Joint Costs Flashcards
What are joint costs?
Costs incurred in a joint production process that yields more than one product simultaneously, including Direct Materials (DM), Direct Labor (DL), and Manufacturing Overhead (MOH).
What is the split-off point in a joint process?
The juncture where at least two products are observable in a joint production process.
Define by-products in joint processes.
Outputs with future use or economic value, produced unintentionally during the joint process.
What distinguishes waste from scrap?
Waste has no future use and must be disposed of, while scrap may have economic value or potential use.
What are the three methods of allocating joint costs?
Sales Value at Split-Off Method, Net Realizable Value (NRV) Method, Physical Quantities Method.
When is the Sales Value at Split-Off Method preferred?
When sales prices at the split-off point are available, as it provides an objective and revenue-focused allocation.
Why are joint costs considered irrelevant for further processing decisions?
Because they are sunk costs and cannot impact future decision-making.
How is the sell-or-process-further decision made?
By comparing sales value at split-off with NRV of final products; process further if NRV is higher.
What are the two methods for accounting for by-products?
Production Method: Recognizes by-products at production and assigns a portion of joint costs to them.
Sales Method: Recognizes by-products only when sold, with no prior allocation of joint costs.
What is the primary advantage of the Production Method for by-products?
It reduces the Cost of Goods Sold (COGS) for the main products, positively impacting gross margin.
What is the Net Realizable Value (NRV) Method?
A method that allocates joint costs based on the final sales value of products minus further processing costs.
When is the Physical Quantities Method suitable?
When sales prices are unpredictable, as it uses measurable properties like weight or volume for allocation.
What factors are critical when deciding to process further?
Alignment with organizational objectives, capacity to process further, market demand for the processed product, profit maximization potential.
What is the treatment of scrap in the Production Method?
Scrap is valued at its Net Realizable Value (NRV) and reduces the joint costs attributed to main products.
Why might a company choose the Sales Method for by-products and scrap?
For simplicity, as it recognizes these items only upon sale without prior accounting.