Pdfcoffee-accounting Joint Products & By Products PDF

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CHAPTER 16COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS16-1 Give two examples of industries in which joint costs are found. For each example, what are the individual products at the splitoff point?Exhibit 16-1 presents many examples of joint products from four different general industries. These in...

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‫ء محسن شحم‬฀฀‫ع‬

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CHAPTER 16 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS 16-1 Give two examples of industries in which joint costs are found. For each example, what are the individual products at the splitoff point? Exhibit 16-1 presents many examples of joint products from four different general industries. These include: Industry Separable Products at the Splitoff Point Food Processing: • Lamb • Lamb cuts, tripe, hides, bones, fat • Turkey • Breasts, wings, thighs, poultry meal Extractive: • Petroleum 16-2

• Crude oil, natural gas

What is a joint cost? What is a separable cost?

A joint cost is a cost of a production process that yields multiple products simultaneously. A separable cost is a cost incurred beyond the splitoff point that is assignable to each of the specific products identified at the splitoff point. 16-3

Distinguish between a joint product and a byproduct.

The distinction between a joint product and a byproduct is based on relative sales value. A joint product is a product from a joint production process (a process that yields two or more products) that has a relatively high total sales value. A byproduct is a product that has a relatively low total sales value compared to the total sales value of the joint (or main) products. 16-4 Why might the number of products in a joint-cost situation differ from the number of outputs? Give an example. A product is any output that has a positive sales value (or an output that enables a company to avoid incurring costs). In some joint-cost settings, outputs can occur that do not have a positive sales value. The offshore processing of hydrocarbons yields water that is recycled back into the ocean as well as yielding oil and gas. The processing of mineral ore to yield gold and silver also yields dirt as an output, which is recycled back into the ground. 16-5

Provide three reasons for allocating joint costs to individual products or services.

The chapter lists the following six reasons for allocating joint costs: 1. Computation of inventoriable costs and cost of goods sold for financial accounting purposes and reports for income tax authorities. 2. Computation of inventoriable costs and cost of goods sold for internal reporting purposes. 3. Cost reimbursement under contracts when only a portion of a business's products or services is sold or delivered under cost-plus contracts. 4. Insurance settlement computations for damage claims made on the basis of cost information of joint products or byproducts. 16-1

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5. 6.

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Rate regulation when one or more of the jointly-produced products or services are subject to price regulation. Litigation in which costs of joint products are key inputs.

16-6 Why does the sales value at splitoff method use the sales value of the total production in the accounting period and not just the revenues from the products sold? The joint production process yields individual products that are either sold this period or held as inventory to be sold in subsequent periods. Hence, the joint costs need to be allocated between total production rather than just those sold this period. 16-7 Describe a situation in which the sales value at splitoff method cannot be used but the NRV method can be used for joint-cost allocation. This situation can occur when a production process yields separable outputs at the splitoff point that do not have selling prices available until further processing. The result is that selling prices are not available at the splitoff point to use the sales value at splitoff method. Examples include processing in integrated pulp and paper companies and in petro-chemical operations. 16-8

Distinguish between the sales value at splitoff method and the NRV method.

Both methods use market selling-price data in allocating joint costs, but they differ in which sales-price data they use. The sales value at splitoff method allocates joint costs to joint products on the basis of the relative total sales value at the splitoff point of the total production of these products during the accounting period. The net realizable value method allocates joint costs to joint products on the basis of the relative net realizable value (the final sales value minus the separable costs of production and marketing) of the total production of the joint products during the accounting period. 16-9 Give two limitations of the physical-measure method of joint-cost allocation. Limitations of the physical measure method of joint-cost allocation include: a. The physical weights used for allocating joint costs may have no relationship to the revenue-producing power of the individual products. b. The joint products may not have a common physical denominator ––for example, one may be a liquid while another a solid with no readily available conversion factor. 16-10 How might a company simplify its use of the NRV method when final selling prices can vary sizably in an accounting period and management frequently changes the point at which it sells individual products? The NRV method can be simplified by assuming (a) a standard set of post-splitoff point processing steps, and (b) a standard set of selling prices. The use of (a) and (b) achieves the same benefits that the use of standard costs does in costing systems. 16-11 Why is the constant gross-margin percentage NRV method sometimes called a ―jointcost-allocation and a profit-allocation‖ method?

16-2

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The constant gross-margin percentage NRV method takes account of the post-splitoff point ―profit‖ contribution earned on individual products, as well as joint costs, when making cost assignments to joint products. In contrast, the sales value at splitoff point and the NRV methods allocate only the joint costs to the individual products. 16-12 ―Managers must decide whether a product should be sold at splitoff or processed further. The sales value at splitoff method of joint-cost allocation is the best method for generating the information managers need for this decision.‖ Do you agree? Explain. No. Any method used to allocate joint costs to individual products that is applicable to the problem of joint product-cost allocation should not be used for management decisions regarding whether a product should be sold or processed further. When a product is an inherent result of a joint process, the decision to process further should not be influenced by either the size of the total joint costs or by the portion of the joint costs assigned to particular products. Joint costs are irrelevant for these decisions. The only relevant items for these decisions are the incremental revenue and the incremental costs beyond the splitoff point. 16-13 ―Managers should consider only additional revenues and separable costs when making decisions about selling at splitoff or processing further.‖ Do you agree? Explain. No. The only relevant items are incremental revenues and incremental costs when making decisions about selling products at the splitoff point or processing them further. Separable costs are not always identical to incremental costs. Separable costs are costs incurred beyond the splitoff point that are assignable to individual products. Some separable costs may not be incremental costs in a specific setting (e.g., allocated manufacturing overhead for post-splitoff processing that includes depreciation). 16-14

Describe two major methods to account for byproducts.

Two methods to account for byproducts are: a. Production method—recognizes byproducts in the financial statements at the time production is completed. b. Sales method—delays recognition of byproducts until the time of sale. 16-15 Why might managers seeking a monthly bonus based on attaining a target operating income prefer the sales method of accounting for byproducts rather than the production method? The sales byproduct method enables a manager to time the sale of byproducts to affect reported operating income. A manager who was below the targeted operating income could adopt a ―firesale‖ approach to selling byproducts so that the reported operating income exceeds the target. This illustrates one dysfunctional aspect of the sales method for byproducts.

16-3

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16-16 Select Manufacturing Co. produces three joint products and one organic waste byproduct. Assuming the byproduct can be sold to an outside party, what is the correct accounting treatment of the byproduct proceeds received by the firm? a. Apply sale proceeds on a prorated basis to the joint products’ sales. b. Use the sale proceeds to reduce the common costs in the joint production process. c. Apply the sale proceeds to the firm’s miscellaneous income account. d. Either ―b‖ or ―c‖ can be used. SOLUTION Choice "d" is correct. Because the sale of by-products are of relatively minor value compared to joint product sales, Select Manufacturing Co. can choose to either apply the by-product sales as an offset to the common costs in the joint production process or apply the revenue from the sale of the by-products to the firm’s miscellaneous income account. Choice "a" is incorrect. This is not a viable option for the firm to use for the sale of its byproducts. Choice "b" is incorrect. Although the firm can use the revenue received on the sale of its byproducts to reduce common costs in the joint production process, it may also decide to record the by-product revenue as miscellaneous income. Choice "c" is incorrect. Although the firm may credit miscellaneous income for the byproduct revenue received, it may also apply the by-product revenue as an offset to its common costs in the joint production process. 16-17 Joint costs of $8,000 are incurred to process X and Y. Upon splitoff, $4,000 and $6,000 in costs are incurred to produce 200 units of X and 150 units of Y, respectively. In order to justify processing further at the splitoff point, revenues for product: a. X must exceed $12,000. b. Y must exceed $14,000. c. X must be greater than $60 per unit. d. Y must be greater than $40 per unit. SOLUTION Choice "d" is correct. The decision at splitoff point to sell or process further will depend on the incremental revenues versus costs beyond the splitoff point. Joint costs incurred prior to the splitoff point are sunk, and therefore irrelevant in the analysis. After splitoff, each unit of X will cost $20 to produce ($4,000 in costs divided by 200 units) and each unit of Y will cost $40 to produce ($6,000 in costs divided by 150 units). As long as the per unit revenues for X and Y are greater than $20 and $4 respectively, processing further is justified. Choice "a" is incorrect. This answer choice takes into account joint costs of $8,000, which are irrelevant. Choice "b" is incorrect. This answer choice takes into account joint costs of $8,000, which are

16-4

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irrelevant. Choice "c" is incorrect. This answer choice takes into account joint cost of $8,000 in addition to the $4,000 of costs for product X beyond the splitoff point. The joint costs should not be factored into the decision. 16-18 Houston Corporation has two products, Astros and Texans, with the following volume information: Volume Product Astros

20,000 gal

Product Texans

10,000 gal

Total

30,000 gal

The joint cost to produce the two products is $120,000. What portion of the joint cost will each product be allocated if the allocation is performed by volume? 1. $100,000 and $0 2. $80,000 and $40,000 3. $40,000 and $80,000 4. $50,000 and $50,000 SOLUTION Choice "2" is correct. In this question, they want to know how much joint cost is allocated to each of two products. Joint cost allocation in this question is based on volume, and volumes are provided. The total volume is 30,000 gallons. Product Astros has 20,000 gallons (2/3) of the total. Thus Product Astros is allocated $80,000 ($120,000 × 2/3) of the total, and Product Texans is allocated the remaining $40,000 ($120,000 × 1/3). 16-19 Dallas Company produces joint products, TomL and JimmyJ, each of which incurs separable production costs after the splitoff point. Information concerning a batch produced at a $200,000 joint cost before splitoff follows:

Product TomL JimmyJ

Separable Costs

Sales Value

$10,000

$ 80,000

20,000

50,000

$30,000

$130,000

What is the joint cost assigned to TomL if costs are assigned using relative net realizable value? 1. $60,000 3. $48,000

2. $140,000 4. $200,000 16-5

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SOLUTION Choice "2" is correct. In this question, they want to know how much joint cost is allocated to each of two products. Joint cost allocation in this question is based on relative net realizable value (relative net sales value at splitoff point), and sales values and separable costs after the splitoff point are provided. Using the relative net realizable value method of allocating joint costs, the net realizable value of both products can be calculated as follows: TomL JimmyJ Sales $80,000 $50,000 Separable costs (10,000) (20,000) Net realizable value $70,000 $30,000 The joint cost is allocated based on the percentage of the product's net realizable value to the total. For TomL, that is 70% ($70,000 ÷ $100,000). 70% of the joint cost, or $140,000 ($200,000 × 0.70), is thus allocated to TomL The remainder, 30% of the joint cost, or $60,000 ($200,000 × 0.30), is allocated to JimmyJ. 16-20 Earl’s Hurricane Lamp Oil Company produces both A-1 Fancy and B Grade Oil. There are approximately $9,000 in joint costs that Earl may allocate using the relative sales value at splitoff or the net realizable value approach. Before splitoff, A-1 sells for $20,000 while B grade sells for $40,000. After an additional investment of $10,000 after splitoff, $3,000 for B grade and $7,000 for A-1, both the products sell for $50,000. What is the difference in allocated costs for the A-1 product assuming applications of the net realizable value and the net realizable value at splitoff approach? 1. A-1 Fancy has $1,300 more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. 2. A-1 Fancy has $1,300 less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. 3. A-1 Fancy has $1,500 more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. 4. A-1 Fancy has $1,500 less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. SOLUTION Choice ―1‖ is correct. A comparison of the results of the net realizable value method of joint cost allocation versus the relative sale value at splitoff approach produces a $1,300 greater allocation of joint costs to the A-1 Product when using the net realizable value approach computed as follows: Relative Sales Value at Splitoff Sales value at splitoff

A1 Fancy

B Grade

$20,000

$40,000

16-6

Total $60,000

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Percentage Joint Costs Allocated

33% $ 3,000

67% $ 6,000

100% $ 9,000

Net Realizable Value Final sales value Additional costs incurred after splitoff Net Realizable Value Percentage Joint Costs Allocated

$50,000 (7,000) $43,000 48% $ 4,300

$50,000 (3,000) $47,000 52% $ 4,700

$100,000 (10,000) $ 90,000 100% $ 9,000

Additional (Reduced) Burden

$ 1,300

$ (1,300)

−

Choices "2", "3", and "4" are incorrect, per the explanation above. 16-21 Joint-cost allocation, insurance settlement. Quality Chicken grows and processes chickens. Each chicken is disassembled into five main parts. Information pertaining to production in July 2017 is as follows:

Pounds of Product

Wholesale Selling Price per Pound When Production Is Complete

Breasts

100

$0.55

Wings

20

0.20

Thighs

40

0.35

Bones

80

0.10

Feathers

10

0.05

Parts

Joint cost of production in July 2017 was $50. A special shipment of 40 pounds of breasts and 15 pounds of wings has been destroyed in a fire. Quality Chicken’s insurance policy provides reimbursement for the cost of the items destroyed. The insurance company permits Quality Chicken to use a joint-cost-allocation method. The splitoff point is assumed to be at the end of the production process. Required: 1. Compute the cost of the special shipment destroyed using the following: a. Sales value at splitoff method b. Physical-measure method (pounds of finished product) 2. What joint-cost-allocation method would you recommend Quality Chicken use? Explain. SOLUTION (20-30 min.) Joint-cost allocation, insurance settlement. 1. (a)

Sales value at splitoff method:

16-7

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Breasts Wings Thighs Bones Feathers

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Pounds of Product 100 20 40 80 10 250

Wholesale Selling Price per Pound $0.55 0.20 0.35 0.10 0.05

Sales Weighting: Value Sales Value at Splitoff at Splitoff $55.00 0.675 4.00 0.049 14.00 0.172 0.098 8.00 0.006 0.50 1.000 $81.50

Joint Costs Allocated $33.75 2.45 8.60 4.90 0.30 $50.00

Allocated Costs per Pound 0.3375 0.1225 0.2150 0.0613 0.0300

Costs of Destroyed Product Breasts: $0.3375 per pound  40 pounds = $13.50 Wings: $0.1225 per pound  15 pounds = 1.84 $15.34 b. Physical measure method:

Breasts Wings Thighs Bones Feathers

Pounds of Product 100 20 40 80 10 250

Weighting: Physical Measures 0.400 0.080 0.160 0.320 0.040 1.000

Costs of Destroyed Product Breast: $0.20 per pound  40 pounds Wings: $0.20 per pound  15 pounds

Joint Costs Allocated $20.00 4.00 8.00 16.00 2.00 $50.00

= =

Allocated Costs per Pound $0.200 0.200 0.200 0.200 0.200

$ 8 3 $11

Note: Although not required, it is useful to highlight the individual product profitability figures:

Product Breasts Wings Thighs Bones Feathers

Sales Value $55.00 4.00 14.00 8.00 0.50

Sales Value at Splitoff Method Joint Costs Gross Allocated Income $33.75 $21.25 2.45 1.55 8.60 5.40 4.90 3.10 0.30 0.20

16-8

Physical Measures Method Joint Costs Gross Allocated Income $20.00 $35.00 4.00 0.00 8.00 6.00 16.00 (8.00) 2.00 (1.50)

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2. The sales value at splitoff method captures the benefits-received criterion of cost allocation and is the preferred method. The costs of processing a chicken are allocated to products in proportion to the ability to contribute revenue. Quality Chicken’s decision to process chicken is heavily influenced by the revenues from breasts and thighs. The bones provide relatively few benefits to Quality Chicken despite their high physical volume. The physical measures method shows profits on breasts and thighs and losses on bones and feathers. Given that Quality Chicken has to jointly process all the chicken products, it is nonintuitive to single out individual products that are being processed simultaneously as making losses while the overall operations make a profit. Quality Chicken is processing chicken mainly for breasts and thighs and not for wings, bones, and fe...