Lecture 4 Flashcards
What are joint products and by-products both outcomes of
Joint products and by-products are both outcomes of a single production process
What are joint products
Joint products are multiple main products generated simultaneously from a single production process
What’s the value of joint products
Joint products are high-value products that are intended as primary outputs
How are joint products cost allocated
Joint costs are usually allocated among joint products
What are by-products
By-products are secondary outputs from a production process that primarily aims to produce one or more main products
What is the value of by-products
By-products have lower value, often seen as a secondary benefit or even as waste to be minimized
What is the cost allocation of by-products
By-products often receive minimal or no allocation of joint costs
What happens to revenue from by-products
Any revenue from by-products may offset the cost of the main production process
What is the split off point
The split off point refers to the specific stage in a production process where the products that are generated from a common input separate into distinct, identifiable products
What happens at the split off point
At the split off point the joint production process ends, and the products can either be sold as they are or further processed individually
What are some key characteristics of the split off point
Key Characteristics of the Split-Off Point are:
- End of joint costs
- Start of individual processing
- Determines cost allocation
What happens to costs at the split off point
The split-off point marks the end of costs that are shared across multiple products
What are costs considered before the split off point
Up until this point, all costs are considered joint costs, as they are incurred for the overall production process and not for individual products
What do companies use to allocate joint costs to the individual products
Companies often use methods such as the sales value at the split-off point, the physical units method, or the net realizable value method to allocate joint costs to the individual products
What are the main methods used to allocate joint costs to products
The main methods used to allocate joint costs to products are:
- Physical units method
- Sales value at split-off method
- Net Realisable value (NRV) method
- Constant Gross Margin Percentage (GM%) Method
How does the physical units method allocate joint costs
The physical units method allocates joint costs based on a physical measures
What is the approach for allocating joint costs for the physical units method
Joint costs are distributed in proportion to the physical quantity of each product at the split-off point
What are the advantages for the physical units method
Advantages for the physical units method are: Simple and objective; works well when products have similar physical measures
What are the limitations for the physical units method
Limitations for the physical units method are: Doesn’t consider the economic value of each product, which can lead to misleading cost allocations if the products vary significantly in value
How does the sales value at split off method allocate joint costs
Sales value at split-off method allocates joint costs based on the relative sales value of each product at the split-off point
What is the approach for distributing costs with the sales value at split-off method
With the sales value at split-off method joint costs are distributed according to each product’s share of the total sales value at the split-off point
What are the advantages of the sales split-off method
Advantages of the sales split-off method are: Considers the economic value of each product, providing a fairer allocation for products of different values
What are the limitations of the sales split-off method
Limitations of the sales split-off method are: Only applicable if the products can be sold at the split-off point, which might not always be the case
What does net releasable value method allocate joint costs based on
Net releasable value method allocates joint costs based on the estimated final sales value of each product after deducting additional processing costs incurred after the split-off point
How do managers calculate each product’s NRV
Managers calculate each product’s NRV by subtracting the separable costs from the final sales value
What are the advantages of NRV
Advantages of NRV are:
- Allows for a fairer allocation when products need further processing, as it considers both the final sales value and the extra processing costs
What are the limitations of NRV
Limitations of NRV are:
- Requires additional calculations and estimates, which may be complex and subjective
Why does the constant gross margin percentage (GM%) method allocate joint costs
Allocates joint costs to achieve a constant gross margin percentage across all joint products
What is the approach taken by managers with the constant gross margin percentage method
First, the total gross margin percentage for the combined products is calculated. Then, each product is assigned joint costs such that their individual gross margins match this overall percentage
What are the advantages of GM%
Advantages of GM% are:
- Ensures each product has a consistent profitability percentage, which can be useful for profitability analysis
What are the limitations of GM%
Limitations of GM% are:
- Complex to calculate and less intuitive
- Achieving a uniform gross margin may not always reflect each product’s true value
