Since
production costs are incurred in a joint process to produce several outputs, those costs are indirect to the individual output produced and must be assigned to the output because of the cost principle This is necessary in order to have
appropriate inventory valuations for the joint products
produced in the joint process Accountants allocate fixed production costs to products produced within a period, and allocate certain plant and equipment costs to the time periodsduring which those assets are used through depreciation Amortization and allocation of intangible costs are other examples
9 Approaches to allocating joint process costs are classified
into two general categories: (1) physical measures and (2) monetary measures Physical measures (e.g., tons, barrels, feet) are unchanging yardsticks; monetary measures change overtime with inflation and deflation However, monetary measuresassign joint process costs to joint products proportionately
to relative sales value Physical measures treat each physicalunit of output as equally desirable by assigning a uniform amount of joint process cost to every unit of output produced
10 Approximated net realizable values are necessary when some or
Trang 3all of the joint products are not salable at the split-off point An approximated net realizable value is calculated by subtracting the incremental separate costs incurred between split-off and point of sale from the expected final sales price of the product Thus the additional approximations are the final sale price and the incremental separate costs.
11 One approach is to ignore by-product inventory completely
until it is sold Only then does the revenue it generates acknowledge the existence of the by-product This revenue is carried to the income statement as an increase to net income
of the period The second approach is to record, at the
split-off point, the final net realizable value of the
by-products recovered The net realizable value is credited
as a reduction of the joint process costs that gave rise to the by-product The second approach is theoretically
preferable because it causes the benefit to be matched with the source of the benefit – namely, the joint process costs being incurred during the period
Each student will have a different answer to preferability
12 If a company using job order costing produces a by-product or
a scrap item continuously from normal production, the net realizable value of that by-product or scrap should be
considered in setting the predetermined overhead rate The estimated net realizable value of the by-product or scrap should be deducted from total estimated overhead costs in setting the rate When the by-product or scrap is actually sold, its net realizable value should be credited to
Manufacturing Overhead
If a company using job order costing only produces a product or a scrap item during a particular job, then the net realizable value of the by-product/scrap should not be
by-considered in setting the predetermined overhead rate The net realizable value should be credited to the particular job that gave rise to the by-product/scrap
13 For a not-for-profit to appropriately evaluate the uses of its
resources, the AICPA require that multipurpose costs be
allocated between program and support categories Program expenses are those that are directly aimed at the
accomplishment of the organization's charitable objectives andare considered a more valid use of resources Comparison of support expenses to total expenses may suggest a measure of organizational efficiency The AICPA is concerned with donorshaving knowledge of the relative and absolute magnitude of funds spent on fundraising
14 Student solutions will vary No answer provided
Trang 416 a In a butcher shop, the major joint input is
meat The major questions to be asked follow: (1) Do I really want to be in the butcher shop business?
Presumably, this question has been answered in the affirmative (2) What specific meats do I want to work with and what customers do I want to serve? The answer
to this question will determine what inputs will be purchased and, to some extent, what production processes will be performed (3) What specific cuts of meat should
be selected from the meat carcasses? The answer to this question will determine how the carcasses are cut into salable parts (4) How much processing should I do to the individual cuts The answer to this question will determine what specific processes will be necessary beyond the split-off point The answer to this question will also determine what types of equipment the butcher shop must have to execute the required conversion
operations The decision to classify output as joint product, by-product, scrap, or waste is not as important
in this environment because inventory levels will be minimal due to the perishable nature of the product Rather, the focus will be on maximizing the value added
to the raw carcasses that are purchased from meat wholesalers
Trang 5b For a butcher shop, the manner in which joint costs is
allocated can affect some decisions For example, in pricing products, a butcher shop wants to cover all costs To do so requires that an appropriate price be established for each cut of meat This price will be determined partly by the costs of each cut, and part of the cost is joint cost The allocation of joint costs can also be important in meeting reporting requirements, e.g., income determination and inventory valuation for purposes of reporting to the Internal Revenue Service Joint products are also relevant in determining whether one is going to engage in production However, once the split-off point is reached in the production operation, the joint costs are irrelevant in determining whether additional conversion operations should be performed
c Four potential categories of output are obtained from
joint production Joint products are the main products obtained and are distinguished from the other outputs by their relatively greater sales value At the opposite end of the continuum, waste is an incidental output of a joint production process and has no value By-products and scrap are distinguished by the fact that they both have some value but the value is substantially below that
of joint products By-product differs from scrap in that
a by-product has a somewhat larger market value
17 a Direct instructional costs $38,000
Overhead 4,000Total costs $42,000
Application rate = $42,000 ÷ (4,000 + 2,000) = $7.00 per hour
Cost assignment:
Small Business Management (4,000 × $7.00) $28,000Intro to Internet (2,000 × $7.00) 14,000Total cost assigned $42,000
Trang 6c The monetary method of allocation best captures the
relative incentives of providing the joint services It
is appropriate to assign Introduction to Internet more cost because it generates more revenues Alternatively, more class hours are required for Small Business
Management If class hours is considered to be a cost driver, it is appropriate to assign more costs to Small Business Management
18 a Allocation rate = $12,000,000 ÷ 20,000 = $600 per ton
Chemical A: $600 × 12,000 = $7,200,000Chemical B: $600 × 8,000 = $4,800,000
b Incremental revenue = (12,000 tons ×
2,000 lbs × $1.00 per lb.) = $24,000,000Incremental costs (12,000 tons ×
$1,500 per ton) 18,000,000Increase in income $ 6,000,000Based on the incremental change in net income, the
company should process Chemical A further
19 a Fish = 8 oz ÷ 16 oz = 50%
Oil = 4 oz ÷ 16 oz = 25%
Meal = 2 oz ÷ 16 oz = 12.5%
The remaining 25% is waste
Joint Unit Total lbs Product AllocatedProducts Weight Produced Total Percent Joint CostFish 0.5 100,000 50,000 57.1 $54,359Oil 0.25 100,000 25,000 28.6 27,227Meal 0.125 100,000 12,500 14.3 13,614
87,500 100.0 $95,200b
Joint Unit AllocatedProducts Units Selling Price Total Percent Joint CostFish 50,000 $3.00 $150,000 54.5 $51,884Oil 25,000 4.00 100,000 36.4 34,653Meal 12,500 2.00 25,000 9.1 8,663
$275,000 100.0 $95,200
c The physical measure (pounds) is an unchanging yardstick,
but it treats all pounds as equally valuable The monetary basis assigns joint costs using sales value but,because of inflation and market price variability, is a changing yardstick However, the monetary basis probablyprovides a better way of matching the joint costs to the benefits achieved from the joint production process
because of the substantial differences in per pound prices among the three products
Trang 720 a Sales value of milk $ 50,000 (31.25%)
Sales value of sour cream 110,000 (68.75%) Total sales value $160,000
Since the milk represents 31.25% of the total sales value
at split-off, then $21,600 represents 31.25% of the totaljoint costs Total joint costs are $69,120 ($21,600 ÷ 0.3125)
b 2 pints = 1 quart
160,000 pints = 80,000 quarts of sour cream
Quarts of milk 120,000 (60%)Quarts of sour cream (160,000 ÷ 2) 80,000 (40%) Total quarts 200,000 Since the milk represents 60% of the total physical quantity produced, then $21,600 represents 60% of the total joint costs Total joint costs are $36,000 ($21,600
÷ 0.60)
21 a Communications News Entertainment
Revenues $18,000,000 $15,000,000 $95,000,000Separate Costs (17,000,000) (8,000,000) (55,000,000)NRV $ 1,000,000 $ 7,000,000 $40,000,000Joint cost allocation:
Communications $12,000,000 × ($1 ÷ $48) $ 250,000News $12,000,000 × ($7 ÷ $48) 1,750,000Entertainment $12,000,000 × ($40 ÷ $48) 10,000,000 Total $12,000,000Revenues $18,000,000 $15,000,000 $95,000,000Separate Costs (17,000,000) (8,000,000) (55,000,000)Allocated costs (250,000) (1,750,000) (10,000,000)Net Profit $ 750,000 $ 5,250,000 $30,000,000
b Total revenues = $18 m + $15 m + $95 m = $128 m
Joint cost allocation:
Communications $12,000,000 × ($18 ÷ $128) $ 1,687,500News $12,000,000 × ($15 ÷ $128) 1,406,250Entertainment $12,000,000 × ($95 ÷ $128) 8,906,250 Total $12,000,000Revenues $18,000,000 $15,000,000 $95,000,000Separate Costs (17,000,000) (8,000,000) (55,000,000)Allocated costs (1,687,500) (1,406,250) ( 8,906,250)Net Profit $ (687,500) $ 5,593,750 $31,093,750
Trang 8c Obviously, as head of the Communications Group, a manager
would be very concerned about the effects of allocatingjoint costs under the scheme in part (b) The result ofthe allocation is to make the Communications Group appear
to be very unprofitable
Some of the points students might make in their presentations include (some of which may be rebuttable):
1 The allocation of joint costs is totally arbitrary;
there is no cause and effect relationship represented in the allocations in part (b)
2 The Communications Group has a different degree of utilization than the other two groups of facilities, administration, etc because most of itsactivities originate at a different location
Evidence of this relationship is found in the separate costs incurred by the Communications Group relative to the other two groups The allocations
in part (b) fail to consider this fact
22 a Units of output allocation:
Total units = 7,500 + 10,000 + 12,500 = 30,000Product 1 (7,500 ÷ 30,000) × $120,000 $30,000Product 2 (10,000 ÷ 30,000) × $120,000 40,000Product 3 (12,500 ÷ 30,000) × $120,000 50,000 Total $120,000Total weight = [(7,500 × 3) + (12,500 × 3)] = 22,500 +20,000 + 37,500 = 80,000 ounces
Weight-based allocation:
Product 1 (22,500 ÷ 80,000) × $120,000 $33,750Product 2 (20,000 ÷ 80,000) × $120,000 30,000Product 3 (37,500 ÷ 80,000) × $120,000 56,250 Total $120,000Approximated Net realizable value computation:
Product 1 [7,500 × ($4.25 - $1)] $24,375Product 2 [10,000 × ($3.00 - $0.50)] 25,000Product 3 [12,500 × ($3.00 - $0.75)] 28,125 Total $77,500Approximated net realizable value allocation:
Product 1 (24,375 ÷ 77,500) × $120,000 $37,742Product 2 (25,000 ÷ 77,500) × $120,000 38,710Product 3 (28,125 ÷ 77,500) × $120,000 43,548 Total $120,000
Trang 9b Cost assigned to inventory = allocated joint cost +
separate costsProduct 1 = $30,000 + ($1 × 7,500) = $37,500Product 2 = $40,000 + ($0.50 × 10,000) = $45,000Product 3 = $50,000 + ($0.75 × 12,500) = $59,375Inventory valuation based on units of production:
Product 1 ($37,500) × (500 ÷ 7,500) $ 2,500Product 2 ($45,000) × (1,000 ÷ 10,000) 4,500Product 3 ($59,375) × (1,500 ÷ 12,500) 7,125 Total $14,125Inventory valuation based on weight:
Product 1 ($33,750 + $7,500) × (1,500 ÷ 22,500) $2,750Product 2 ($30,000 + $5,000) × (2,000 ÷ 20,000) 3,500Product 3 ($56,250 + $9,375) × (4,500 ÷ 37,500) 7,875 Total $14,125Inventory valuation based on approximated net realizablevalue:
Product 1 ($37,742 + $7,500) × (500 ÷ 7,500) $3,016Product 2 ($38,710 + $5,000) × (1,000 ÷ 10,000) 4,371Product 3 ($43,548 + $9,375) × (1,500 ÷ 12,500) 6,351 Total $13,738
23 a Final sales value = Final sales price × Units
Split-off sales value = Sales price at split-off × unitsIncremental costs = Incremental processing cost × units (a) (b) (c)=(a)–(b) (d) (e)=(c)–(d) Final Sales Split-off Incremental Incremental IncrementalProduct Value Sales Value Sales Costs ProfitSun $15,000 $10,000 $ 5,000 $ 7,500 $(2,500) Moon 60,000 10,000 50,000 20,000 30,000 Mars 450 375 75 50 25
Only products Moon and Mars should be processed beyond the split-off point
Trang 10b Joint costs $30,000
Less NRV of Mars ($1.80 - $0.20) × 250 (400)Joint costs to be allocated $29,600Unit-based allocation:
Sun (5,000 ÷ 15,000) × $29,600 $ 9,867Moon (10,000 ÷ 15,000) × $29,600 19,733 Total $29,600Weight-based allocation:
Sun (50,000 ÷ 110,000) × $29,600 $13,455Moon (60,000 ÷ 110,000) × $29,600 16,145 Total $29,600NRV computation (assuming Sun is not processed further)Sun (5,000 × $2) $10,000
Moon (10,000 × $4) 40,000NRV $50,000NRV-based allocation:
Sun (10,000 ÷ 50,000) × $29,600 $ 5,920Moon (40,000 ÷ 50,000) × $29,600 23,680 Total $29,600
24 a Product A Product B
Final revenues $180,000 $140,000Revenues at split-off (120,000) (100,000)Incremental revenues $ 60,000 $ 40,000Incremental costs (40,000) (34,000)Net benefit (cost)
of further processing $ 20,000 $ 6,000
Both products should be processed further
b The irrelevant item is the $40,000 of joint processing
cost
25 a (a) (b) (c)= (a)-(b) (d) (e)=(c)-(d) Final Split-off Incremental Incremental IncrementalProduct Revenues Sales Value Revenues Costs ProfitCandied
peaches $62,000 $40,000 $22,000 $26,000 $(4,000)Peach
jelly 74,000 40,000 34,000 38,000 (4,000)Peach
jam 27,000 10,000 17,000 15,000 2,000
b Candied peaches $ 4,000
Peach jelly 4,000Additional potential profit $8,000
Trang 1126 a Joint cost $32,000
Less NRV of Z [1,000 × (0.50 - 0.10)] (400)Joint cost to be allocated $31,600NRV of X [9,000 × ($4 - $0.75)] $29,250
NRV of Y [10,000 × ($4.25 - $1)] 32,500Total NRV $61,750Cost allocation:
X [$31,600 × ($29,250 ÷ $61,750)] $14,968
Y [$31,600 × ($32,500 ÷ $61,750)] 16,632Total cost allocation $31,600
b Separate costs for X = 9,000 × $0.75 = $6,750
Separate costs for Y = 10,000 × $1.00 = $10,000
X YJoint costs $14,968 $16,632Separate costs 6,750 10,000 Total costs $21,718 $26,632Divide by units 9,000 10,000Unit cost $2.41 $2.66Inventory values
X: 600 × $2.41 $1,446 Y: 900 × $2.66 2,394Z: (54 ÷ 1,000) × $400 22 Total inventory value $3,862
27 Because the by-products have substantial value, they should be
accounted for on the basis of net realizable value rather thanrealized value Use of realized value would result in
distorted cost information Whether the direct or indirect method is used would be dependent on the timing of the sale ofby-products and joint products If both product groups sell shortly after they are produced, then the choice of method is less important However, if the by-product tends to sell in adifferent period than its related joint products, the use of the direct method would provide a stronger match between costsand benefits
28 a Allocate joint cost of $50,000:
Joint Services Increase in Revenues Allocated Cost Leasing $ 800,000 1/3 $16,667
Sales 1,600,000 2/3 33,333 Totals $2,400,000 1 $50,000
b Allocate joint cost of $50,000:
Joint Services Increase in Net Income Allocated Cost Leasing $ 150,000 0.60 $30,000
Sales 100,000 0.40 20,000 Totals $ 250,000 1.00 $50,000
Trang 12c The allocation based on increase in net income may be
better because it matches the advertising cost to the netbenefit of the advertising
29 Joint process cost $120,000
Less net realizable value of
by-product inventory 20,000
Amount to be allocated $100,000
Proration of amount to be allocated based on weight:
Product Pounds Proportion Allocation
M 4,800 0.22 $ 22,000
N 13,000 0.59 59,000
O 4,200 0.19 19,000
22,000 1.00 $100,000
30 a Sales value of pants = Joint cost of pants
Total sales value Total joint cost
Joint cost assigned to shirts $ 69,000
b Joint costs = 60% of relative sales value amounts;
therefore, $87,000 = 0.6X
X = $145,000 sales value for hats
$300,000 – ($145,000 for hats and $40,000 for pants) = sales value of $115,000 for shirts
c Hats Shirts Pants
Final sales value $150,000 $134,000 $105,000Sales value at split off 145,000 115,000 40,000Increase in value $ 5,000 $ 19,000 $ 65,000Additional costs (13,000) (10,000) (39,000)Incremental benefit
(loss) $ (8,000) $ 9,000 $ 26,000
Process shirts and pants further
d Joint costs allocated to shirts: $69,000
Additional costs 10,000