Chapter 16, Cost Allocation: Joint Products and Byproducts Video Solutions, Horngrens Cost Accounting

By itself, a by-product cannot be produced. Further, when compared to the main product, the by-product has only a low commercial value. There may be a situation in which the same input results in more than one article as the output. The products that emerge from the same input and from the same operation may be of equal importance or unequal importance. In other words, multiple products characterise some industries or manufacturing operation.

Variable production costs are $0.80 and annual fixed costs are $150,000. If production is outsourced, all variable costs and 40 percent of annual fixed costs will be eliminated. Although Grade B lumber appears to be unprofitable, elimination of Grade B lumber sales would not increase overall profit for Oregon Lumber. Grade B lumber contributes $60,000 to covering joint costs. Thus elimination of Grade B lumber sales would result in a decrease in overall profit of $60,000. The $62,500 in joint cost allocated to Grade B lumber would simply be reallocated to Grade A lumber.

What is the definition of joint cost and separable cost?

This will have the effect of reducing total fixed marketing and administrative costs by 5 percent. As a result of reducing production capacity, Keyboard’s total fixed manufacturing costs will decrease 30 percent. Total variable manufacturing costs will decrease since only 4,000 pianos will be produced rather than 6,000. Total variable marketing and administrative costs will remain unchanged. The two major methods of allocating joint costs are the net realizable value method and the physical quantities method.

This method is followed when the by-product obtained from the process can be reused as raw materials in some other process of the company. The market value of materials which are similar to the by-product is the replacement price. The replacement price of the by-product is credited to the process account. Dairy Industry provides a good example to By-products. If milk is put to the manufacturing process, it yields Butter and Butter-milk (By-product).

The Physical Quantities Method

This involves apportionment of joint costs more accurately over the joint products. This ability to absorb joint costs is measured either by sale value or selling price. Common costs, distinguished from joint costs, are those assigned to two or more products produced in a single department or responsibility centre. The costs which have to be allocated or apportioned to two or more departments are also termed as ‘common costs’. Making a calculation after production ends has some other benefits.

• Calculate the contribution margin per unit of constrained resource for each product.
• Since these costs can be attributed to specific products, you should never set a product price to be at or below the total costs incurred after the split-off point.
• This stage is known as ‘split off’ point.
• A diagram of the situation is in Solution Exhibit 16-33.
• Scope is a project management term for the objectives necessary to complete a project, allowing managers to estimate costs and time required.
• Two or more products made from a single input are called joint products.

Another example of joint costing is feeding both sheep and cattle. The physical measure method allocates cost by the https://business-accounting.net/ weight, volume, or some other measurement of the product that's produced. It's a contrast to relative sales value.

How do you allocate joint costs using the physical measure method?

In this case, assume that the weight or volume for each two-by-four is the same. A-1 Fancy has $\$ 1,500$ less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. A-1 Fancy has $\$ 1,500$ more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. A-1 Fancy has $\$ 1,300$ less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. A-1 Fancy has $\$ 1,300$ more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.

Three products X, Y and Z are produced at a joint cost of Rs.50,560. These products does not require further processing. Under this method ability to pay is the criterion used to apportion the joint cost. The product bringing more sales revenue is allotted more cost.

Cost Allocation of a Joint Process for Joint Products and By-Products

Oregon Lumber will decide whether or not to process Grade B lumber further regardless of how joint costs are allocated to Grade A and Grade B lumber. In a sense, joint costs are sunk costs with respect to this decision, and will not influence future processing decisions.

• However, fixed costs will not change as a result of the special order.
• For example, when crude oil is refined, the gasoline, kerosene, benzene, and naphtha must be processed further before they can be sold.
• Although byproducts have relatively low total sales values, the presence of byproducts in a joint production process can affect the allocation of joint costs.
• Processing cost incurred after split-off point are Rs.8,000, Rs.6,500 and Rs.5,000 respectively.
• Under this method, estimated profit, selling expenses and further processing cost of the by-product is deducted from the sales value of the by-products to get the joint cost of the by-product.
• This results in more number of units of not only the Joint Product whose output the company wishes to increase but also the output of other Joint Products.
• This feature distinguishes the Joint Products from the Co- products.

Mining companies, for example, receive more benefits from 1 ton of gold than they do from 10 tons of coal. If, however, logs are processed into fine-grade lumber, standard lumber and wood chips, fine – grade lumber and standard lumber are joint products, and wood chips are the byproduct. That’s because both fine-grade lumber and standard lumber have high total sales values when compared with wood chips. Two or more products produced in a process which are almost of equal value and importance are called joint products. Joint products usually require further processing before sale.

What is joint products and by products?

Income from the sale of a by-product is credited to profit and loss account as other income or miscellaneous income. This method is followed when the quantity and sales value is very small. Incorrect apportionment of joint cost will distort the entire decision making process. Using arbitrariness results in inaccurate allocation of joint cost. Those of co- products, however, are within production control.

Assume Green Mowers can increase capacity to accommodate the special order by paying an additional $20 in variable costs per unit for the additional 1,000 units. With this increased capacity, the special order would not affect regular customer sales. A method that allocates joint costs based on the relative sales value of each product at the split-off point. A joint cost is a kind of common cost that occurs after a raw product, such as a sunflower crop, undergoes two separate production processes. For example, the cost of fertilizing and harvesting sunflowers qualifies as a common cost.

Identify at least two qualitative factors that should be considered before making the decision. Special Order Decision at Full Capacity. joint products are outputs from common inputs and a common production process. On average, Green Mowers makes 5,000 mowers each month. Special Order Decision with Idle Capacity and at Full Capacity.

'Managers must decide whether a product should be sold at splitoff or processed further. The sales value at splitoff method of joint-cost allocation is the best method for generating the information managers need for this decision." Do you agree? Explain. A physical base such as raw materials weight, linear measure volume etc. is applied in apportioning pre-separation point costs to joint products. Expenses incurred in the common process axe called joint costs. Expenses like raw materials, labour and other manufacturing expenses incurred up to separation or split-off point is called joint costs. In the production of a main product, a by-product Y is obtained. In a certain period 500 units of the by-product are produced which are transferred to another process where the by-product is consumed.

Physical measurement method

In the real world, different products produce different levels of profit. One of the simplest methods to apportion joint cost is the average unit cost method. Here, the average cost per unit is calculated by simply dividing the total cost of all the joint products incurred before their splitting-off, by the total of the number of units produced all together. No anticipation of subsequent management decisions. The sales value at splitoff method does not require information on the processing steps after splitoff if there is further processing. Add up the cost of all processing costs that each joint product incurs after the split-off point, and subtract this amount from the total revenue that each product will eventually earn.