Slide Deck 6 Flashcards
Joint Cost Terminology:
Joint Cost
Joint Product
Splitoff Point
Separable Costs
Main Product/Joint Product
Byproduct
Scarp
Toxic Waste
JC: The cost of a single production process that yields multiple main products simultaneously
JP: Products that have relatively high sales value but are not separately identifiable as individual products until the split-off point
SP: The juncture in the process when one or more products in a joint cost setting become separately identifiable
SC: All costs incurred beyond the splitoff point that are assignable to 1+ products
MP/JP: products with a high sales value relative to the other products that a single process yields
BP: A product that has a low sales value compared with the sales value of the MP/JP (No extra processing cost)
S: Outputs have minimal sales value/residual material left over when making a product (No extra processing cost, potential for neg rev because of disposal cost)
TW: process by-products that are potential harmful and have negative revenue
7 Reasons to Allocate Joint Costs
- External financial statements
- Internal financial reporting
- Cost reimbursement under contracts
- Customer profitability analysis
- Insurance settlement calculations
- Rate Regulation
- Contract litigations
EICC
IRC
4 Joint Cost Allocation methods:
Two to use when selling price at split/no further processing required
Two to use when no selling prices at splitoff/ further processing is required
A. Physical Measure Method
B. Sales Value at Splitoff Method
C. Estimated Net Realizable Method (NRV)
D. Constant Gross Margin % of NRV Method
Physical Measure Method
Define:
3 Adv
4 Dis
Def: Allocate joint cost on the basis of their relative proportion at splitoff point using a common physical measure
ADV:
1. Observable/readily verifiable
2. Economically plausible
3. Does not rely on selling price
DIS:
A. Cost allocated to a joint product may have no relationship to the product’s economic value
B. Managers lose motivation if a negative gross margin
C. Probleme deciding what unit of output to include/exclude
D. Finding a common unit of physical measure can be challenging
Do the Physical Measure Method
Slides or pearson please
Sales Value at Splitoff Method
Def:
2 Adv
1 Dis
Def: Allocate joint costs on the basis of relative sales value at the split-off point
Average cost allocation rate= joint cost pool/total revenue
Gross Margin % will be the same for all products this way
ADV:
1. Straight forwards & verifiable
2. Intuitive & economically plausible
DIS:
1. Assume all products can be sold at splitoff point
Do a Sales Value at Splitoff Method exercise
Pearson or Slides please
Net Realizable Value (NRV) Method
Def:
Equation:
Def: Allocates joint costs on the basis of the relative estimated net realizable values
It goes against GAAP, so not for external reporting
NRV= Final sales value- separable costs
Do the NRV method exercise
Pearson or Slides Please
Constant Gross Margin % of NRV method
Define:
-Works in reverse to the estimated NRV method
For each product the gross margin and total separable costs are deducted from the final sales value of units produced.
The remaining amount of each product is its allocation of join cost
Gross margin % is identical for all individual products
Do the Constant Gross Margin % exercise
Pearson or Slides please
How to select joint cost allocation method:
If selling prices at splitoff is available use:
Is selling price at splitoff is not available use:
If simplicity is the primary consideration use:
- Sales value at splitoff method
- Estimated NRV Method
- Physical measure or constant gross margin %
Sell or Process further:
What about seperable costs?
No technique for allocation of joint product cost should guide management’s decision regarding wether a product should be sold at the splitoff point or processed further.
The amount of joint cost allocated and how it was allocated to products up to the splitoff is irrelevant (joint costs are sunk cost)
Separable cost need to be evaluated for relevance individually as some might actually be FC
2 Assumptions we make about sell or process further:
- All units of the given product are either sold at the splitoff point or processed into the next product line
- Firms are more interested in absolute $ measurement (total dollar amount of gross margin) than relative measurement (highest gross margin %)
