2. Hilton Maher Selto

3. 9 Joint-Process Costing McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

4. 9-3 JOINT PROCESS COMMON INPUT Simultaneously converts a common input into several outcomes Simultaneously converts a common input into several outcomes JOINT COSTS Costs to operate joint processes JOINT COSTS Costs to operate joint processes FINAL PRODUC T A FINAL PRODUC T A FINAL PRODUC T B FINAL PRODUC T B SPLIT-OFF POINT Point at which joint-products appear SPLIT-OFF POINT Point at which joint-products appear FINAL PRODUCT One that is ready for sale without further processing FINAL PRODUCT One that is ready for sale without further processing

5. 9-4 INTERMEDIATE PRODUCT A product that requires further processing before it is salable to the public. INTERMEDIATE PRODUCT A product that requires further processing before it is salable to the public. INTERMEDIAT E PRODUCT A INTERMEDIAT E PRODUCT A INTERMEDIAT E PRODUCT B INTERMEDIAT E PRODUCT B FINAL PRODUC T A FINAL PRODUC T A FINAL PRODUC T B FINAL PRODUC T B JOINT PROCESS COMMON INPUT Simultaneously converts a common input into several outcomes Simultaneously converts a common input into several outcomes JOINT COSTS Costs to operate joint processes JOINT COSTS Costs to operate joint processes

6. 9-5 There are four basic steps in estimating profit from joint products. 1. Identify all alternative sets and quantities of final products possible from the joint process 2. Forecast the sales price of each product 3. Estimate the costs (if any) required to further process joint products into salable products. 4. Choose the set of products with the overall maximum profit. Estimating Profit From Joint Products

7. 9-6 What is the potential additional revenue after further processing? What are the additional costs of further processing? Net realizable value (NRV) = Sales value - further processing costs after split off Net realizable value (NRV) = Sales value - further processing costs after split off Sell Intermediate Products Or Process Them Further? Net realizable value is the measure of a product’s contribution to profit after the split-off point.

8. 9-7 Sell Intermediate Products Or Process Them Further? National Wood Products has a sawmill in Georgia. The mill has a monthly capacity of 4,700 mbf (1,000 board feet). For a month of production, the mill acquires logs and cuts them into two grades of lumber (1,000 mbf of Grade A Standard and 3,000 mbf of Grade B Standard) at a cost of $1,400,000. The Grade A Standard can be further processed into Grade A Special lumber at an additional cost of $100,000. Forecasted Sales Price information is as follows: Exh. 9-2

9. 9-8 Sell Intermediate Products Or Process Them Further? National Wood Products has a decision to make. They can choose Option 1 and produce 1,000mbf of Grade A Standard and 3,000 mbf of Grade B Standard. Alternatively, Option 2 allows them to produce 1,000 mbf of Grade A Special and 3,000 mbf of Grade B Standard. Which option should National Wood Products choose? National Wood Products has a decision to make. They can choose Option 1 and produce 1,000mbf of Grade A Standard and 3,000 mbf of Grade B Standard. Alternatively, Option 2 allows them to produce 1,000 mbf of Grade A Special and 3,000 mbf of Grade B Standard. Which option should National Wood Products choose? Note: The decision hinges on making an accurate determination of which option provides the highest Net Realizable Value.

10. 9-9 Sell Intermediate Products Or Process Them Further? Net realizable value (NRV) = Sales value - further processing costs after split off Net realizable value (NRV) = Sales value - further processing costs after split off Option 2 obviously has the higher NRV is the option of choice. Exh. 9-4

11. 9-10 Computing the NPV of each set of products provides a comparison of each products sales revenues to cost after split-off What is RELEVANT? Allocation of the wood mill’s $800,000 joint processing costs Revenues from processing beyond the split-off and any expenditures for additional processing Maximizing The Profit Of Joint Product Processes NOYES

12. 9-11 Reasons for Allocating Joint Costs While it may be difficult to be precise in allocating joint (common) costs to different products, use of different allocation methods can be very important to management decisions. Performance Measurement Casualty Loss Estimation Determining and Responding to Rate Regulation Specifying and Resolving Contractual Interests and Obligations. While it may be difficult to be precise in allocating joint (common) costs to different products, use of different allocation methods can be very important to management decisions. Performance Measurement Casualty Loss Estimation Determining and Responding to Rate Regulation Specifying and Resolving Contractual Interests and Obligations.

13. 9-12 MAIN PRODUCT a joint output that generates a significant portion of of the net realizable value MAIN PRODUCT a joint output that generates a significant portion of of the net realizable value BY-PRODUCTS outputs from a joint process that are minor in quantity and/or NRV when compared to the main products BY-PRODUCTS outputs from a joint process that are minor in quantity and/or NRV when compared to the main products Do not allocate joint costs to by-products Distinguishing between Main and By-Products

14. 9-13 Allocates joint costs based on the NRV of each main product at split-off Allocates joint costs based on the NRV of each main product at split-off Can the main product be sold at split-off without further processing? Can the main product be sold at split-off without further processing? Is further processing required? Is further processing required? Use market value or sales price for allocation Use market value or sales price for allocation Estimate the NRV at split-off by deducting estimated added- processing costs from sales value Estimate the NRV at split-off by deducting estimated added- processing costs from sales value Net Realizable Value Method

15. 9-14 Allocation follows the proportions of net realizable values Allocation follows the proportions of net realizable values Net Realizable Value Method

16. 9-15 Expected gross margins at split-off Expected gross margins at split-off The NRV method preserves the relative profitability of joint products The NRV method preserves the relative profitability of joint products Net Realizable Value Method

17. 9-16 Allocation is based on a physical measure of the joint products at split- off point Energy Content Energy Content Weight Volume Example: BTU content Example: BTU content Example: Pounds Example: Pounds Example: Gallons Example: Gallons Physical Measures Method

18. 9-17 When is the physical measures method used? Output prices are highly volatile or unpredictable Output prices are highly volatile or unpredictable Significant processing occurs between the split-off point and the first sales opportunity Significant processing occurs between the split-off point and the first sales opportunity The market does not set product prices The market does not set product prices Physical Measures Method

19. 9-18 Physical Measures Method Exh. 9.5 Allocation of $1,400,000 joint process costs for National Wood Products based on relative NRV. The same $1,400,000 could also be allocated based on mbf of lumber produced.

20. 9-19 Impossible to use cause-effect basis... Can be arbitrary The mere fact that joint costs are common between different products means... Therefore, any attempt at allocating those “joint” costs, by definition,... Choosing Among Joint Cost Allocation Methods

21. 9-20 Do not base product or service production decisions on joint margins (I.e., after joint-cost allocation) unless the choice is in responses to regulatory opportunities Do not base product or service production decisions on joint margins (I.e., after joint-cost allocation) unless the choice is in responses to regulatory opportunities Choose the joint-cost allocation method that maximizes regulated profits of cost reimbursements Choose the joint-cost allocation method that maximizes regulated profits of cost reimbursements Clearly define how to allocate joint costs in contractual agreements among parties that share outputs and joint costs of joint processes Clearly define how to allocate joint costs in contractual agreements among parties that share outputs and joint costs of joint processes Choosing Among Joint Cost Allocation Methods

22. 9-21 Consider by-product NRV as other revenue Consider by-product NRV as other revenue Whether to sell the by-product at split-off or process them further usually depends on the highest NPR obtainable like a major product Whether to sell the by-product at split-off or process them further usually depends on the highest NPR obtainable like a major product Two standard methods Two standard methods Deduct by-product NRV from costs as main product Deduct by-product NRV from costs as main product Basics of Accounting for By- Products By-products are minor products and alternative methods are not likely to have a material effect on the financial statements for either internal or external reporting By-products are minor products and alternative methods are not likely to have a material effect on the financial statements for either internal or external reporting

23. 9-22 Method 1: The NRV of the by-product treated as other revenue Used because by-product NRVs are small and effects on income are immaterial Used because by-product NRVs are small and effects on income are immaterial Basics of Accounting for By- Products

24. 9-23 Method 2: Deduct net realizable value related to the sale of the by-products from the cost of the main product Basics of Accounting for By- Products

25. 9-24 Basics of Accounting for By- Products Method 2: Deduct net realizable value related to the sale of the by-products from the cost of the main product If all the main products produced in the period have not been sold, the NRV of by-products should be prorated to the main product inventories and cost of goods sold.

26. 9-25 Sales value exceeds cost of further processing Sales value exceeds cost of further processing Scrap and Waste By-Product Sold as by-product Disposal of Scrap And Waste Dispose of legally at minimum cost Dispose of legally at minimum cost Look for new products Look for new products or Cost of further processing exceeds sales value Cost of further processing exceeds sales value

27. 9-26 END OF CHAPTER 9