Download - Contrôle Interne Avancé-HEC Lausanne- 2007/2008 1 Thème 5 Cost Allocation: Joint Products and Byproducts

Contrôle Interne Avancé-HEC Lausanne-2007/2008

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Thème 5

Cost Allocation:

Joint Products and Byproducts


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Joint Cost Terminology

Joint Costs – costs of a single production process that yields multiple products simultaneously,

Split-off Point – the place in a joint production process where two or more products become separately identifiable,

Separable Costs – all costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific products.


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Joint Cost Terminology Categories of Joint Process Outputs:

1. Outputs with a positive sales value,2. Outputs with a zero sales value.

E.g., offshore processing of hydrocarbons yields oil and natural gas, which have positive sales value, and it also yields water, which has zero sales value and is recycled back into the ocean.

Product – any output with a positive sales value, or an output that enables a firm to avoid incurring costs (e.g., an intermediate chemical product used as input in another process):

Value can be high (main or joint products) or low (byproduct).


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Main Product – output of a joint production process that yields one product with a high sales value compared to the sales values of the other outputs,

Joint Products – outputs of a joint production process that yields two or more products with a high sales value compared to the sales values of any other outputs.


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Byproducts – outputs of a joint production process that have low sales values compare to the sales values of the other outputs.


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Sum-Up

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.

JointCosts

Product A Product A Separable Costs A

Product B Product B Separable Costs B

Split-offPoint


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Sum-up 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,

Scrap products have a minimal (often zero) sales value.

Main ProductsJoint Products Byproducts

High LowSales Value


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Joint Process Flowchart

Single Production Process

Joint Product #1

Byproduct

Joint Product #2

Steam: An Output with Zero Sales Value


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Reasons for Allocating Joint Costs

Required for GAAP and taxation purposes,Cost values may be used for evaluation

purposes,Cost-based contracting.


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Joint Cost Allocation Methods

Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc.

Market-Based – allocate using market-derived data (dollars):

1. Sales value at split-off,

2. Net Realizable Value (NRV),

3. Constant Gross-Margin percentage NRV.


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Physical-Measure Method

Allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the split-off point of total production of the products.


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Physical Measure Method

Allocate joint costs to products based on their relative proportions at the split-off point.

Raw Milk$400

Cream 25 units

Skim 75 units

Split-offPoint

Cream Skim Total

Physical measure 25 75 100

Weighting 25% 75% 100%

Joint costs allocated $100 $300 $400


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Sales Value at Split-off Method

Uses the sales value of the entire production of the accounting period to calculate allocation percentage and not just the quantity sold because joint costs were incurred on all units produced, not just the portion sold during the current period.


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Cream Skim Total

Sales value at split-off $200 $300 $500

Weighting 40% 60% 100%

Joint costs allocated $160 $240 $400

Sales Value at Split-off Method

Allocate joint costs to products based on their relative value at the split-off point.

RawMilk$400

Cream $200

Skim $300

Split-offPoint


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Net Realizable Value Method

Allocates joint costs to joint products on the basis of relative NRV of total production of the joint products,

NRV = Final Sales Value – Separable Costs.


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Allocate joint costs to products based on their estimated final selling prices less separable processing costs.

Net Realizable Value (NRV) Method

Pages 573 - 574

RawMilk$400

Cream

Split-offPoint

Skim

Butter $500

CondensedMilk $1,100

Processing$280

Processing$520

Cream Skim Total

Final sales value $500 $1,100 $1,600Separable processing costs 280 520 800

Net realizable value 220 580 800

Weighting 27.5% 72.5% 100%

Joint cost allocation $110 $290 $400


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Constant Gross Margin NRV Method

Allocates joint costs to joint products in a way that the overall gross-margin percentage is identical for the individual products,

Joint Costs are calculated as a residual amount.


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Butter CondensedCream Milk Total

Total final sales value $1,600Joint and separable costs 1,200Gross margin $400Gross margin % 25%

Final sales value $500 $1,100 $1,600Gross margin @ 25% 125 275 400

Imputed total costs 375 825 1,200Separable 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


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Irrelevance of Joint Costs When considering whether to sell a product at the split-

off point or process further, ignore joint costs.

RawMilk$400

Cream

Split-offPoint

Skim

Butter $500

CondensedMilk $1,100

Processing$520

Processing$280

Cream versus Butter Cream Sell @ Split-off Process Further

Relevant revenue $200 $500Relevant costs 280

Incremental operating income $200 $320


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Method Selection

If selling price at split-off is available, use the Sales Value at Splitoff Method,

If selling price at splitoff is not available, use the NRV Method,

If simplicity is the primary consideration, Physical-Measures Method or the Constant Gross-Margin Method could be used,

Despite this, some firms choose not to allocate joint costs at all.


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Sell-or-Process Further Decisions

In Sell-or-Process Further decisions, joint costs are irrelevant. Joint products have been produced, and a prospective decision must be made: to sell immediately or process further and sell later,

Joint Costs are sunk,Separable Costs need to be evaluated for

relevance individually.


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Sell-or-Process Further Flowchart

Single Production Process

Joint Product #1

Joint Product #2

Further Processing Dept 1

Further Processing Dept 2

Final Product

#1

Final Product

#2


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Byproducts

Two methods for accounting for byproducts:

Production Method – recognizes byproduct inventory as it is created, and sales and costs at the time of sale,

Sales Method – recognizes no byproduct inventory, and recognizes only sales at the time of sales: byproduct costs are not tracked separately.

Download - Contrôle Interne Avancé-HEC Lausanne- 2007/2008 1 Thème 5 Cost Allocation: Joint Products and Byproducts

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