1. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 9 Joint-Process Costing

2. 9-2 Single Input Product 1 Product 2 Product 3 Joint Product Processes A number of products are produced from a single raw material input.

3. 9-3 Concept: in some industries, a number of products are produced from a single raw material input. Key terms: Joint products – products resulting from a process with a common input. Split-off point – the stage of processing where joint products are separated. Joint costs – costs of processing joint products prior to the split-off point. Final product – ready for sale without further processing. Intermediate product – requires further processing before sale. Concept: in some industries, a number of products are produced from a single raw material input. Key terms: Joint products – products resulting from a process with a common input. Split-off point – the stage of processing where joint products are separated. Joint costs – costs of processing joint products prior to the split-off point. Final product – ready for sale without further processing. Intermediate product – requires further processing before sale. Joint Product Processes

4. 9-4 Consider the following example of an oil refinery. We will assume only two products, gasoline and oil. Joint Product Processes

5. 9-5 Joint Input Common Production Process Split-Off Point Joint Costs Joint Product Processes Oil Gasoline Intermediate products Final Sale Final Sale Separate Processing Separate Processing Costs Separate Processing Separate Processing Costs Final products

6. 9-6 Learning Objective 1

7. 9-7 The Decision Challenge: Which Joint Products to Produce The usual objective in the production of joint products is to maximize profits.  Identify final products possible from the joint process.  Forecast the sales price of each final product.  Estimate costs to further process joint products into final products.  Choose the set of products with the overall maximum profit.

8. 9-8 Learning Objective 2

9. 9-9 Decision to Sell Products at Split Off or Process Them Further Joint product costs incurred prior to the split-off point are sunk costs — not affected by a decision to process further after the split-off point. A product should be processed beyond the split-off point only if if the incremental revenue exceeds the incremental processing costs. Joint product costs incurred prior to the split-off point are sunk costs — not affected by a decision to process further after the split-off point. A product should be processed beyond the split-off point only if if the incremental revenue exceeds the incremental processing costs. Value is added only if the incremental value from processing exceeds the incremental processing costs.

10. 9-10 Sawmill, Inc. cuts logs from which unfinished lumber and wood chips are the joint products. Unfinished lumber is sold “as is” or processed further into finished lumber. Wood chips can also be sold “as is” for landscaping or processed further into 4 × 8 composition boards. Sawmill, Inc. cuts logs from which unfinished lumber and wood chips are the joint products. Unfinished lumber is sold “as is” or processed further into finished lumber. Wood chips can also be sold “as is” for landscaping or processed further into 4 × 8 composition boards. Decision to Sell Products at Split Off or Process Them Further

11. 9-11 Data about Sawmill’s joint products includes: Decision to Sell Products at Split Off or Process Them Further

12. 9-12 Decision to Sell Products at Split Off or Process Them Further

13. 9-13 Should we process the lumber further and sell the wood chips “as is?” Decision to Sell Products at Split Off or Process Them Further

14. 9-14 Learning Objective 3

15. 9-15  To measure performance based on earnings  To value inventory for financial statements  To estimate casualty losses  To determine and respond to rate regulation  To specify and resolve contractual interests and obligations  To measure performance based on earnings  To value inventory for financial statements  To estimate casualty losses  To determine and respond to rate regulation  To specify and resolve contractual interests and obligations Reasons for Allocating Joint Costs

16. 9-16 Learning Objective 4

17. 9-17 Monetary measure method Joint costs are allocated based on the relative values of the products at the split-off point. Joint costs are allocated based on a proportional measure (weight, volume, etc.) of the joint products at the split-off point. Physical measure method Joint Cost Allocation Methods

18. 9-18 Joint costs Allocation If we allocate the joint costs of raising an animal to the two products based on weight, which product would receive the largest cost allocation? Hamburger, because there is more of it. Allocating Joint Costs

19. 9-19 If we allocate the joint costs of raising the animal to the two products based on sales value, would the steak receive a greater portion of the cost allocation? Yes, steak has a higher sales value than hamburger. Joint costs Allocation Allocating Joint Costs

20. 9-20 Let’s look at an example illustrating the joint cost allocation methods. Joint Cost Allocation Methods

21. 9-21 If products require further processing beyond the split-off point before they are marketable, it may be necessary to estimate the net realizable value (NRV) at the split-off point. NRV Final Sales Value Added Processing Costs –= Monetary Measure Method Net Realizable Value

22. 9-22 Joint input Common production process Split-off point Joint costs OilGasoline Intermediate products Final sale Final sale Separate processing Separate processing costs Separate processing Separate processing costs Final products Monetary Measure Method Net Realizable Value

23. 9-23 Common production process Split-off point OilGasoline Separate processing Separate processing Monetary Measure Method Net Realizable Value Sales value $500,000 Separate processing costs $500,000 Separate Processing Costs $200,000 Joint material cost = $275,000 Joint conversion cost = $225,000 Sales value $1,200,000

24. 9-24 Monetary Measure Method Net Realizable Value

25. 9-25 Monetary Measure Method Net Realizable Value

26. 9-26 Monetary Measure Method Net Realizable Value

27. 9-27 Monetary Measure Method Net Realizable Value

28. 9-28 Monetary Measure Method Net Realizable Value

29. 9-29 The net realizable value method results in equal gross margin percentages for all products. Monetary Measure Method Net Realizable Value

30. 9-30 The physical measure method may be used when  Output product prices are highly volatile.  Many additional processes occur between the split-off point and the first point of marketability.  Market prices are unavailable for products provided via cost-plus contracts. The physical measure method may be used when  Output product prices are highly volatile.  Many additional processes occur between the split-off point and the first point of marketability.  Market prices are unavailable for products provided via cost-plus contracts. Physical Measure Method

31. 9-31 Joint input Common production process Split-off point Joint costs Oil Gasoline 240,000 gallons 360,000 gallons Physical Measure Method

32. 9-32 Common production process 240,000 gallons 360,000 gallons Joint material cost = $275,000 Joint conversion cost = $225,000 Oil Gasoline Split-off point Physical Measure Method

33. 9-33 Physical Measure Method

34. 9-34 Physical Measure Method

35. 9-35 $275,000 joint material cost plus $225,000 joint conversion cost Physical Measure Method

36. 9-36 Which joint cost allocation method should we use? We get a different result with each method. Choosing Among Joint Cost Allocation Methods Joint costs are truly common costs. It is impossible to separate the portion of joint costs attributable to one product on a cause and effect basis.

37. 9-37 That makes the choice of methods somewhat arbitrary. Regardless of the method we choose, we really need to be careful using allocated costs for decision-making purposes. Choosing Among Joint Cost Allocation Methods

38. 9-38 Do not base product or service production decisions on joint margins (I.e., after joint-cost allocation) unless the choice is in response 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 response to regulatory opportunities. Choose the joint-cost allocation method that maximizes regulated profits or cost reimbursements. Choose the joint-cost allocation method that maximizes regulated profits or 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

39. 9-39 Learning Objective 5

40. 9-40 What Are By-Products? Their sales value is minimal. Do not allocate joint costs to by-products They are incidental to a production process. Examples Lumber production: wood chips Fertilizer production: methane gas

41. 9-41 Two commonly used methods of accounting for by-products are...  Realized Value Approach By-product NRV is treated as other revenue.  Net Realizable Value Approach By-product NRV is deducted from joint production costs before allocation. 1 2 Accounting for By-Products

42. 9-42 By-products Major product Common production process Split-off point Joint input Joint costs Accounting for By-Products Relatively low value or quantity when compared to major products

43. 9-43 Sales value $100,000 Separate processing Separate processing costs $400 Joint material cost = $50,000 Joint conversion cost = $50,000 Sales value $1,500 Sales value $70,000 By-products Major product Common production process Split-off point Accounting for By-Products

44. 9-44 Accounting for By-Products Major product revenue = $100,000 + $70,000

45. 9-45 Accounting for By-Products By-product NRV = $1,500 – $400 = $1,100

46. 9-46 Accounting for By-Products Joint production costs = $50,000 material + $50,000 conversion

47. 9-47 Accounting for By-Products

48. 9-48 By-Products: Some Complications The preceding example assumes the by- product has been sold. If the by-product is unsold... Using method 2, the $1,100 by-product NRV is deducted from finished goods inventory or work-in-process inventory if unfinished. Using method 1, the $1,100 by-product NRV is placed in a by-product inventory account. The preceding example assumes the by- product has been sold. If the by-product is unsold... Using method 2, the $1,100 by-product NRV is deducted from finished goods inventory or work-in-process inventory if unfinished. Using method 1, the $1,100 by-product NRV is placed in a by-product inventory account.

49. 9-49 Waste is a by-product with negative NRV. (Cost of disposal exceeds sales value) Waste is disposed of at minimum cost. Waste disposal cost is charged to manufacturing overhead and applied to other products as part of the manufacturing overhead allocation process. Waste is a by-product with negative NRV. (Cost of disposal exceeds sales value) Waste is disposed of at minimum cost. Waste disposal cost is charged to manufacturing overhead and applied to other products as part of the manufacturing overhead allocation process. Disposal of Scrap or Waste

50. 9-50 Learning Objective 6

51. 9-51 Allocation of Joint Costs – Other Economic Value Methods In addition to net realizable value Relative sales value at split-off Further processing costs not considered Constant gross margin percentage Use total sales value of all products Compute overall gross margin for process Set the same gross margin for all products Allocate joint costs so as to achieve that uniform gross margin

52. 9-52 End of Chapter 9