©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Allocation: Joint Products and Byproducts Chapter 16

©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.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Joint productsJoint costs Separable costs Splitoff point Byproduct

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Raw milk CreamLiquidSkim

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Coal GasBenzylTar

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Distinguish joint products from byproducts.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint Products and Byproducts Sales Value High Low Main Products Joint Products Byproducts

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Explain why joint costs should be allocated to individual products.

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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Allocate joint costs using four different methods.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Approaches to Allocating Joint Costs Approach 2: Physical measure Approach 1: Market based Two basic ways to allocate joint costs to products are:

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Approach 1: Market-based Data Sales value at splitoff method Estimated net realizable value (NRV) method Constant gross-margin percentage NRV method

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 = $230,00 Joint processing cost is $200,000 Splitoff point

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Allocating Joint Costs Example A B C Total Sales Value$100,000$315,000$230,000$645,000 Allocation of Joint Cost 100 ÷ , ÷ , ÷ , ,000 Gross margin$ 68,992$217,326$158,682$445,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales Value at Splitoff Method Example Product A Revenues: 7,500 units × $10.00$75,000 Cost of goods sold: Joint product costs$31,008 Less ending inventory $31,008 × 25% 7,752 23,256 Gross margin$51,744

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales Value at Splitoff Method 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%

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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: 10,000 × $12.00 = $120,000 B1: 10,500 × $33.00 = $346,500 C1: 11,500 × $21.00 = $241,500

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Estimated Net Realizable Value (NRV) Method Example Additional processing (separable) costs are as follows: A1: $35,000 B1: $46,500C1: $51,500 What is the estimated net realizable value of each product at the splitoff point?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Estimated Net Realizable Value (NRV) Method Example 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?

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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Estimated Net Realizable Value (NRV) Method Example AllocatedSeparableInventory joint costs costs costs A1$ 29,565$ 35,000$ 64,565 B1 104,348 46, ,848 C1 66,087 51, ,587 Total$200,000$133,000$333,000

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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Constant Gross-Margin Percentage NRV Method Step 3: Deduct the expected separable costs from the total costs to obtain the joint-cost allocation.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Constant Gross-Margin Percentage NRV Method 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Constant Gross-Margin Percentage NRV Method 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 = %