Some companies use cost allocation bases such as the revenue even though

# Some companies use cost allocation bases such as the

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Some companies use cost-allocation bases such as the revenue even though revenue is not necessarily the cost driver (the cause of the costs), but rather the result
Titel van de presentatie 1-3-2020 | 62
Titel van de presentatie 1-3-2020 | 63
Managerial Accounting 1-3-2020 | 64 3. A GENERAL FRAMEWORK FOR COST ALLOCATION ALLOCATION OF JOINT COSTS JOINT PRODUCTS Joint products have relatively significant sales values They are not separately identifiable as individual products until their split- off point The split-off point is that juncture of manufacturing where the joint products become individually identifiable Separable costs are any costs beyond the split-off point Joint costs are the costs of manufacturing joint products before the split-off point Joint costs X1 X2 Split-off point
Managerial Accounting 1-3-2020 | 65 3. A GENERAL FRAMEWORK FOR COST ALLOCATION ALLOCATION OF JOINT COSTS JOINT PRODUCTS Companies allocate joint product costs to products for inventory valuation purposes and income determination Two conventional ways of allocating joint costs to products are widely used: 1) The physical-units method : requires a common physical unit for measuring the output of each product. The joint costs are allocated based on each product’s percentage of the total physical units produced 2) The Relative Sales value method : the joint costs are allocated based on each product’s sales value as a percentage of the total sales value at split-off. Allocation of joint costs should not affect decisions about the individual products
Managerial Accounting 1-3-2020 | 66 3. A GENERAL FRAMEWORK FOR COST ALLOCATION ALLOCATION OF JOINT COSTS THE PHYSICAL UNITS METHOD The company produces two chemicals, X and Y. Joint cost is \$100,000. X sells for \$.09 per liter and Y for \$.06. Two-thirds of the liters produced are chemical X; One-third of the liters are chemical Y Allocate two-thirds of the joint cost to X; allocate one-third of the cost to Y. Drawbacks? The product’s percentage of the total physical units produced are not always related to the sales value of the products
Managerial Accounting 1-3-2020 | 67 3. A GENERAL FRAMEWORK FOR COST ALLOCATION ALLOCATION OF JOINT COSTS THE RELATIVE SALES VALUE METHOD If a common physical unit is lacking , many companies use the relative-sales-value method for allocating joint costs. (e.g., production of meat and hides from butchering a steer) Weighting is based on the sales values of the individual products at the split-off point
Managerial Accounting 1-3-2020 | 68 3. A GENERAL FRAMEWORK FOR COST ALLOCATION ALLOCATION OF BY-PRODUCTS COSTS Joint costs X1 X2 Split-off point By-product costs are not individually identifiable until manufacturing reaches a split-off point By-product costs have a relatively insignificant sales value in comparison with other products emerging at split-off If an item is accounted for as a by-product, only separable costs are allocated to it (e.g.; 30 000 €) All joint costs are allocated to the main products Any revenues (e.g.; 20 000 €) from by-

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• Spring '18
• Peter ERDKAMP
• Cost Accounting, Cost Management Systems and Cost Accounting Systems