Copyright © 2003 Pearson Education Canada Inc. Slide Chapter 15 Cost Allocation: Joint Products and Byproducts

Copyright © 2003 Pearson Education Canada Inc. Slide Joint Products in Joint Processes Joint costs are costs which yield multiple products simultaneously Split-off point is the juncture in the process when separate identifiable products emerge Separable costs are costs incurred beyond the split- off point and are assignable to separate products Joint Costs Product A Separable Costs A Product B Separable Costs B Split-off Point Pages

Copyright © 2003 Pearson Education Canada Inc. Slide Joint Products, Byproducts and Scrap Joint products have a relatively high sales value and are not separately identifiable as individual products until the split-off point Main product is the one with the highest sales value resulting from a process yielding two or more products Byproducts have a low sales value relative to sales value of the main or joint products (s) Scrap products have a minimal (often zero) sales value Main Products Joint Products Byproducts HighLow Pages Sales Value

Copyright © 2003 Pearson Education Canada Inc. Slide Why Allocate Joint Costs? Allocate joint costs to products for: inventory costing and cost of goods sold calculations cost reimbursement under contracts customer profitability analysis insurance settlement computations rate regulation situations Page 568

Copyright © 2003 Pearson Education Canada Inc. Slide CreamSkimTotal Sales value at split-off$200$300$500 Weighting40%60%100% Joint costs allocated$160$240$400 Sales Value at Splitoff Method Allocate joint costs to products based on their relative value at the split-off point Pages Raw Milk $400 Cream $200 Skim $300 Split-off Point

Copyright © 2003 Pearson Education Canada Inc. Slide Physical Measure Method Allocate joint costs to products based on their relative proportions at the split-off point Pages Raw Milk $400 Cream 25 units Skim 75 units Split-off Point CreamSkimTotal Physical measure Weighting25%75%100% Joint costs allocated$100$300$400

Copyright © 2003 Pearson Education Canada Inc. Slide Allocate joint costs to products based on their estimated final selling prices less separable processing costs Net Realizable Value (NRV) Method Pages Raw Milk $400 Cream Split-off Point Skim Butter $500 Condensed Milk $1,100 Processing $280 Processing $520 CreamSkimTotal Final sales value$500$1,100$1,600 Separable processing costs Net realizable value Weighting27.5%72.5%100% Joint cost allocation$110$290$400

Copyright © 2003 Pearson Education Canada Inc. Slide ButterCondensed CreamMilkTotal Total final sales value$1,600 Joint and separable costs1,200 Gross margin$400 Gross margin %25% Final sales value$500$1,100$1,600 Gross 25% Imputed total costs ,200 Separable costs Allocated joint costs$ 95$ 305$400 Constant Gross Margin % NRV Method Allocate joint costs so that the gross margin % for each product is the same Pages

Copyright © 2003 Pearson Education Canada Inc. Slide Irrelevance of Joint Costs When considering whether to sell a product at the split-off point or process further, ignore joint costs Raw Milk $400 Cream Split-off Point Skim Butter $500 Condensed Milk $1,100 Processing $520 Processing $280 Pages Cream versus Butter Split-offProcess Further Relevant revenue$200$500 Relevant costs 280 Incremental operating income$200$320

Copyright © 2003 Pearson Education Canada Inc. Slide Main Products and Byproducts Main products are products which constitute the major portion of the total sales value Byproducts are products with low sales values compared to the main products Scrap are outputs with minimal sales values These classifications can change over time especially when market prices change dramatically from year to year When allocating joint costs to byproducts either recognize at the time production is completed recognize at the time of sale Pages