Chapter 11 - Cost Accounting

In a sell-or-process further decision, what is the relevant data to be considered?

(1) the additional revenue after further processing and (2) the additional costs of processing further. The only costs and revenues relevant to the decision are those that result from it--the joint costs incurred prior to the split-off point are not affected by the decision. It is simply an application of the differential analysis approach.

When is the the physical quantities method often used?

(1) when output product prices are highly volatile and (2) when significant processing occurs between the split-off point and the first point of marketability or when product prices are not set by the market.

Joint Cost

Cost of a manufacturing process with several different outputs. Costs incurred prior to the split-off point.

When should the estimated net realizable value be determined?

It should be determined when no sales value exist for the outputs at the split-off point by taking the sales value of each product at the first point at which it can be marketed and deducting the processing costs that must be incurred after the split-off point.

Physical Quantities Method

Joint cost allocation based on measurement of the volume, weight, or other physical measurement of the joint products at the split-off point.

Net Realizable Value Method

Joint cost allocation based on the promotional values of the joint products at the split-off point. If the joint products can be sold at the split-off point, the market value or sales price should be used for this allocation.

Joint Products

Outputs from a common input and common production process.

By-Products

Outputs from a joint production process that are relatively minor in quantity and/or value when compared to the main products.

Estimated Net Realizable Value

Sales price of a final product minus additional processing costs necessary to prepare a product for sale. This might be necessary if the products require further processing before they are marketable.

Process further if:

Sales value at split off < sales value after processing, less additional processing costs.

Sell at split off if:

Sales value at split off > Sales value after processing, less additional processing costs.

Split-Off Point

Stage of processing that separates two or more products.

What is one important concept of the net realizable value method?

That revenue dollars from any joint product are assumed to make the same percentage contribution at the split-off as the revenue dollars from any other joint product.

What is the difference between net realizable value and estimated net realizable value?

The difference is that in net realizable value, we can sell the product at the split-off point, so we do not have to estimate a value.

What is the Net Realizable Value?

The estimated sales value of each product at the split-off point.

What is the first common method of accounting for by-products?

The net realizable value from sale of the by-product is deducted from the joint costs, effectively allocating to the by-product an amount of joint costs equal to the sales value of the by product. The remaining joint costs are allocated to main products.

What are the two major methods to allocate joint costs?

The net realizable value method and the physical quantities method.

What is the second common method of accounting for by products?

The proceeds from sale of the by-product are treated as other revenue. All joint costs are allocated to the main products. (Looks like the net realizable value, no costs are added or subtracted from the by-product revenue).

Why are joint costs allocated?

To assign common costs to two or more products manufactured from a common input. Companies allocate costs to establish a cost basis for pricing or performance evaluation.