Joint Products

1. Joint Products

2. Allocation of Costs to Joint Products 30 lb.s of loin 20 lb.s of belly 50 lb.s of other meat products 250 lb.s Common Costs Separable Costs Split-off Point

3. Allocation of Costs to Joint Products Questions: 1. How much does it cost to produce 1 lb of loin? 2. How much does it cost to produce 1 lb of bacon? 2. Why is this information useful?

4. Allocation of Costs toJoint Products Common Costs: $100 100 lb.s of meat (excluding bone) Split-off Point 20 lb.s belly 30 lb.s loin 1 lb of belly sells for $1.20 1 lb of loin sells for $1.50 50 lb.s of everything else sells for $1/lb on average

5. Allocation of Costs to Joint Products Non-Financial - Physical Measure Financial - Sales Value at Split-off Point - Net Realizable Value

6. Allocation of Costs toJoint Products Common Costs: $100 100 lb.s of meat (excluding bone) Split-off Point 20 lb.s belly 30 lb.s loin 50 lb.s of other product

7. Allocation using Physical Measure $100 to bring to slaughter ÷ 100 lb.s of marketable meat = $1.00 per lb. $1 per lb. for each cut of meat: pork, belly, etc. At $1 per lb., loin appears very profitable, since it sells for $1.50 per lb.

8. Allocation of Costs toJoint Products Non-Financial Measures - Physical Measure Financial Measures - Sales Value at Split-off Point - Net Realizable Value

9. Allocation of Costs toJoint Products Common Costs: $100 100 lb.s of meat (excluding bone) Split-off Point 20lb.s belly 30lb.s loin 1 lb of belly sells for $1.20 1 lb of loin sells for $1.50 50 lb.s of everything else sells for $1/lb on average

10. Allocation using Sales Value at Split-off Total sales value at split-off: loin: 30 lb.s x $1.50 = $45 belly: 20 lb.s x $1.20 = $24 Everything else: 50 lb.s x $1.00 = $50 Total sales value = $119 Allocate $100 common costs: 45/119 or 38% to loin: $38 24/119 or 20% to belly: $20 50/119 or 42% to other stuff $42

11. Allocation using Sales Value at Split-off From the previous slide: 45/119 or 38% to loin: $38 24/119 or 20% to belly: $20 50/119 or 42% to other stuff $42 Cost per pound: Loin: $38 ÷ 30 lb.s = $1.26 per lb. Belly: $20 ÷ 20 lb.s = $1.00 per lb. Other: $42 ÷ 50 lb.s = $0.84 per lb.

12. Allocation using Sales Value at Split-off Cost per pound (from previous slide): Loin: $38 ÷ 30 lb.s = $1.26 per lb. Belly: $20 ÷ 20 lb.s = $1.00 per lb. Other: $42 ÷ 50 lb.s = $0.84 per lb. With a sales price of $1.50 per lb., loin still looks profitable, but not as profitable as before, when common costs were allocated using weight. The belly is also profitable, since it sells for $1.20.

13. Allocation of Costs toJoint Products Non-Financial - Physical Measure Financial - Sales Value at Split-off Point - Net Realizable Value

14. Allocation of Costs toJoint Products Common Costs: $100 100 lb.s of meat (excluding bone) Split-off Point 20 lb.s belly 1 lb of belly sells for $1.20 branded product “value added” 1 lb of belly cured to make 1 lb of bacon

15. Allocation of Costs toJoint Products Common Costs: $100 Split-off Point 20 lb.s belly 1 lb of belly sells for $1.20 Additional processing costs: $0.50 per lb. Separable Costs: 1 lb of bacon sells for $2.20

16. Allocation using Net Realizable Value Net Realizable Value: loin: 30 lb.s x $1.50 = $45 belly: 20 lb.s x ($2.20 - $0.50) = $34 Everything else: 50 lb.s x $1.00 = $50 Total sales value =$129 Allocate $100 common costs: 45/129 or 35% to loin: $35 34/129 or 26% to belly: $26 50/129 or 39% to other stuff $39

17. Allocation using Net Realizable Value From the previous slide: 45/129 or 35% to loin: $35 34/129 or 26% to belly: $26 50/129 or 39% to other stuff $39 Cost per pound: Loin: $35 ÷ 30 lb.s = $1.17 per lb. Belly: $26 ÷ 20 lb.s = $1.30 per lb. Other: $39 ÷ 50 lb.s = $0.78 per lb.

18. Allocation using Net Realizable Value Cost per pound (from previous slide): Loin: $35 ÷ 30 lb.s = $1.17 per lb. Belly: $26 ÷ 20 lb.s = $1.30 per lb. Other: $39 ÷ 50 lb.s = $0.78 per lb. Belly sells for $1.20 per lb., but costs $1.30 per lb to produce!? If the belly is cured into bacon, the total cost is $1.80 per lb ($1.30 common + $0.50 separable), and sells for $2.20, so it is profitable after all.

19. Allocation of Costs toJoint Products Summary of the three methods: loin belly other $1.00 $1.00 $1.00 $1.26 $1.00 $0.84 $1.17 $1.30 $0.78 Allocation based on Physical measure: Sales value at split-off: Net realizable value:

20. Allocation of Costs toJoint Products 2. Why is this information useful? Here are some possibilities: Managerial Decision-making: Which products to make. What price to charge for those products. Whether to stay in business. Financial reporting: Calculate ending inventory and C.O.G.S.

21. Which products to make. What price to charge for those products. Whether to stay in business. Financial reporting: calculation of ending inventory and C.O.G.S. No Allocation of Costs toJoint Products 2. Why is this information useful? • No • No • Yes

22. Allocation of Costs toJoint Products WARNING: Any method for assigning joint costs is used mainly for product costing. It is almost always useless for control or decision-making purposes.