1. 16 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Allocation: Joint Products and Byproducts

2. 16 - 2 ©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.

3. 16 - 3 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Joint productsJoint costs Separable costs Splitoff point Byproduct

4. 16 - 4 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Raw milk CreamLiquidSkim

5. 16 - 5 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Joint-Cost Basics Coal GasBenzylTar

6. 16 - 6 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Distinguish joint products from byproducts.

7. 16 - 7 ©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

8. 16 - 8 ©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.

9. 16 - 9 ©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

10. 16 - 10 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Allocate joint costs using four different methods.

11. 16 - 11 ©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:

12. 16 - 12 ©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

13. 16 - 13 ©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

14. 16 - 14 ©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$645,000 Allocation of Joint Cost 100 ÷ 645 31,008 315 ÷ 645 97,674 230 ÷ 645 71,318 200,000 Gross margin$ 68,992$217,326$158,682$445,000

15. 16 - 15 ©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?

16. 16 - 16 ©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

17. 16 - 17 ©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%

18. 16 - 18 ©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

19. 16 - 19 ©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?

20. 16 - 20 ©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?

21. 16 - 21 ©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

22. 16 - 22 ©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 46,500 150,848 C1 66,087 51,500 117,587 Total$200,000$133,000$333,000

23. 16 - 23 ©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.

24. 16 - 24 ©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.

25. 16 - 25 ©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

26. 16 - 26 ©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 = 52.966%

27. 16 - 27 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Constant Gross-Margin Percentage NRV Method Step 2: Deduct the gross margin. Sales Gross Cost of Value Margin Goods sold Product A1:$120,000$ 63,559$ 56,441 Product B1: 346,500 183,527 162,973 Product C1: 241,500 127,913 113,587 Total$708,000$375,000$333,000 ($1 rounding)

28. 16 - 28 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Constant Gross-Margin Percentage NRV Method Step 3: Deduct separable costs. Cost of Separable Joint costs goods sold costs allocated Product A1:$ 56,441$ 35,000$ 21,441 Product B1: 162,973 46,500 116,473 Product C1: 113,587 51,500 62,087 Total$333,000$133,000$200,000

29. 16 - 29 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Approach 2: Physical Measure Method Example $200,000 joint cost 20,000 pounds A 48,000 pounds B 12,000 pounds C Product A $50,000 Product B $120,000 Product C $30,000

30. 16 - 30 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 7 Account for byproducts using two different methods.

31. 16 - 31 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method A: The production method recognizes byproducts at the time their production is completed. Method B: The sale method delays recognition of byproducts until the time of their sale.

32. 16 - 32 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Example Main Products Byproducts (Yards) (Yards) Production1,000400 Sales 800300 Ending inventory 200100 Sales price$13/yard$1.00/yard No beginning finished goods inventory

33. 16 - 33 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Example Joint production costs for joint (main) products and byproducts: Material$2,000 Manufacturing labor 3,000 Manufacturing overhead 4,000 Total production cost$9,000

34. 16 - 34 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method A Method A: The production method What is the value of ending inventory of joint (main) products? $9,000 total production cost – $400 net realizable value of the byproduct = $8,600 net production cost for the joint products

35. 16 - 35 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method A 200 ÷ 1,000 × $8,600 = $1,720 is the value assigned to the 200 yards in ending inventory. What is the cost of goods sold? Joint production costs$9,000 Less byproduct revenue 400 Less main product inventory 1,720 Cost of goods sold$6,880

36. 16 - 36 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method A Income Statement (Method A) Revenues: (800 yards × $13)$10,400 Cost of goods sold 6,880 Gross margin$ 3,520 What is the gross margin percentage? $3,520 ÷ $10,400 = 33.85%

37. 16 - 37 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method A What are the inventoriable costs? Main product: 200 ÷ 1,000 × $8,600 = $1,720 Byproduct: 100 × $1.00 = $100

38. 16 - 38 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Method A Work in Process2,000 Accounts Payable2,000 To record direct materials purchased and used in production Work in Process7,000 Various Accounts7,000 To record conversion costs in the joint process

39. 16 - 39 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Method A Byproduct Inventory 400 Finished Goods8,600 Work in Process9,000 To record cost of goods completed Cost of Goods Sold6,880 Finished Goods6,880 To record the cost of the main product sold

40. 16 - 40 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Method A Cash or Accounts Receivable10,400 Revenues10,400 To record the sale of the main product

41. 16 - 41 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method B Method B: The sale method What is the value of ending inventory of joint (main) products? 200 ÷ 1,000 × $9,000 = $1,800 No value is assigned to the 400 yards of byproducts at the time of production. The $300 resulting from the sale of byproducts is reported as revenues.

42. 16 - 42 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method B Income Statement (Method B) Revenues: Main product (800 × $13)$10,400 Byproducts sold 300 Total revenues$10,700 Cost of goods sold: Joint production costs9,000 Less main product inventory1,800$ 7,200 Gross margin$ 3,200

43. 16 - 43 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Accounting for Byproducts Method B What is the gross margin percentage? $3,200 ÷ $10,700 = 29.91% What are the inventoriable costs? Main product: 200 ÷ 1,000 × $9,000 = $1,800 By-product: -0-

44. 16 - 44 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Method B Work in Process2,000 Accounts Payable2,000 To record direct materials purchased and used in production Work in Process7,000 Various Accounts7,000 To record conversion costs in the joint process

45. 16 - 45 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Method B Finished Goods9,000 Work in Process9,000 To record cost of goods completed Cost of Goods Sold7,200 Finished Goods7,200 To record the cost of the main product sold

46. 16 - 46 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Method B Cash or Accounts Receivable10,400 Revenues10,400 To record the sale of the main product Cash or Accounts Receivable 300 Revenues 300 To record the sale of the byproduct

47. 16 - 47 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster DISCUSSION