Lecture 4

Question 1

What are joint products and by-products both outcomes of

Answer 1

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

Question 2

What are joint products

Answer 2

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

Question 3

What’s the value of joint products

Answer 3

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

Question 4

How are joint products cost allocated

Answer 4

Joint costs are usually allocated among joint products

Question 5

What are by-products

Answer 5

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

Question 6

What is the value of by-products

Answer 6

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

Question 7

What is the cost allocation of by-products

Answer 7

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

Question 8

What happens to revenue from by-products

Answer 8

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

Question 9

What is the split off point

Answer 9

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

Question 10

What happens at the split off point

Answer 10

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

Question 11

What are some key characteristics of the split off point

Answer 11

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

Question 12

What happens to costs at the split off point

Answer 12

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

Question 13

What are costs considered before the split off point

Answer 13

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

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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

Question 16

How does the physical units method allocate joint costs

Answer 16

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

Question 17

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

Answer 17

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

Question 18

What are the advantages for the physical units method

Answer 18

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

Question 19

What are the limitations for the physical units method

Answer 19

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

Question 20

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

Answer 20

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

Question 21

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

Answer 21

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

Question 22

What are the advantages of the sales split-off method

Answer 22

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

Question 23

What are the limitations of the sales split-off method

Answer 23

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

Question 24

What does net releasable value method allocate joint costs based on

Answer 24

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

Question 25

How do managers calculate each product’s NRV

Answer 25

Managers calculate each product’s NRV by subtracting the separable costs from the final sales value

Question 26

What are the advantages of NRV

Answer 26

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

Question 27

What are the limitations of NRV

Answer 27

Limitations of NRV are:
- Requires additional calculations and estimates, which may be complex and subjective

Question 28

Why does the constant gross margin percentage (GM%) method allocate joint costs

Answer 28

Allocates joint costs to achieve a constant gross margin percentage across all joint products

Question 29

What is the approach taken by managers with the constant gross margin percentage method

Answer 29

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

Question 30

What are the advantages of GM%

Answer 30

Advantages of GM% are:
- Ensures each product has a consistent profitability percentage, which can be useful for profitability analysis

Question 31

What are the limitations of GM%

Answer 31

Limitations of GM% are:
- Complex to calculate and less intuitive
- Achieving a uniform gross margin may not always reflect each product’s true value