Lecture 4 Flashcards
Weighted average vs FIFO
Under weighted average, all costs were mixed together
Under FIFO we trat old units and new units separately
Dont mix old costs and new costs
Find out how many equivalent units of work done this period
FIFO overview
Under the FIFO method, we assume that the old units are finished before the new units
Therefore, we have to keep track of cost and units separately
-Costs from B WIP
-Costs to finish B WIP
-Costs for the units that we start and finish
-Costs for the units in E. WIP
Fudging the numbers
What would happen to COGS if we overstated how far along ending WIP was
Income shifting
Moving income or expenses from one period to another. Earning management one period will come back to bite you the next
academic white tower (materiality approach)
Everything matters! be exact! every single partial unit should be correctly accounted for
materiality approach
When managers ignore partially completed units. They say that the effect is immaterial relative to the whole so we just ignore them
This approach is often used when the production time is very short and there are very few in progress units at the end of the year
joint products
Are products that are produced together. Producing one alwaays gives you the other
Joint costs
Are the shared costs of the joint product – costs that occur before the split-off point
Splitt off point
The point when the products become separately identifiable
Separate costs
Are costs that can be attributed to an individual product
Physical measures (allocation methods)
joint costs are allocated based on physical measure (weight, volume) of products at the split off point
Relative sales value (allocation methods)
joint costs are allocated based on the relative sales value of the two products
Net realizable value (NRV) (allocation methods)
Joint costs are allocated based on the values of the products after additional processing
Constant gross margin(allocation methods)
Joint costs are allocated based on the gross margin of products after additional processing
problems with physical units method
Not fair
Just because something has a large number of units doesnt mean its worth a lot
Fertilizer is losing money
But method can be useful if the different objects have similar values
Problems with relative sales value
Not fair
Just because something has a large sales revenue doesnt mean its profitable
Fertilizer is losing money
BUT method can be useful if the different objects have similar values (e.g. ferilizer were just as valuable per kilo as milk is, after taking into account additional processing costs)
Why is NRV method good?
Fair allocation
Fertilizer isnt our main thing. its almost like a by product, barely scrapping by at all and shouldnt be charged as much of the joint costs
Why is constant gross margin method good
Fair allocation
Fertilizer isnt our main thing. Its almost like a by product, barely scrapping by at all. Shouldnt be charged much of the joint costs
Though to say whether rnv or constant gross margin is “more fair”
By products
A by-product has little or no value relative to the main product
Scrap
Technically has sales value, but its very small compared to the main product
Eg Scratched/dented products
Bruised/defective fruit
Waste
Is stuff that has a negative NPV. You have to pay to get rid of it
E.g. MIlk from sick cows that have been treated with antibiotics
Accounting for By-Products
If the bi-products have a negative NPV
Add the negative NPV to the joint costs that is allocated to the main products
IF the bi-products have a positive but small NPV you have three options:
1) treat the bi-products as though it were a main product and allocate a small amount of joint costs to it
2) Dont allocate any joint costs to it. Just take the small NPV as extra earning
3) Deduct the NPV from the joint cost allocated to the other products (i.e. treat the by-product not as its own product line, but more like a negative expense)
Usually it doesnt matter which option you choose. Its a bi-product so the NPV is very small
Further processing
Sometimes products can be sold as is or developed further
To decide whether or not to further process something, compare the marginal cost to the marginal revenue
