©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 = %

©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, , ,973 Product C1: 241, , ,587 Total$708,000$375,000$333,000 ($1 rounding)

©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, ,473 Product C1: 113,587 51,500 62,087 Total$333,000$133,000$200,000

©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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Explain why the sales value at splitoff method is preferred when allocating joint costs.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Choosing a Method Why is the sales value at splitoff method widely used? It measures the value of the joint product immediately. It does not anticipate subsequent management decisions. It uses a meaningful basis. It is simple.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Choosing a Method The purpose of the joint-cost allocation is important in choosing the allocation method. The physical-measure method is a more appropriate method to use in rate regulation.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Avoiding Joint Cost Allocation Some companies refrain from allocating joint costs and instead carry their inventories at estimated net realizable value.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 6 Explain why joint costs are irrelevant in a sell-or-process-further decision.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Irrelevance of Joint Costs for Decision Making Assume that products A, B, and C can be sold at the splitoff point or processed further into A1, B1, and C1. SellingSelling Additional Units price price costs 10,000A: $10A1: $12$35,000 10,500B: $30B1: $33$46,500 11,500C: $20C1: $21$51,500

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Irrelevance of Joint Costs for Decision Making Should A, B, or C be sold at the splitoff point or processed further? Product A: Incremental revenue $20,000 – Incremental cost $35,000 = ($15,000) Product B: Incremental revenue $31,500 – Incremental cost $46,500 = ($15,000) Product C: Incremental revenue $11,500 – Incremental cost $51,500 = ($40,000)

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

©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.

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

©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

©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

©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

©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%

©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

©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

©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

©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

©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.

©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

©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-

©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

©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

©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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 16