HDFChapter16Solutions12e - CHAPTER 16 COST ALLOCATION JOINT...

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CHAPTER 16 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS 16-1 Exhibit 16-1 presents nine examples of joint products from four different general industries. These include: IndustrySeparable Products at the Splitoff Point Food Processing: • Lamb • Lamb cuts, tripe, hides, bones, fat • Turkey • Breasts, wings, thighs, poultry meal Extractive: • Petroleum • Crude oil, natural gas, raw LPG 16-2 A joint cost is a cost of a production process that yields multiple products simultaneously. A s eparable 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 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. 16-5 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. 5. Rate regulation when one or more of the jointly-produced products or services are subject to price regulation. 6. Litigation in which costs of joint products are key inputs. 16-6 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. 16-8 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 Limitations of the physical measure method of joint-cost allocation include: 16-1
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a. The physical weights used for allocating joint costs may have no relationship to the revenue-producing power of the individual products.
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HDFChapter16Solutions12e - CHAPTER 16 COST ALLOCATION JOINT...

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