ACCT307:3-8, 3-9 Chp 11

Cost per physical measure =

Total joint cost ÷ Total units of physical measurement

What about the sales value at split off method .... What assumption are we making there?

We are assuming that all of the joint products have either an actual sales value at that point, or that if there is no market price, their value at split off can be reasonably estimated. If no, we cannot use this method.

Specifically why MUST we allocate joint costs?

While joint cost allocation may be helpful with many of the reasons discussed in slide #1, the one reason that we MUST allocate joint costs is because GAAP and IRS require it to be done, in order to value inventories and report results of operations..

An easy, objective way to prorate joint cost at the split-off point is to use

physical measure allocation or proration using a common physical characteristic of the joint products such as: tons of meat, bone, and hide in the meat packing or turkey processing industry, pounds of milk in the dairy industry, linear board feet in the lumber milling industry, barrels of oil in the petroleum refining industry, or number of computer chips in the semiconductor industry

by-product and scrap are

incidental outputs of a joint process

realized value approach (or other income approach)-

is the easiest approach to accounting for by-product because no value is recognized for the by-product until it is sold

The assignment of raw material costs to the major end products resulting from refining a barrel of crude oil is best described as

joint costing

Joint products are typically manufactured in companies using

mass production processes and a process costing accounting method

In a joint process

one product line cannot be manufactured without producing others

The net realizable value (NRV) method is an appropriate method of allocation when

products cannot be sold at split-off

net realizable value approach (or offset approach)-

reduces joint product cost for the NRV that will be created by the by-product's sale

The approximated net realizable value at split-off allocation uses

simulated NRVs for the joint products at split-off to calculate the joint cost allocation

The point at which joint process outputs are first identifiable as individual products is called the

split-off point -can have more than 1

Joint products are

the key outputs of a joint process -Joint products have substantial revenue-generating ability and, as such, provide the financial motive for the company entering into the production process

approximated NRV at split-off provides the most logical joint cost assignment because this method captures the

intended level of separate processing, costs of separate processing, expected selling costs of each joint product, and expected selling price of each joint product

Products that result from a joint process and that have a sales value are classified as

joint products (also called primary products, main products, or co-products), by-products, or scrap

Costs are allocated in many different places and for different reasons. What are the basic reasons (top 4) why we allocate things?

#1 - Because regulatory authorities such as GAAP and IRS require it. #2 - To help evaluate the performance of management, products, business segments, etc. #3 - To make long-term decisions, such as pricing. #4 - To discourage frivolous use of organizational resources

more complex monetary measure allocations use the following steps to prorate joint cost to joint products:

1. Choose a monetary allocation base. 2. List each joint product's base values. 3. Add the values in Step 2 to obtain total. 4. Divide each individual Step 2 value by the Step 3 total to obtain numerical proportions. These proportions should add to 100 percent 5. Multiply the joint cost by each proportion to obtain the allocation for each product. 6. Divide each product's prorated joint cost by the number of product units to obtain a cost per unit for valuation purposes

The principal disadvantage of using the physical quantity method of allocating joint costs is that

Costs assigned to inventories may have no relationship to value

incremental cost

Incremental cost is the total cost incurred due to an additional unit of product being produced.

Sell or Process Further?

Incremental revenues > Incremental costs= Process further Incremental revenues < Incremental costs= Sell at split-off

Is one method clearly better than another? Why or why not?

Nope. It depends. Physical units method is certainly the easiest if you have the type of product for which it can be used. Sales value of split off offers the best "matching" of the costs with the revenues up to that point, but it might be poor for evaluating the overall profitability of a production run and ignores the fact that certain products gain a lot of value by processing AFTER split off. (Diamonds are a good example. Almost all of their value comes from what we do AFTER the lump of coal comes out of the ground.)

A company manufactures several products that originate in a joint process and are separated at a split-off point. Which one of the following methods of joint-cost allocation would allocate the same unit cost to each separable product?

Physical quantity method -The physical quantity (unit) method is the simplest; it allocates joint production costs to each product based on their relative proportions of the measure selected. Using this method results in a an identical unit cost for each separable product.

In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold to maximize profits?

Separable costs after the split-off point

All of the following are methods of allocating joint costs to joint products except

Separable production cost method

The 3 most common bases for allocation are?

The 3 most common bases for allocation are physical units, sales value at split off and net realizable value (NRV) In addition, the weighted average method, estimated NRV at split off and constant gross profit method may also be used.

The primary purpose for allocating common costs to joint products is to determine

The inventory cost of joint products for financial reporting

The methods are similar in some ways, while different in other ways. Each method makes a critical assumption. Let's take the physical units method. What critical assumption does this method make? Can you mention a type of product for which this method would be useful?

The physical units method assumes that the types of units are comparable and similar in value. If not, it's really a poor method. Say we were making bottles of diet soda ... to keep it simple, say we had 3 flavors: cola, orange and root beer. The sales value of each type is the same, let's say $2 each. We make a production run of 30,000, 10,000 of each flavor at a cost of $3,000. Lets do the physical units method. Each product has 1/3 of the units and gets 1/3 of the cost, or $1,000. Now let's use the sales value. Each product would have a sales value of $2*1,000 or $2,000. They would have 1/3 of the sales value and thus, the same allocation as the physical units.

Monetary Measure Allocation's primary benefit

The primary benefit of monetary over physical measure allocations is that the former recognizes the relative revenue generation of each product

The net realizable value approach reflects the

expected amount to be received from the by-product sale

approximated NRV measures the

expected contribution of each product line to the coverage of joint cost.

Incremental cost is calculated by

analyzing the additional expenses involved in the production process, such as raw materials, for one additional unit of production.

Joint costs are useful for

determining inventory cost for accounting purposes -Joint costs are useful for inventory costing when two or more identifiable products emerge from a common production process. The joint costs of production must be allocated on some basis, such as relative sales value