1. Copyright © 2003 Pearson Education Canada Inc. Slide 15-158 Chapter 15 Cost Allocation: Joint Products and Byproducts

2. Copyright © 2003 Pearson Education Canada Inc. Slide 15-159 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 567- 568

3. Copyright © 2003 Pearson Education Canada Inc. Slide 15-160 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 567 - 568 Sales Value

4. Copyright © 2003 Pearson Education Canada Inc. Slide 15-161 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

5. Copyright © 2003 Pearson Education Canada Inc. Slide 15-162 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 570 - 571 Raw Milk $400 Cream $200 Skim $300 Split-off Point

6. Copyright © 2003 Pearson Education Canada Inc. Slide 15-163 Physical Measure Method Allocate joint costs to products based on their relative proportions at the split-off point Pages 571 - 572 Raw Milk $400 Cream 25 units Skim 75 units Split-off Point CreamSkimTotal Physical measure 2575100 Weighting25%75%100% Joint costs allocated$100$300$400

7. Copyright © 2003 Pearson Education Canada Inc. Slide 15-164 Allocate joint costs to products based on their estimated final selling prices less separable processing costs Net Realizable Value (NRV) Method Pages 573 - 574 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 costs280520800 Net realizable value220580800 Weighting27.5%72.5%100% Joint cost allocation$110$290$400

8. Copyright © 2003 Pearson Education Canada Inc. Slide 15-165 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$1,600 Gross margin @ 25%125 275 400 Imputed total costs3758251,200 Separable costs 280 520 800 Allocated joint costs$ 95$ 305$400 Constant Gross Margin % NRV Method Allocate joint costs so that the gross margin % for each product is the same Pages 574 - 575

9. Copyright © 2003 Pearson Education Canada Inc. Slide 15-166 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 578 - 579 Cream versus Butter CreamSell @ Split-offProcess Further Relevant revenue$200$500 Relevant costs 280 Incremental operating income$200$320

10. Copyright © 2003 Pearson Education Canada Inc. Slide 15-167 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 579 - 581