16 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster...

16 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Constant Gross-MarginPercentage NRV MethodConstant Gross-Margin

Percentage NRV Method

Step 2:Deduct the gross margin.

Sales Gross Cost of Value Margin Goods sold

Product A1: $120,000 $ 63,559 $ 56,441Product B1: 346,500 183,527 162,973Product C1: 241,500 127,913 113,587Total $708,000 $375,000 $333,000($1 rounding)


Constant Gross-MarginPercentage NRV MethodConstant Gross-Margin

Percentage NRV Method

Step 3:Deduct separable costs.

Cost of Separable Joint costs goods sold costs allocated

Product A1: $ 56,441 $ 35,000 $ 21,441Product B1: 162,973 46,500 116,473Product C1: 113,587 51,500 62,087Total $333,000 $133,000 $200,000


Approach 2: PhysicalMeasure Method Example

Approach 2: PhysicalMeasure Method Example

$200,000 joint cost

20,000pounds A

48,000pounds B

12,000pounds C

Product A$50,000

Product B$120,000

Product C$30,000


Learning Objective 5Learning Objective 5

Explain why the sales value at

splitoff method is preferred

when allocating joint costs.


Choosing a MethodChoosing a Method

Why is the sales value at splitoff method widely used?

It measures the valueof the joint product

immediately.

It does not anticipatesubsequent management

decisions.

It uses ameaningful basis.

It is simple.


Choosing a MethodChoosing a Method

The purpose of the joint-cost allocation isimportant in choosing the allocation method.

The physical-measure method is a moreappropriate method to use in rate regulation.


Avoiding Joint Cost AllocationAvoiding Joint Cost Allocation

Some companies refrain from allocating jointcosts and instead carry their inventories

at estimated net realizable value.



Explain why joint costs

are irrelevant in a

sell-or-process-further decision.


Irrelevance of Joint Costsfor Decision Making


Assume that products A, B, and C can be soldat the splitoff point or processed further

into A1, B1, and C1.

Selling Selling Additional Units price price costs10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $46,50011,500 C: $20 C1: $21 $51,500




Should A, B, or C be sold at the splitoffpoint or processed further?

Product A: Incremental revenue $20,000– Incremental cost $35,000 = ($15,000)

Product B: Incremental revenue $31,500– Incremental cost $46,500 = ($15,000)

Product C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)



Account for byproducts

using two different methods.


Accounting for ByproductsAccounting for Byproducts

Method A:The production method recognizes byproducts

at the time their production is completed.

Method B:The sale method delays recognition ofbyproducts until the time of their sale.


Accounting for ByproductsExample


Main Products Byproducts (Yards) (Yards)

Production 1,000 400Sales 800 300Ending inventory 200 100Sales price $13/yard $1.00/yardNo beginning finished goods inventory




Joint production costs for joint(main) products and byproducts:

Material $2,000Manufacturing labor 3,000Manufacturing overhead 4,000Total production cost $9,000


Accounting for ByproductsMethod A


Method A: The production method

What is the value of ending inventoryof joint (main) products?

$9,000 total production cost– $400 net realizable value of the byproduct

= $8,600 net production cost for the joint products




200 ÷ 1,000 × $8,600 = $1,720 is the valueassigned to the 200 yards in ending inventory.

What is the cost of goods sold?

Joint production costs $9,000Less byproduct revenue 400Less main product inventory 1,720Cost of goods sold $6,880




Income Statement (Method A)

Revenues: (800 yards × $13) $10,400Cost of goods sold 6,880Gross margin $ 3,520

What is the gross margin percentage?

$3,520 ÷ $10,400 = 33.85%




What are the inventoriable costs?

Main product: 200 ÷ 1,000 × $8,600 = $1,720

Byproduct: 100 × $1.00 = $100


Journal Entries Method AJournal Entries Method A

Work in Process 2,000Accounts Payable 2,000

To record direct materials purchased and usedin production

Work in Process 7,000Various Accounts 7,000

To record conversion costs in the joint process



Byproduct Inventory 400Finished Goods 8,600

Work in Process 9,000To record cost of goods completed

Cost of Goods Sold 6,880Finished Goods 6,880

To record the cost of the main product sold



Cash or Accounts Receivable 10,400Revenues 10,400

To record the sale of the main product


Accounting for ByproductsMethod B


Method B: The sale method

What is the value of ending inventory ofjoint (main) products?

200 ÷ 1,000 × $9,000 = $1,800

No value is assigned to the 400 yards ofbyproducts at the time of production.The $300 resulting from the sale ofbyproducts is reported as revenues.




Income Statement (Method B)

Revenues: Main product (800 × $13) $10,400Byproducts sold 300Total revenues $10,700Cost of goods sold:

Joint production costs 9,000Less main product inventory 1,800 $ 7,200

Gross margin $ 3,200




What is the gross margin percentage?

$3,200 ÷ $10,700 = 29.91%

What are the inventoriable costs?

Main product: 200 ÷ 1,000 × $9,000 = $1,800By-product: -0-


Journal Entries Method BJournal Entries Method B

Work in Process 2,000Accounts Payable 2,000

To record direct materials purchased and usedin production

Work in Process 7,000Various Accounts 7,000

To record conversion costs in the joint process



Finished Goods 9,000Work in Process 9,000

To record cost of goods completed

Cost of Goods Sold 7,200Finished Goods 7,200

To record the cost of the main product sold



Cash or Accounts Receivable 10,400Revenues 10,400

To record the sale of the main product

Cash or Accounts Receivable 300Revenues 300

To record the sale of the byproduct


End of Chapter 16End of Chapter 16

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