16 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost Allocation: Joint Productsand Byproducts
Chapter 16
16 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Identify the splitoff point(s)in a joint-cost situation.
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Joint-Cost Basics
Joint productsJoint costs
Separable costs
Splitoff pointByproduct
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Joint-Cost Basics
Raw milk
Cream Liquid Skim
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Joint-Cost Basics
Coal
Gas Benzyl Tar
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Learning Objective 2
Distinguish joint productsfrom byproducts.
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Joint Products and Byproducts
Sales Value
High Low
Main ProductsJoint Products Byproducts
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Learning Objective 3
Explain why joint costs should beallocated to individual products.
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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
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Learning Objective 4
Allocate joint costs usingfour different methods.
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Approaches to AllocatingJoint Costs
Approach 2:Physical measure
Approach 1:Market based
Two basic ways to allocatejoint costs to products are:
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Approach 1: Market-based Data
Sales value at splitoff methodEstimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
16 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs Example
10,000 units of A at aselling price of $10 = $100,000
10,500 units of B at aselling price of $30 = $315,000
11,500 units of C at aselling price of $20 = $230,00
Joint processingcost is $200,000
Splitoff point
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Allocating Joint Costs Example
A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ 645 31,008 315 ÷ 645 97,674230 ÷ 645 71,318
200,000Gross margin $ 68,992 $217,326 $158,682 $445,000
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Sales Value at SplitoffMethod Example
Assume all of the units producedof B and C were sold.
2,500 units of A (25%)remain in inventory.
What is the gross marginpercentage of each product?
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Sales Value at SplitoffMethod Example
Product A Revenues: 7,500 units × $10.00 $75,000Cost of goods sold:
Joint product costs $31,008Less ending inventory
$31,008 × 25% 7,752 23,256Gross margin $51,744
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Sales Value at SplitoffMethod Example
Product A:($75,000 – $ 23,256) ÷ $75,000 = 69%
Product B:($315,000 – $97,674) ÷ $315,000 = 69%
Product C:($230,000 – $71,318) ÷ $230,000 = 69%
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Estimated Net Realizable Value(NRV) Method Example
Assume that Oklahoma Company can processproducts A, B, and, C further into A1, B1, and C1.The new sales values after further processing are:
A1:10,000 × $12.00
= $120,000
B1:10,500 × $33.00
= $346,500
C1:11,500 × $21.00
= $241,500
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Estimated Net Realizable Value(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of eachproduct at the splitoff point?
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Estimated Net Realizable Value(NRV) Method Example
Product A1: $120,000 – $35,000 = $85,000Product B1: $346,500 – $46,500 = $300,000Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocatedto each product?
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Estimated Net Realizable Value(NRV) Method Example
To A1:85 ÷ 575 × $200,000 = $29,565
To B1:300 ÷ 575 × $200,000 = $104,348
To C1:190 ÷ 575 × $200,000 = $66,087
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Estimated Net Realizable Value(NRV) Method Example
Allocated Separable Inventory joint costs costs costs
A1 $ 29,565 $ 35,000 $ 64,565B1 104,348 46,500 150,848C1 66,087 51,500 117,587Total $200,000 $133,000 $333,000
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Constant Gross-MarginPercentage NRV Method
This method entails three steps:Step 1:
Compute the overall gross-margin percentage.Step 2:
Use the overall gross-margin percentageand deduct the gross margin from thefinal sales values to obtain the totalcosts that each product should bear.
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Constant Gross-MarginPercentage NRV Method
Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.
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Constant Gross-MarginPercentage NRV Method
What is the expected final sales value of totalproduction during the accounting period?
Product A1: $120,000Product B1: 346,500Product C1: 241,500Total $708,000
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Constant Gross-MarginPercentage NRV Method
Step 1:Compute the overall gross-margin percentage.Expected final sales value $708,000Deduct joint and separable costs 333,000Gross margin $375,000
Gross margin percentage:$375,000 ÷ $708,000 = 52.966%