Cost Exam 4

The joint cost allocation method that assigns joint production costs based on the proportionate share of eventual revenues less further processing costs is the

net realizable value method

Managers must decide whether a product should be sold at split off or process further. The sales value at split off method of joint cost allocation is the best method for generating the information managers need for this decision. Do you agree?

no because the method chosen for joint cost allocation is irrelevant

Joint costs for joint products

point at which separate products having relatively equal sales values can be identified

Joint costs for by products

point at which the main product and its associated by products emerge

Production method

recognizes byproduct inventory as it is created, and sales and costs at the time of sale

Sales method

recognizes no byproduct inventory, and recognizes only sales at the time of sales: byproduct costs are not tracked separately

Main product

the one product having a high total sales value emerging from a joint production process

Joint cost allocation methods:

1. Physical measures method 2. Sales value at split off method 3. Net realizable value method 4. Constant gross margin method

Products G and H are joint products developed from the same process with each being processed further. Joint costs are incurred until splitoff, the separable costs are incurred in further refining each product. Sales values of G and H at splitoff are used to allocate joint costs. If the sales value of G at splitoff increases and all other costs and selling prices remain unchanged, joint costs allocated to:

-G increases -H decreases

Sales value at split off method is preferred because:

-best measure of benefits received -independent of further processing decisions -common allocation basis (revenue) -simplicity

Method selection:

-if selling price at split off is available, use the sales value at split off method -if selling price at split off is not available, use the NRV method -if simplicity is the primary consideration, use the physical measures method or the constant gross margin method

In sell or process further decisions, joint costs are:

-irrelevant -sunk

For the purposes of allocating joint costs to joint products, the sales value at split off method could be used in which of the following situations?

-no costs beyond split off -costs beyond split off

In accounting for byproducts, the value of the byproduct may be recognized at the time of:

-production -sale

Basic characteristics of joint products:

1. an unavoidable physical relationship which requires simultaneous common processing 2. a split off point at which separate products emerge to be sold or further processes 3. none of the joint products are significantly greater in value than other joint products values

Two methods are utilized to account for byproducts:

1. production method 2. sales method

Reasons for allocating joint costs:

1. required for gaap and taxation purposes 2. cost values may be used for evaluation purposes 3. cost based contracting 4. insurance settlements 5. required by regulators 6. litigation

Difficulties associated with joint costs:

1. true joint costs are indivisible. they are not specifically identifiable with any of the products being simultaneously produced. the total of these costs must be allocated to individual products on some logical basis 2. joint costs are frequently confused with common costs. common costs are those incurred to produce products simultaneously, but each of the products could have been produced separately. the difference is that joint costs are indivisible while common costs are divisible

Accounting challenge

a portion of joint costs must be allocated to each of the joint products

Separable costs

all costs incurred beyond the split off point that are assignable to each of the now identifiable specific products

Physical measures method

allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc.

Constant gross margin method

allocates joint costs to joint products in a way that the overall gross margin percentage is identical for the individual products -joint costs are calculated as a residual amount

Net realizable value method

allocates joint costs to joint products on the basis of relative NRV of total production of the joint products

Byproduct

an output of a joint production process having a low sales value

The secondary product recovered in the course of manufacturing a primary product during a joint process is

by product

The joint cost allocation method that yields the same gross margin percentage for each product is the

constant gross margin percentage method

Relevant costs

expected future costs that differ among alternative courses of action

Relevant revenues

expected future revenues that differ among alternative courses of action

NRV =

final sales value - separable costs

First step in constant gross margin method is to allocate joint, to compute:

gross margin percentage

In joint process of production, two or more products that yield high volume of sales as compared to total sales of other products are classified as

joint product

Managers should consider only additional revenues and separable costs when making decisions about selling at split off or processing further. Do you agree?

look at incremental costs and incremental revenues

Which of the following costs of a joint process would be allocated to the joint products?

materials, labor and overhead

Difference between final sales value and separable costs is equal to

net realizable value

Joint products

refers to individual products, each of significant sales value, produced simultaneously as a result of a common process or series of processes

A joint cost allocation method is based on relative value of total sales, at point of split off is classified as

sales value at split off method

Which of the following is not an acceptable method of accounting for by-products?

the by product is valued at its opportunity costs of purchasing or replacing the prodcut

Which of the following is a true statement regarding joint costs?

the primary reason for allocating joint costs is for inventory valuation for financial reporting

Split off point

the stage of production at which separate products are identifiable

Joint costing

those costs incurred up to the point in a given process where individual products can be identified

Joint product costs

those which arise in the course of such common processes involving common raw materials

Sales value at split off method

uses the sales value of the entire production of the accounting period to calculate allocation percentage -ignores inventories -preferred method because it uses the value of the joint product at split off -best measure of the value of the product relative to other joint products