Joint Costs Flashcards

1
Q

What are joint costs?

A

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).

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2
Q

What is the split-off point in a joint process?

A

The juncture where at least two products are observable in a joint production process.

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3
Q

Define by-products in joint processes.

A

Outputs with future use or economic value, produced unintentionally during the joint process.

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4
Q

What distinguishes waste from scrap?

A

Waste has no future use and must be disposed of, while scrap may have economic value or potential use.

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5
Q

What are the three methods of allocating joint costs?

A

Sales Value at Split-Off Method, Net Realizable Value (NRV) Method, Physical Quantities Method.

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6
Q

When is the Sales Value at Split-Off Method preferred?

A

When sales prices at the split-off point are available, as it provides an objective and revenue-focused allocation.

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7
Q

Why are joint costs considered irrelevant for further processing decisions?

A

Because they are sunk costs and cannot impact future decision-making.

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8
Q

How is the sell-or-process-further decision made?

A

By comparing sales value at split-off with NRV of final products; process further if NRV is higher.

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9
Q

What are the two methods for accounting for by-products?

A

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.

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10
Q

What is the primary advantage of the Production Method for by-products?

A

It reduces the Cost of Goods Sold (COGS) for the main products, positively impacting gross margin.

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11
Q

What is the Net Realizable Value (NRV) Method?

A

A method that allocates joint costs based on the final sales value of products minus further processing costs.

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12
Q

When is the Physical Quantities Method suitable?

A

When sales prices are unpredictable, as it uses measurable properties like weight or volume for allocation.

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13
Q

What factors are critical when deciding to process further?

A

Alignment with organizational objectives, capacity to process further, market demand for the processed product, profit maximization potential.

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14
Q

What is the treatment of scrap in the Production Method?

A

Scrap is valued at its Net Realizable Value (NRV) and reduces the joint costs attributed to main products.

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15
Q

Why might a company choose the Sales Method for by-products and scrap?

A

For simplicity, as it recognizes these items only upon sale without prior accounting.

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