chapter 16 Flashcards
What are saleable products?
Products that can be sold for profit or processed more to be sold.
What is scrap?
Low-value byproducts, often sold cheaply or thrown away.
What is toxic waste?
Harmful products that need special disposal, not saleable.
How do you allocate joint costs using the Physical Measure Method?
Based on physical attributes (e.g., weight or volume).
Why is the Physical Measure Method less useful?
It doesn’t relate to how much money the products will actually make.
How do you allocate joint costs using the Sales Value at Splitoff Method?
Based on how much each product can be sold for when split off.
Why is the Sales Value at Splitoff Method better?
It reflects each product’s revenue-making potential.
What is the Net Realizable Value (NRV) Method used for?
When there’s no sales value at splitoff, allocate costs based on expected final sales minus separable costs.
How does the Constant Gross Margin Percentage Method work?
Allocates joint costs to keep the same profit margin across products.
What is a sell or process further decision?
choice to either sell a product now or process it more and sell later.
Why are joint costs irrelevant in the sell or process further decision?
Joint costs are sunk costs and can’t be recovered, so they don’t affect the decision
What should you focus on when making a sell or process further decision?
Incremental costs (extra costs to process further) and potential revenue.
How do joint costs affect profitability reports?
Allocating joint costs affects how profitable each product looks, influencing decisions.
Why is the market-based method often more accurate?
It allocates costs based on real sales values, showing true revenue potential.
What’s a downside of the market-based method?
It can be hard to use if market prices are unstable or unavailable.
When would the physical measure method be used?
For simplicity or when no market price data is available, but it may not reflect real value.
What is the main goal of joint cost allocation?
To fairly assign costs to products that share production costs.
What is the Production Byproduct Method?
Recognizes byproducts as they’re made and records their value at production.
When is revenue recognized in the Production Byproduct Method?
Revenue is recorded when the byproduct is sold.
What is the Sale Byproduct Method?
Byproducts are recognized only when they are sold, not at production.
How does the Sale Byproduct Method treat costs?
How does the Sale Byproduct Method treat costs?
What is the key difference between scrap and saleable products?
Scrap has little to no value, while saleable products can be sold for profit
What are joint costs?
Shared costs incurred in the production of multiple products at the same time.
What is the key consideration when choosing a joint cost allocation method?
It should match the company’s needs for simplicity, accuracy, and relevance.
What is the benefits-received criterion in cost allocation?
Allocating costs based on how much each product contributes to revenue.
How does allocating joint costs affect pricing strategies?
It helps determine how much to charge for each product, based on its share of costs.
: What happens if joint costs are not allocated?
Some companies skip allocation if it doesn’t significantly affect decisions or performance.
Why are separable costs important in the sell or process further decision?
They are the extra costs incurred if the product is processed further, which should be evaluated individually.
What is the goal of cost allocation in general?
To fairly divide costs among different products based on their revenue-generating potential.
What’s the best method to allocate joint costs if selling prices are available?
The Sales Value at Splitoff Method is usually the best because it uses actual market values.
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
The full product costs of processing incurred by each identifiable product beyond the splitoff point.
Product
Any output that can be sold at full product cost plus profit, or enables the company to avoid purchasing direct materials
Sales value can be high or low
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
But are not separately identifiable as individual products until after the split-off point
Main Product
Output of a joint production process that yields one product with a high sales value compared to the values of the other outputs
Byproduct
Outputs of a joint production process that have a low sales value compared to the sales values of other outputs (i.e., the main or joint products)
Reasons for Allocating Joint Costs
Cost reimbursement
Customer profitability analysis
Insurance settlements
Rate regulations
Litigation
External financial, tax reporting, intrnal financial reporting
Joint Cost Allocation Methods (Market based)
- Sales value at split off
- NRV
- Constant gross-margin percentage NRV
Uses market-derived data
Not market based:
Physical
Two methods for accounting for byproducts
- Production byproduct Method
- Sale byproduct method
