Lecture 4 Flashcards

1
Q

What are joint products and by-products both outcomes of

A

Joint products and by-products are both outcomes of a single production process

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2
Q

What are joint products

A

Joint products are multiple main products generated simultaneously from a single production process

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3
Q

What’s the value of joint products

A

Joint products are high-value products that are intended as primary outputs

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4
Q

How are joint products cost allocated

A

Joint costs are usually allocated among joint products

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5
Q

What are by-products

A

By-products are secondary outputs from a production process that primarily aims to produce one or more main products

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6
Q

What is the value of by-products

A

By-products have lower value, often seen as a secondary benefit or even as waste to be minimized

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7
Q

What is the cost allocation of by-products

A

By-products often receive minimal or no allocation of joint costs

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8
Q

What happens to revenue from by-products

A

Any revenue from by-products may offset the cost of the main production process

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9
Q

What is the split off point

A

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

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10
Q

What happens at the split off point

A

At the split off point the joint production process ends, and the products can either be sold as they are or further processed individually

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11
Q

What are some key characteristics of the split off point

A

Key Characteristics of the Split-Off Point are:
- End of joint costs
- Start of individual processing
- Determines cost allocation

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12
Q

What happens to costs at the split off point

A

The split-off point marks the end of costs that are shared across multiple products

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13
Q

What are costs considered before the split off point

A

Up until this point, all costs are considered joint costs, as they are incurred for the overall production process and not for individual products

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14
Q

What do companies use to allocate joint costs to the individual products

A

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

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15
Q

What are the main methods used to allocate joint costs to products

A

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

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16
Q

How does the physical units method allocate joint costs

A

The physical units method allocates joint costs based on a physical measures

17
Q

What is the approach for allocating joint costs for the physical units method

A

Joint costs are distributed in proportion to the physical quantity of each product at the split-off point

18
Q

What are the advantages for the physical units method

A

Advantages for the physical units method are: Simple and objective; works well when products have similar physical measures

19
Q

What are the limitations for the physical units method

A

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

20
Q

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

A

Sales value at split-off method allocates joint costs based on the relative sales value of each product at the split-off point

21
Q

What is the approach for distributing costs with the sales value at split-off method

A

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

22
Q

What are the advantages of the sales split-off method

A

Advantages of the sales split-off method are: Considers the economic value of each product, providing a fairer allocation for products of different values

23
Q

What are the limitations of the sales split-off method

A

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

24
Q

What does net releasable value method allocate joint costs based on

A

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

25
How do managers calculate each product's NRV
Managers calculate each product’s NRV by subtracting the separable costs from the final sales value
26
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
27
What are the limitations of NRV
Limitations of NRV are: - Requires additional calculations and estimates, which may be complex and subjective
28
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
29
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
30
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
31
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