16-1 CHAPTER 16 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS16-1 Exhibit 16-1 presents nine 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 • Crude oil, natural gas, raw LPG 16-2 A joint costis a cost of a production process that yields multiple products simultaneously. A separable cost is acost 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 productis a product from a joint production process (a process that yields two or more products) that has a relatively high total sales value. A byproductis a product that has a relatively low total sales value compared to the total sales value of the joint (or main) products. 16-4A productis 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 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. 16-7 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.
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