# 11ch16 1 Essay

Submitted By Jr-Fresh
Words: 2262
Pages: 10

Cost Allocation: Joint Products and Byproducts
Chapter 16

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Learning Objective 1
Identify the splitoff point(s) in a joint-cost situation.

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Joint-Cost Basics
Joint costs

Joint products

Byproduct

Splitoff point

Separable costs

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Joint-Cost Basics
Raw milk

Cream

Liquid

Skim

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Joint-Cost Basics
Coal

Gas

Benzyl

Tar

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Learning Objective 2
Distinguish joint products from byproducts.

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Joint Products and Byproducts
Main Products
Joint Products

Byproducts

High

Low
Sales Value

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Learning Objective 3
Explain why joint costs should be allocated to individual products.

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Why Allocate Joint Costs?
• to compute inventory cost and cost of goods sold
• to determine cost reimbursement under contracts
• for insurance settlement computations
• for rate regulation
• for litigation purposes

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Learning Objective 4
Allocate joint costs using four different methods.

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Approaches to Allocating
Joint Costs
Two basic ways to allocate joint costs to products are:

Approach 1:
Market based

Approach 2:
Physical measure

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Approach 1: Market-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method

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Allocating Joint Costs Example
10,000 units of A at a selling price of \$10 = \$100,000
10,500 units of B at a selling price of \$30 = \$315,000
11,500 units of C at a selling price of \$20 = \$230,00

Joint processing cost is \$200,000

Splitoff point

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Allocating Joint Costs Example
Sales Value
Allocation of
Joint Cost
100 ÷ 645
315 ÷ 645
230 ÷ 645

A
\$100,000

B
\$315,000

C
\$230,000

Total
\$645,000

31,008

Gross margin \$ 68,992

97,674
71,318
\$217,326

\$158,682

200,000
\$445,000
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Sales Value at Splitoff
Method Example
Assume all of the units produced of B and C were sold.
2,500 units of A (25%) remain in inventory.
What is the gross margin percentage of each product?

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Sales Value at Splitoff
Method Example
Product A Revenues: 7,500 units × \$10.00
Cost of goods sold:
Joint product costs
\$31,008
Less ending inventory
\$31,008 × 25%
7,752
Gross margin

\$75,000

23,256
\$51,744

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Sales Value at Splitoff
Method Example
Product A:
(\$75,000 – \$ 23,256) ÷ \$75,000 = 69%
Product B:
(\$315,000 – \$97,674) ÷ \$315,000 = 69%
Product C:
(\$230,000 – \$71,318) ÷ \$230,000 = 69%