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Cost Allocation:Cost Allocation:
Joint ProductsJoint Productsand By-productsand By-products
Key terms:
– Joint products – two or more outputs produced simultaneously by a single manufacturing process using common input
– Split-off point – the stage of processing where joint products are separated.
– Joint cost – costs of processing two or more products prior to the split-off point; common cost
– Byproducts– products that result incidentally from the joint products
- Separable cost – cost after the split-off point
Consider the following example of an oil
refinery.We will assume only
two products,gasoline and oil.
Joint Product Cost AllocationJoint Product Cost Allocation
SeparateProcessing Costs
FinalSale
SeparateProcessing
FinalSale
SeparateProcessing
SeparateProcessing Costs
JointInput
JointProduction
Process
Split-OffPoint
JointProductCosts Oil
Gasoline
Joint Product Cost AllocationJoint Product Cost Allocation
Joint Products and ByproductsJoint Products and Byproducts
Sales Value
High Low
Main ProductsJoint Products Byproducts
By-ProductsBy-Products
JointInput
JointProduction
Process
Split-OffPoint
JointCosts
By-products
MajorProduct
Relatively lowvalue or quantity
when compared tomajor products
MajorProduct
Explain why joint costs should be
allocated to individual products.
Why Allocate Joint Costs?Why Allocate Joint Costs?
• to compute inventory cost and cost of goods sold
• to determine cost reimbursement under contracts
• for insurance settlement computations
• for rate regulation
• for litigation purposes
Approaches to AllocatingApproaches to AllocatingJoint CostsJoint Costs
Approach 2:Market-based
Approach 1:Physical measure
Two basic ways to allocatejoint costs to products are:
Allocating Joint Allocating Joint CostsCosts
Joint Product Costs
Approach 1
a. Physical-UnitsMethod
b. Net-Realizable- Value Method
c. Gross margin Percent method
Approach 2
a. Relative- Sales- Value Method
Allocation based onthe relative valuesof the products at
the split-off point.
Allocation based on a physical measure of the
joint products at the split-off point.
Allocation based onfinal sales values lessseparable processing
costs.
Relative-Sales-Value Method
Physical-UnitsMethod
Net-Realizable-Value Method
Gross margin Percent Method
Allocation based ona constant gross margin
for all products.
240,000 gallons
360,000 gallons
JointProduction
Process
Split-OffPoint
Oil
Gasoline
Joint material
cost = $275,000
Joint conversioncost = $225,000
Physical-Units MethodPhysical-Units Method
Physical Measure Physical Measure Method ExampleMethod 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
Market-based DataMarket-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
Allocating Joint Costs ExampleAllocating Joint Costs Example
1,000 units of A at aselling price of P100 = P100,000
1,500 units of B at aselling price of P300 = P450,000
2,000 units of C at aselling price of P200 = P400,00
Joint processingcost is P200,000
Splitoff point
Allocating Joint Costs ExampleAllocating Joint Costs Example
A B C TotalSales Value P100,000 P450,000 P400,000 P950,000Allocation ofJoint Cost100 ÷ 950 21,053 450 ÷ 950 94,737400 ÷ 950 84,210
200,000Gross margin P 78,947 P355,263 P315,790 P750,000
Sales Value at SplitoffSales Value at SplitoffMethod ExampleMethod Example
Assume all of the units producedof B and C were sold.
250 units of A (25%)remain in inventory.
What is the gross marginpercentage of each product?
Sales Value at SplitoffSales Value at SplitoffMethod ExampleMethod Example
Product A Revenues: 750 units × P100 P75,000Cost of goods sold:
Joint product costs P21,053Less ending inventory
P21,053 × 25% 5,263 15,790Gross margin P59,210
Sales Value at SplitoffSales Value at SplitoffMethod ExampleMethod Example
Product A:(P75,000 – P 15,790) ÷ 75,000 = 79%
Product B:(P450,000 – P94,737) ÷ P450,000 = 79%
Product C:(P400,000 – $84,210) ÷ P400,000 = 79%
Estimated Net Realizable ValueEstimated Net Realizable Value(NRV) Method Example(NRV) Method Example
Assume that MBA-TEP Company can processproducts A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:1,000 × P120= P120,000
B1:1,500 × P330= P495,000
C1:2,000 × $210= P420,000
Estimated Net Realizable ValueEstimated Net Realizable Value(NRV) Method Example(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: P35,000 B1: P50,000 C1: P55,000
What is the estimated net realizable value of eachproduct at the splitoff point?
Estimated Net Realizable ValueEstimated Net Realizable Value(NRV) Method Example(NRV) Method Example
Product A1: P120,000 – P35,000 = P85,000
Product B1: P495,000 – P50,000 = P445,000
Product C1: P420,000 – P55,000 = P365,000
How much of the joint cost is allocatedto each product?
Estimated Net Realizable ValueEstimated Net Realizable Value(NRV) Method Example(NRV) Method Example
To A1:85,000 ÷ 895,000 × P200,000 = P18,994
To B1:445,000 ÷ 895,000 × P200,000 = P99,441
To C1:365,000 ÷ 895,000 × P200,000 = P81,564
Estimated Net Realizable ValueEstimated Net Realizable Value(NRV) Method Example(NRV) Method Example
Allocated Separable Inventory joint costs costs costs
A1 P 18,994 P 35,000 P 53,994B1 99,442 50,000 149,442C1 81,564 55,000 136,564Total P200,000 P140,000 P340,000
Constant Gross-MarginConstant Gross-MarginPercentage NRV MethodPercentage NRV Method
This method entails three steps:
Step 1:Compute the overall gross-margin percentage.
Step 2:Use the overall gross-margin percentage
and deduct the gross margin from thefinal sales values to obtain the totalcosts that each product should bear.
Constant Gross-MarginConstant Gross-MarginPercentage NRV MethodPercentage NRV Method
Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.
Constant Gross-MarginConstant Gross-MarginPercentage NRV MethodPercentage NRV Method
What is the expected final sales value of totalproduction during the accounting period?
Product A1: P 120,000Product B1: 495,000Product C1: 420,000Total P1,035,000
Constant Gross-MarginConstant Gross-MarginPercentage NRV MethodPercentage NRV Method
Step 1:Compute the overall gross-margin percentage.
Expected final sales value P1,035,000Deduct joint and separable costs 340,000Gross margin P695,000
Gross margin percentage:P695,000 ÷ P1,035,000 = 67.15%
Constant Gross-MarginConstant Gross-MarginPercentage NRV MethodPercentage NRV Method
Step 2:Deduct the gross margin.
Sales Gross Cost of Value Margin Goods sold
Product A1: P120,000 P 80,580 P 39,421Product B1: 495,000 332,392 162,608Product C1: 420,000 282,030 137,971Total P 1,035,000 P695,000 P340,000
Constant Gross-MarginConstant Gross-MarginPercentage NRV MethodPercentage NRV Method
Step 3:Deduct separable costs.
Cost of Separable Joint costs goods sold costs allocated
Product A1: P 39,421 P 35,000 P 4,421Product B1: 162,608 50,000 112,608Product C1: 137,971 55,000 82,971Total P340,000 P140,000 P200,000
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 CostsIrrelevance of Joint Costsfor Decision Makingfor 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 costs1,000 A: P100 A1: P120 P35,0001,500 B: P300 B1: P330 P50,0002,000 C: P200 C1: P210 P55,000
Irrelevance of Joint CostsIrrelevance of Joint Costsfor Decision Makingfor Decision Making
Should A, B, or C be sold at the splitoffpoint or processed further?
Product A: Incremental revenue P20,000– Incremental cost P35,000 = (P15,000)
Product B: Incremental revenue P45,000– Incremental cost P50,000 = (P5,000)
Product C: Incremental revenue $20,000– Incremental cost P55,000= (P35,000)
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.
End of ReportEnd of Report
Thank youThank you