Cost Accounting Chapter 16 PDF

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Cost Accounting Chapter 16: 1. Identify the split off point in a joint-cost situation and distinguish joint products from byproducts 

Joint cost: the costs of a production process that yields multiple products simultaneously.

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Split off point: the juncture in a joint production process when two or more products become separately identifiable.

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Separable costs (or further-processing costs): all costs (manufacturing, marketing, distribution, and so on) incurred beyond the split off point that are assignable to each of the specific products identified at the split off point.

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Final products: End product of each product line; May be a joint product or a further processed product

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Output of a joint production process, compared to the sales values of other outputs: o Main product 

One product with a high sales value

o Joint products 

Two or more products with high total sales values

o Byproducts  

Outputs that have low sales values

Flowchart:

o 2. Explain why joint costs are allocated to individual products

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For external and internal reporting purposes

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Reimbursement under cost-plus contracts o The Federal False Claims Act: cross-charging

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Regulation of the rates or prices

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Litigation or insurance settlement situations

3. Allocate joint costs using four methods Tip: Draw a simple flow chat to organize information (especially important to identify the products you are working on!!)  Market-based methods: allocate using market-based data (dollars): o 1. Sales value at split off method 

Does NOT need further processing information

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Selling prices must exist for all products at the split off point

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Joint costs are assigned in proportion to their revenue-generating power a. Assign joint costs based on the relative total sales value at the splito ff point b. The sales value of the entire production

o 2. Net realizable value (NRV) method 

Needs further processing information

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When should I used it? a. When selling prices of one or more products at the split off point do not exist

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Assign joint costs based on the relative NRV a. If a product without the selling price at the split off point: i. (sales value of final product) – (separable costs) b. If a product with the selling price at the split off point: i. (sales value at split off point)

o 3. Constant gross margin percentage NRV method 

Needs further processing information



Allocate both profit and joint costs

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All product lines achieve an identical gross-margin percentage a. Work backwards to assign joint cost

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How to do it: a. 1. Compute the overall gross margin percentage for all product lines as a whole b. 2. Compute the total production costs for each product line: = sales value of the final product * (1 – gross margin percentage) c. 3. *compute the allocated joint costs for each product line = total production costs – separable costs

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4. Physical measures – allocate using tangible attributes of the products, such as weight, quantity, or volume of the joint products o Does NOT need further processing information o Assign joint costs based on a comparable physical measure at the split off point 

The unit cost will be the same across products at the split off point (not a coincidence)

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A less desirable method a. May be no relationship between the physical measure and the revenue generating ability

4. Identify situations where the sales value at split off method is preferred when allocating joint costs 

Consider this scenario: 

What if it is 1,000 pounds of fried chicken lost in the fire?

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What if the question is about the gross margin percentage of buffalo wings?

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What if the question is about the ending value of the chicken breasts?

o If selling price at split off is available, the sales value at split off point method is preferred, even if further processing is done 

Reasons include: a. Best measure of benefits received b. Independent of further processing decisions c. Common allocation basis (dollar amount) d. Simplicity

o If selling prices are not available, the NRV method is the best alternative o (despite this, some firms choose not to allocate joint costs at all) 5. Explain why joint costs are irrelevant in a sell-or-process further decision 

The further processing is the relevant information – the joint costs are sunk

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What information is relevant in a sell-or-process further decision? o The decisions should be based on: 

The incremental OI attainable beyond the split off point

o The joint cost allocation information? o Not all separable costs are incremental costs 

Issues to consider when using joint cost allocation: o Check: 

Is the information for decision-making or not?

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Any allocated fixed costs?

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Physical-measure method?

o Pricing decisions: 

Potential lack of cause-and-effect relationship

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Revenue drives cost allocation not cost based pricing

6. Account for byproducts using two methods 

Why care about byproducts? o The value of byproducts may affect the allocation of joint costs o Byproducts can be quite profitable o Byproducts do not create any revenue/cost

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The features of these 2 methods o Production method 

Recognize on B/S when produced

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Is consistent with the matching principle and is the preferred method

o Sales method 

Recognize on I/S when sold

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Is simpler and is often used in practice, primarily because the dollar amounts of byproducts are immaterial

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Evaluate the 2 methods

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Under each method, how costs assigned to joint products is affected (or not)? (Refer to the handout, and #3 above)

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Journal entries under each method (for example, specific job number, at different time – production, completion of production, and sales) o Starting point: 

During production: WIP

(DM + DL + OH) Material Inventory

(DM)

Wages Payable

(DL)

MOH

(MOH)

o Production Method 

When production is completed:

Byproduct inventory – PF

xxx

WIP

xxx

Finished Goods – TC

xxx

Finished Goods – CC

xxx

WIP 

When products are sold:

Cash or A/R Byproduct inv – PF Cash or A/R Sales Rev – TC Sales Rev – CC COGS – TC COGS – CC F/G – TC F/G – TC o Sales Method 

xxx

xxx xxx xxx xxx xxx xxx xxx xxx xxx

When production is completed: No entry for byproduct F/G – TC

xxx

F/G – CC

xxx

WIP 

xxx

When products are sold: Cash or A/R

xxx

Sales Rev – PF Cash or A/R Sales Rev – TC Sales Rev – CC COGS – TC COGS – CC F/G – TC

xxx xxx xxx xxx xxx xxx xxx

F/G – TC xxx 7. Example: Cost Allocation: Joint Products and Byproducts  Healthy Chicken grows and processes chickens. Each chicken is disassembled into parts. Joint cost of production in Jan. 2018 was $50,000. Information pertaining to production in this month is as follows:

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

Parts

Pounds of Product

Wings

12,000

Wholesale Selling Price per Pound $1.5

Breasts Thighs

20,000 16,000

$3 $1

New Product

Buffalo Wings

Further Processing Cost (for the month) $700

Wholesale Selling Price per Pound $4

Fried $500 $2.5 Chicken A special shipment of 2,000 pounds of wings and 1,000 pounds of breasts has been destroyed in a fire. Healthy Chicken’s insurance policy provides reimbursement for the cost of the items destroyed. The insurance company permits the company to use a joint-cost-allocation method. --- wings (12,000 @ 1.5) – (700) -> Buffalo wings (12,000 @ 4) Joint Cost ($50,000) --- breasts (20,000 @ 3) --- thighs (16,000 @ 1) - (500) -> Fried chicken (16,000 @ 2.5) o Quantity is production, not sales

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1. Compute the cost of the special shipment destroyed using the following: o Sales value at split off method 

Sales value Assigned

Wings $18,000 Breasts $60,000 Thighs $16,000 Total $94,000  Per unit cost

Allocation Ratio

Joint Cost

19.1% 63.8% 17% 100%

= $9,574 = $31,915 = $ 8,511

x 50,000 x 50,000 x 50,000

Insurance Settlement

Wings 9574/12000 = $0.80/lb x 2000 lb = $1,595.74 Breasts 31915/20,000 = $1.60/lb x 1000 lb = $1,595.74 Thighs Total

$3,191.49

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Per Unit Cost

Buffalo Wings (9,574 + 700)/12,000 = $0.86/lb o Physical-measure method (pounds of finished product) 

Allocation Basis Assigned

Allocation Ratio

Wings 12,000 lbs Breasts 20,000 lbs Thighs 16,000 lbs Total 48,000 lbs  Per unit cost

25% = $12,500 41.67% = $20,835 33.33% = $16,665 100% = $50,000 Insurance Settlement

Wings 12,500/12,000 = $1.04 Breasts 20,835/20,000 = $1.04 Thighs $16,665/16,000 = $1.04 Total  Per Unit Cost 

Joint Cost

$2,080 $1,040 $3,120

Buffalo Wings (12,500 + 700)/12,000 = $1.10 2. Assume wings and thighs are further processed without weight loss. Assume the selling price of wings and thighs are unavailable. Compute the cost of the special shipment destroyed using the following: o Net realizable method  Hypothetical Value Allocation Ratio Joint Cost Assigned Wings (12,000 x $4) – 700 = 47,300

32.22%

$16,110

Breasts (20,000 x $3) – 0 = $60,000 40.87% Thighs (16,000 x $2.5) – 500 = $39,500 26.91% Total $146,800 100%

$20,435 $13,455 $50,000

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Per unit cost

Insurance Settlement

Wings 16,110/12,000 = $1.34 x 2,000 = $2,680 Breasts 20,435/20,000 = $1.02 x 1000 = $1,020 Thighs 13,455/16,000 = $0.84 o Constant gross-margin percentage NRV method 

Overall Gross Margin %:

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Total Rev = (12,000 x 4) + (20,000 x 3) + (16,000 x 2.5) = $148,000 Total Cost = $50,000 + 500 + 700 = $51,200 GM = $148,000 – 51,200 = $96,800 Gm% = 96,800/148,000 = 65.41% Cost% = 1- .6541 = 34.59% Production Cost for Individual Product Line: Final Product: Buffalo Wings (12,000 x 4) x 34.59% = $16,605.41 Breasts (20,000 x 3) x 34.59% = $20,754 Fried Chicken (16,000 x 2.5) x 34.59% = $13,836 Joint Cost Assigned Per Unit Cost Insurance Settlement

Wings $16,605.41 – 700 = $15,905.41 Breasts $20,754

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$1.33 x 2000 $1.04 x 1000

Thighs $13,836 – 500 = $13,336 $0.83 Total $49,995.41 Other potential questions: price−unit cost o GM% of a product = price o Ending inventory volume of a product = unit cost x units sold

o COGS = unit cost x units sold 8. Look at 16-38 and 16-39 for joint products and byproducts

$2,651 $1,038 $3,689...