HDF16_Allocation+Joint

HDF16_Allocation+Joint - Cost Allocation: Joint Products...

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Cost Allocation: Joint Products and Byproducts
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Joint Cost Terminology • Joint Costs – costs of a single production process that yields multiple products simultaneously. • Splitoff Point – the place in a joint production process where two or more products become separately identifiable • Separable Costs – all costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific products
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Examples of Joint Cost Situations
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Joint Cost Terminology Categories of Joint Process Outputs: 1. Outputs with a positive sales value 2. Outputs with a zero sales value Product – any output with a positive sales value, or an output that enables a firm to avoid incurring costs Value can be high or low
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Joint Cost Terminology • Main Product – output of a joint production process that yields one product with a high sales value compared to the sales values of the other outputs • Joint Products – outputs of a joint production process that yields two or more products with a high sales value compared to the sales values of any other outputs • Byproducts – outputs of a joint production process that have low sales values compare to the sales values of the other outputs
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Joint Process Overview Single Production Process Joint Product #1 Byproduct Joint Product #2 Steam: An Output with Zero Sales Value
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Reasons for Allocating Joint Costs • Required for GAAP and taxation purposes • Cost values may be used for evaluation purposes • Cost-based Contracting • Insurance Settlements • Required by regulators • Litigation
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Joint Cost Allocation Methods Market-Based – allocate using market- derived data (dollars): 1. Sales value at splitoff 2. Net Realizable Value (NRV) 3. Constant Gross-Margin percentage NRV Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc
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Farmer’s Dairy example
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Joint Cost Illustration Overview
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Sales Value at Splitoff Method • Uses the sales value of the entire production of the accounting period to calculate allocation percentage • Ignores inventories
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Sales Value at Splitoff Illustration
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Physical-Measure Method • Allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the splitoff point of total production of the products
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Physical Measures Illustration
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Net Realizable Value Method • Allocates joint costs to joint products on the basis of relative NRV of total production of the joint products • NRV = Final Sales Value – Separable Costs
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Net Realizable Value Method Overview
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Net Realizable Value Method Illustrated
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Net Realizable Value Method Illustrated
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HDF16_Allocation+Joint - Cost Allocation: Joint Products...

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