ch11 - Chapter 11 Cost Allocation for Joint Products and By...

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Chapter 11 Cost Allocation for Joint Products and By- Product/Scrap QUESTIONS 1. Joint processing output is classified based on the relative sales value of each type of output. Joint products are those outputs that have the largest sales value. By-products are those outputs that have some sales value, but not a sufficient amount to justify undertaking the joint process simply to obtain those outputs. Scrap is output that has no or very little sales value. Usually, the output classification is determined before production. Management decides whether a joint process output is a joint product, a by-product, or scrap based on the judgment of the relative sales value of each type of output. However, in unusual cases, the actual outputs of the joint process may not result as planned. In such cases, management may classify the output differently than was originally intended. 2. Processing of the outputs of a joint production process does not always stop at the split-off point. Some products may not be able to be sold at that point and, as such, must be processed further before it can be sold. Other products may have a sales value at split-off but further processing might result in sufficiently greater profitability to justify the additional costs involved. 3. The three decision points are (1) before the joint process is undertaken, (2) at the split-off point, and (3) after the split-off point. The criterion for proceeding at any point is whether the anticipated incremental revenues will exceed the anticipated incremental costs. 4. Cost allocation refers to the assignment of an indirect cost to a cost object using some reasonable method. Since production costs are incurred in a joint process to produce several outputs, those costs are indirect to the individual output produced and must be assigned to the output because of the cost principle. This is necessary to have appropriate inventory valuations for the joint products produced in the joint process. Accountants allocate fixed production costs to products produced within a period, and allocate certain plant and equipment costs to the time periods during which those assets are used through depreciation. Amortization and allocation of intangible costs are other examples. 5. Approaches to allocating joint process costs are classified into two general categories: (1) physical measures and (2) monetary measures. Physical measures (e.g., tons, barrels, feet) are unchanging yardsticks; monetary measures change over time with inflation. However, monetary 251
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Chapter 11 measures assign joint process costs to joint products proportionately to relative sales value. Physical measures treat each physical unit of output as equally desirable by assigning a uniform amount of joint process cost to every unit of output produced. 6.
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This note was uploaded on 12/12/2008 for the course ACCT 310 taught by Professor Nacemagner during the Fall '08 term at Western Kentucky University.

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ch11 - Chapter 11 Cost Allocation for Joint Products and By...

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