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Cost Allocation: Joint Products and Byproducts. Horngren, Foster & Datar Modified by Charles Bailey. Learning Objective 1. Identify the splitoff point(s) in a joint-cost situation. Joint-Cost Basics. Joint costs. Joint products. Byproduct. Splitoff point. Separable costs.

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## Cost Allocation: Joint Products and Byproducts

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**Cost Allocation: Joint Productsand Byproducts**Horngren, Foster & Datar Modified by Charles Bailey**Learning Objective 1**Identify the splitoff point(s) in a joint-cost situation.**Joint-Cost Basics**Joint costs Joint products Byproduct Splitoff point Separable costs**Joint-Cost Basics**Raw milk Cream Liquid Skim**Joint-Cost Basics**Coal Gas Benzyl Tar**Learning Objective 2**Distinguish joint products from byproducts.**Joint Products and Byproducts**Main Products Joint Products Byproducts High Low Sales Value**Learning Objective 3**Explain why joint costs should be allocated to individual products.**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**Learning Objective 4**Allocate joint costs using four different methods.**Approaches to AllocatingJoint Costs**Two basic ways to allocate joint costs to products are: Approach 1: Market based Approach 2: Physical measure**Approach 1: Market-based Data**Sales value at splitoff method Estimated net realizable value (NRV) method We will not cover: Constant gross-margin percentage NRV method**Allocating Joint Costs Example**10,000 units of A at a selling price of $10 = $100,000 Joint processing cost is $200,000 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 Splitoff point**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**Sales Value at SplitoffMethod 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?**Sales Value at SplitoffMethod 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**Sales Value at SplitoffMethod 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%**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**Estimated Net Realizable Value(NRV) Method Example**Additional processing (separable) costs are as follows: B1: $46,500 C1: $51,500 A1: $35,000 What is the estimated net realizable value of each product at the splitoff point?**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?**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**Estimated Net Realizable Value(NRV) Method Example**Allocated Separable Inventory joint costscostscosts 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**Approach 2: PhysicalMeasure Method Example**$200,000 joint cost 20,000 pounds A 48,000 pounds B 12,000 pounds C (20/60)*$200K Product A $50,000 Product B $120,000 Product C $30,000**Learning Objective 5**Explain why the sales value at splitoff method is preferred when allocating joint costs.**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.**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.**Learning Objective 6**Joint costs are irrelevant in managerial decisions!**Irrelevance of Joint Costsfor Decision Making**Assume that products A, B, and C can be sold at the splitoff point or processed further into A1, B1, and C1. Selling Selling Additional Unitspricepricecosts 10,000 A: $10 A1: $12 $35,000 10,500 B: $30 B1: $33 $46,500 11,500 C: $20 C1: $21 $51,500**Irrelevance of Joint Costsfor 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)**Learning Objective 7**Accounting for byproducts: A very brief overview omitting bookkeeping details.**Accounting for Byproducts**The net sales value of a by product reduces the joint costs to be assigned to the joint or main product(s).**Joint-Cost Basics**Coal each ton costs $50 Gas NRV=$100 Benzyl NRV=$80 Tar (byproduct) NRV=$10 Now the net joint costs to assign to Gas & Benzyl are ($50-10)=$40/ton

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