Sesi 11 Joint Cost

Joint Costing
A Lecture Presentation by School of Accounting Padjadjaran State University
4/4/2012
Learning Objective 1
Identify the splitoff point(s) in a joint-cost situation.
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Joint-Cost Basics
Joint costs Joint products
ByProduct MainProduct
Splitoff point
Separable costs
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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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Distinguish joint products from byproducts.
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Joint Products and Byproducts

Main Products Joint Products
Byproducts
High Sales Value

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Low
Explain why joint costs should be allocated 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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Allocate joint costs using four different methods.
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10
Approaches to Allocating Joint Costs
Two basic ways to allocate joint costs to products are:
Approach 1: Market based

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Approach 2: Physical measure

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Approach 1: Market-based Data

Sales value at splitoff method Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
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12
Allocating Joint Costs Example

10,000 units of A at a selling price of $10 = $100,000 10,500 units of B at a selling price of $30 = $315,000 11,500 units of C at a selling price of $20 = $230,000
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Joint processing cost is $200,000
Splitoff point
13
Allocating Joint Costs Example

A $100,000 B $315,000 C $230,000 Total $645,000
Sales Value Allocation of Joint Cost 100 645 315 645 230 645
31,008
97,674 71,318 $217,326 $158,682
Gross margin $ 68,992

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200,000 $445,000
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Sales Value at Splitoff Method Example

Assume all of the units produced of B and C were sold. 2,500 units of A (25%) remain in inventory. What is the gross margin percentage of each product?
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Product A Revenues: 7,500 units $10.00 Cost of goods sold: Joint product costs $31,008 Less ending inventory $31,008 25% 7,752 Gross margin $75,000
23,256 $51,744
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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 process products A, B, and, C further into A1, B1, and C1. The new sales values after further processing are: A1: B1: C1: 10,000 $12.00 10,500 $33.00 11,500 $21.00 = $120,000 = $346,500 = $241,500
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Additional processing (separable) costs are as follows:
A1: $35,000
B1: $46,500
C1: $51,500
What is the estimated net realizable value of each product at the splitoff point?
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Product A1: $120,000 $35,000 = $85,000 Product B1: $346,500 $46,500 = $300,000
Product C1: $241,500 $51,500 = $190,000

How much of the joint cost is allocated to each product?
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20

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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Allocated joint costs $ 29,565 104,348 66,087 $200,000 Separable costs $ 35,000 46,500 51,500 $133,000 Inventory costs $ 64,565 150,848 117,587 $333,000
A1 B1 C1 Total
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Constant Gross-Margin Percentage 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 the final sales values to obtain the total costs that each product should bear.
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Step 3: Deduct the expected separable costs from the total costs to obtain the joint-cost allocation.
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What is the expected final sales value of total production during the accounting period? Product A1: $120,000 Product B1: 346,500 Product C1: 241,500 Total $708,000
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Step 1: Compute the overall gross-margin percentage. Expected final sales value $708,000 Deduct joint and separable costs 333,000 Gross margin $375,000 Gross margin percentage: $375,000 $708,000 = 52.966%
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Step 2: Deduct the gross margin. Sales Gross Cost of Value Margin Goods sold Product A1: $120,000 $ 63,559 $ 56,441 Product B1: 346,500 183,527 162,973 Product C1: 241,500 127,913 113,587 Total $708,000 $375,000 $333,000
($1 rounding)
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Step 3: Deduct separable costs. Cost of Separable Joint costs goods sold costs allocated Product A1: $ 56,441 $ 35,000 $ 21,441 Product B1: 162,973 46,500 116,473 Product C1: 113,587 51,500 62,087 Total $333,000 $133,000 $200,000
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Approach 2: Physical Measure Method Example

$200,000 joint cost 20,000 pounds A Product A $50,000
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48,000 pounds B Product B $120,000
12,000 pounds C Product C $30,000

29
Explain why the sales value at splitoff method is preferred when allocating joint costs.
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30
Choosing a Method
Why is the sales value at splitoff method widely used? It measures the value of the joint product immediately.
It uses a meaningful basis.
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It does not anticipate subsequent management decisions.

It is simple.
31
Choosing a Method
The purpose of the joint-cost allocation is important in choosing the allocation method. The physical-measure method is a more appropriate method to use in rate regulation.
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Avoiding Joint Cost Allocation
Some companies refrain from allocating joint costs and instead carry their inventories at estimated net realizable value.
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Explain why joint costs are irrelevant in a sell-or-process-further decision.
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34
Irrelevance of Joint Costs for Decision Making

Assume that products A, B, and C can be sold at the splitoff point or processed further into A1, B1, and C1. Selling Selling Additional Units price price costs 10,000 A: $10 A1: $12 $35,000 10,500 B: $30 B1: $33 $46,500 11,500 C: $20 C1: $21 $51,500
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Irrelevance of Joint Costs for Decision Making

Should A, B, or C be sold at the splitoff point 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)
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Account for byproducts using two different methods.
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37
Accounting for Byproducts

Method A: The production method recognizes byproducts at the time their production is completed. Method B: The sale method delays recognition of byproducts until the time of their sale.
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Accounting for Byproducts Example

Main Products Byproducts (Yards) (Yards) Production 1,000 400 Sales 800 300 Ending inventory 200 100 Sales price $13/yard $1.00/yard No beginning finished goods inventory
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Accounting for Byproducts Example

Joint production costs for joint (main) products and byproducts: Material $2,000 Manufacturing labor 3,000 Manufacturing overhead 4,000 Total production cost $9,000
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Accounting for Byproducts Method A

Method A: The production method What is the value of ending inventory of joint (main) products? $9,000 total production cost $400 net realizable value of the byproduct = $8,600 net production cost for the joint products
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200 1,000 $8,600 = $1,720 is the value assigned to the 200 yards in ending inventory. What is the cost of goods sold? Joint production costs Less byproduct revenue Less main product inventory Cost of goods sold
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$9,000 400 1,720 $6,880

42

Income Statement (Method A) Revenues: (800 yards $13) $10,400 Cost of goods sold 6,880 Gross margin $ 3,520 What is the gross margin percentage?
$3,520 $10,400 = 33.85%

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What are the inventoriable costs? Main product: 200 1,000 $8,600 = $1,720
Byproduct: 100 $1.00 = $100
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Journal Entries Method A

Work in Process 2,000 Accounts Payable 2,000 To record direct materials purchased and used in production Work in Process 7,000 Various Accounts 7,000 To record conversion costs in the joint process
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Byproduct Inventory 400 Finished Goods 8,600 Work in Process 9,000 To record cost of goods completed Cost of Goods Sold 6,880 Finished Goods 6,880 To record the cost of the main product sold
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Cash or Accounts Receivable 10,400 Revenues 10,400 To record the sale of the main product
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Accounting for Byproducts Method B

Method B: The sale method What is the value of ending inventory of joint (main) products? 200 1,000 $9,000 = $1,800 No value is assigned to the 400 yards of byproducts at the time of production. The $300 resulting from the sale of byproducts is reported as revenues.
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Income Statement (Method B)
Revenues: Main product (800 $13) Byproducts sold Total revenues Cost of goods sold: Joint production costs 9,000 Less main product inventory 1,800 Gross margin
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$10,400 300 $10,700
$ 7,200 $ 3,200
49

What is the gross margin percentage? $3,200 $10,700 = 29.91%
What are the inventoriable costs?

Main product: 200 1,000 $9,000 = $1,800 By-product: -0-
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Journal Entries Method B

Work in Process 2,000 Accounts Payable 2,000 To record direct materials purchased and used in production Work in Process 7,000 Various Accounts 7,000 To record conversion costs in the joint process
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Finished Goods 9,000 Work in Process 9,000 To record cost of goods completed Cost of Goods Sold 7,200 Finished Goods 7,200 To record the cost of the main product sold
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Cash or Accounts Receivable 10,400 Revenues 10,400 To record the sale of the main product Cash or Accounts Receivable 300 Revenues 300 To record the sale of the byproduct
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End of Course
Thank You
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Sesi 11 Joint Cost

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Joint Costing

A Lecture Presentation by School of Accounting Padjadjaran State University

Identify the splitoff point(s) in a joint-cost situation.

Distinguish joint products from byproducts.

Joint Products and Byproducts

High Sales Value

Explain why joint costs should be allocated to individual products.

Why Allocate Joint Costs?

for insurance settlement computations

Allocate joint costs using four different methods.

Approaches to Allocating Joint Costs

Two basic ways to allocate joint costs to products are:

Approach 1: Market based

Approach 2: Physical measure

Approach 1: Market-based Data

Constant gross-margin percentage NRV method

Allocating Joint Costs Example

Joint processing cost is $200,000

Allocating Joint Costs Example

Gross margin $ 68,992

Sales Value at Splitoff Method Example

Sales Value at Splitoff Method Example

Sales Value at Splitoff Method Example

Estimated Net Realizable Value (NRV) Method Example

Estimated Net Realizable Value (NRV) Method Example

Estimated Net Realizable Value (NRV) Method Example

Product C1: $241,500 $51,500 = $190,000

Estimated Net Realizable Value (NRV) Method Example

Estimated Net Realizable Value (NRV) Method Example

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

Constant Gross-Margin Percentage NRV Method

Approach 2: Physical Measure Method Example

48,000 pounds B Product B $120,000

12,000 pounds C Product C $30,000

It does not anticipate subsequent management decisions.

Avoiding Joint Cost Allocation

Explain why joint costs are irrelevant in a sell-or-process-further decision.

Irrelevance of Joint Costs for Decision Making

Irrelevance of Joint Costs for Decision Making

Account for byproducts using two different methods.

Accounting for Byproducts

Accounting for Byproducts Example

Accounting for Byproducts Example

Accounting for Byproducts Method A

Accounting for Byproducts Method A

$9,000 400 1,720 $6,880

Accounting for Byproducts Method A

$3,520 $10,400 = 33.85%

Accounting for Byproducts Method A

Byproduct: 100 $1.00 = $100

Journal Entries Method A

Journal Entries Method A

Journal Entries Method A

Accounting for Byproducts Method B

Accounting for Byproducts Method B

$10,400 300 $10,700

Accounting for Byproducts Method B

What are the inventoriable costs?

Journal Entries Method B