Chapter 6

Question 1

Joint costs

Answer 1

Joint costs are the costs of a production process that yields multiple products simultaneously, including input costs (materials) and joint processing costs.

Question 2

What is the split-off point?

Answer 2

The split-off point is the juncture in the process when one or more products in a joint-cost setting become separately identifiable.

Question 3

What are separable costs?

Answer 3

Separable costs are costs incurred beyond the split-off point that are assignable to one or more individual products.

Question 4

How do decisions about products change at or beyond the split-off point?

Answer 4

Decisions relating to sale or further processing of individual products can be made independently of decisions about other products.

Question 5

What is a joint product?

Answer 5

A joint product is an output that has a relatively high sales value but is not separately identifiable as an individual product until the split-off point.

Question 6

What is a main product?

Answer 6

A main product is the product with a relatively high sales volume when a single process is yielding two or more products.

Question 7

How does a by-product differ from a main product?

Answer 7

A by-product has a low sales value compared with the sales value of the main or joint products.

Question 8

What is the sales value of scrap?

Answer 8

Scrap has a minimal sales value.

Question 8

Can the classification of products change over time?

Answer 8

Yes, the classification of products can change over time.

Question 9

What happens in joint-cost settings when outputs exceed the number of products?

Answer 9

There may be outputs produced as part of the joint process that are not sold or valued as products. These outputs can be recycled or disposed of without adding any value. The physical quantity of these outputs might be large compared to the actual products recorded in the accounting system. No separate accounting entries are made for these outputs.

Question 10

Why are joint costs allocated for external financial statements and income tax reports?

Answer 10

To determine stock costing and cost-of-goods-sold computations necessary for accurate financial reporting and compliance with tax authorities.

Question 11

Why are joint costs allocated for internal financial reporting?

Answer 11

To assess division profitability and determine compensation for division managers by accurately calculating the costs of products and services.

Question 12

How are joint costs used in cost reimbursement under contracts?

Answer 12

Joint costs are allocated when a business sells or delivers only a portion of its products or services to a customer, such as a government agency, to determine reimbursement amounts.

Question 13

Why is joint cost allocation important for customer profitability analysis?

Answer 13

To evaluate the profitability of individual customers who purchase varying combinations of joint products, by-products, and other products.

Question 14

How do joint costs affect insurance settlement computations?

Answer 14

Insurance claims for damage involving joint products, main products, or by-products are based on cost information derived from joint cost allocations.

Question 15

Why are joint costs allocated in rate regulation?

Answer 15

To set prices for jointly produced products or services that are subject to regulatory oversight, ensuring compliance with price regulations.

Question 16

What are the two basic approaches to allocating joint costs?

Answer 16

1. Market-based data approach. 2. Physical measure-based data approach.

Question 17

What are the methods under the market-based data approach for allocating joint costs?

Answer 17

a. Sales value at split-off method.

b. Estimated net realizable value (NRV) method.

c. Constant gross-margin percentage NRV method.

Question 18

What is the physical measure-based data approach in allocating joint costs?

Answer 18

It involves allocating joint costs based on physical measures or quantities of the products, such as weight or volume.

Question 19

How does the sales value at split-off method allocate joint costs?

Answer 19

It allocates joint costs based on the relative sales value of each product at the split-off point, using the sales value of the entire production of the accounting period. Costs are distributed in proportion to each product’s ability to contribute revenue.

Question 20

What does the sales value at split-off point method exemplify?

Answer 20

It exemplifies the benefits-received criterion of cost allocation, where costs are allocated based on the revenue-generating potential of each product.

Question 21

How are joint costs allocated under the sales value at split-off method if multiple products have high sales values?

Answer 21

Joint costs are allocated in proportion to the relative sales values of all products with high sales values.

Question 22

How are joint costs allocated if only one product has a high sales value under the sales value at split-off method?

Answer 22

The joint costs are allocated primarily based on the sales value of the single high-value product.

Question 23

What is the primary characteristic of the physical measure method for allocating joint costs?

Answer 23

It allocates joint costs based on relative proportions at the split-off point using a common physical measure, such as weight or volume.

Question 24

How does the physical measure method compare to the sales value at split-off method in terms of the benefits-received criterion?

Answer 24

The physical measure method is less preferred than the sales value at split-off method because it does not consider the revenue-producing power of the individual products.

Question 25

When using the physical measure method, how might physical weights affect cost allocation?

Answer 25

Physical weights used may have no direct relationship to the revenue-generating potential of the individual products.

Question 26

How does the estimated net realizable value (NRV) method allocate joint costs?

Answer 26

It allocates joint costs based on the relative estimated net realizable value, which is the expected final sales value minus the expected separable costs of production and marketing for each product.

Question 27

What information is needed to estimate the net realizable value (NRV) of each product at the split-off point?

Answer 27

Information about the subsequent processing steps, including production and marketing costs, is required to estimate the NRV.

Question 28

How does the estimated NRV method handle multiple split-off points?

Answer 28

Additional allocations may be required if processes after the initial split-off point create a second joint-cost situation.

Question 29

Why might the sales value at split-off method be preferred over the estimated NRV method?

Answer 29

The sales value at split-off method is less complex and does not require knowledge of subsequent processing steps.

Question 30

How does the constant gross-margin percentage NRV method allocate joint costs?

Answer 30

It allocates joint costs to achieve an identical overall gross-margin percentage for all individual products by:
1. Calculating the overall gross-margin percentage.

2. Deducting the gross margin from final sales values to determine total costs each product should bear.
3. Deducting expected separable costs from these total costs to allocate joint costs.

Question 31

What does the constant gross-margin percentage NRV method use to determine joint-cost allocation?

Answer 31

It uses the expected final sales value of the total production of the period, not the actual sales, and the joint costs allocated to each product may not always be positive.

Question 32

What are some benefits of the sales value at split-off point method?

Answer 32

Benefits include no need to anticipate subsequent management decisions, availability of a meaningful common denominator for calculating weighing factors, and simplicity.

Question 33

Why is the benefits-received criterion preferred in allocating joint costs?

Answer 33

It leads to a preference for the sales value at split-off point method, which aligns with the revenue-generating potential of each product and simplifies the allocation process.

Question 34

Why should joint-product costs not guide management decisions about whether to sell a product at the split-off point or process it further?

Answer 34

Because joint costs are incurred regardless of the decision and are arbitrary for decision making. Decisions should be based on incremental operating profit rather than on allocated joint costs.

Question 35

What should influence the decision to process a product beyond the split-off point?

Answer 35

The decision should be based on the incremental operating profit attainable beyond the split-off point, not on the size of total joint costs or allocated costs.

Question 36

What is the role of joint-cost allocations in managerial decision making?

Answer 36

Joint-cost allocations are arbitrary and should not influence decisions regarding further processing. Instead, focus on incremental costs and profits.

Question 37

What should accountants focus on when designing reports for managerial decisions regarding joint products?

Answer 37

Accountants should concentrate on incremental costs and benefits rather than on how historical joint costs are allocated among products.

Question 38

Why are joint-cost allocations considered arbitrary?

Answer 38

Because joint costs are incurred for the overall process and cannot be specifically attributed to the individual decisions of processing or selling products at split-off.

Question 39

How should incremental costs be used in decision making?

Answer 39

Incremental costs should be used to evaluate the additional expenses and profits associated with processing products beyond the split-off point.