AC 10 - MODULE 5 - Joint Products and By-Products - FINAL

 

1

PSBA-MANILA ACCOUNTING 10 Prof. C. Gonzaga

COST ALLOCATION FOR JOINT PRODUCTS AND BY-PRODUCTS BY-PRODUCTS  A.

Ou!u" of a Jo#n Pro$%"" 1.

A  &o#n !ro$%""  !ro$%""  is a manufacturing process that simultaneously produces more than one product line. The product lines resulting from a joint process and having a sales value are referred to as (1) joint products, (2) by-products, and () scrap.

2.

A &o#n $o" is $o" is the total of all costs (direct material, direct labor, and overhead) incurred in a joint process up to the split-off point. These costs are recorded by the follo!ing journal entry" #or$-in-process-%epartment 1 'aterials nventory ayroll (%irect *abor) +actory verhead

     

&&& &&& &&& &&&

 

.

.

Jo#n !ro'u$"  !ro'u$"  are the primary outputs of a joint process, each of !hich has substantial revenuegenerating ability ability..

.

B(-!ro'u$"  are incidental outputs of a joint process they are salable, but the sales value of by-products B(-!ro'u$" are is not substantial enough for management to justify underta$ing the joint process they are vie!ed as having a higher sales value than scrap. /&le, rice hus$ in rice-milling, sa!dust in lumber production, $erosene in oil refinery, refinery, etc.

0.

S$ra! is an incidental output of a joint process it is salable, but the sales value from scrap is not enough S$ra! is for management to justify underta$ing the joint process it is vie!ed as having a lo!er sales value than a by-product leftover material that has a minimal but distinguishable disposal value.

.

)a"% is a residual output of a production process that must be disposed of because it has no sales )a"% is value.

T*% Jo#n Pro$%""  Pro$%""  1.

The "!+#-off !o#n is !o#n is the point at !hich the outputs of a joint process are first identifiable or can be separated as individual products.

2.

A  joint  cost  includes the costs incurred, up to the split-off point, for material, labor, and overhead during a  joint process.

. 3.

a.

3o 3ost sts s inc incur urre red d aft after er s spl plit it-o -off ff are are assi assign gned ed to tthe he se sepa para rate te pr prod oduct ucts s for ! !hi hich ch thos those e costs costs ar are e incurred.

b.

The jjoin ointt co cost st iis s alloc allocate ated, d, a att th the e splitsplit-off off point, point, to the the prima primary ry o outp utput ut o off th the e produ producti ction on proce process. ss.

A "un, $o" is $o" is a cost incurred in the past and not n ot relevant to any future courses of action.

Manag%%n D%$#"#on" R%gar'#ng Jo#n Pro$%""%"  Pro$%""%"  1.

'a 'ana nage gers rs ne need ed to ma$e ma$e ce cert rtai ain n decis decisio ions ns befo before re th the e com compa pany ny co comm mmit its s resou resourc rces es to a joi joint nt prod produc ucti tion on process. a.

Total e& e&pe pect cted ed re reve venu nues es fr from om th the e sale sale of th the e jo join intt proce process ss ou outp tput ut must must be es esti tima mate ted d and compared compar ed to total total e&p e&pect ected ed proces processin sing g cos costs ts of the out output put.. t ther her potent potential ial costs costs must must be considered in determining if the revenues are e&pected to e&ceed the costs.

b.

'a 'ana nage gers rs m mus ustt co comp mpar are e th the e net inc incom ome e from from tthi his s use o off reso resour urce ces s to the the n net et iinc ncom ome e th that at !ou !ould ld be provided by all other alternative uses of company resources if total anticipated revenues from the 4bas$et5 of products e&ceed the anticipated joint and separate costs. 'anagement !ould then

 

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decide that this joint production process is the best use of capacity and !ould begin production if   joint process net income income is greater tthan han the net income that !ould be pr provided ovided by other uses.

2.

%.

c.

6o 6oin intt proc proces ess s outp output ut m mus ustt be c cla lass ssif ifie ied d as prim primar ary y, by by-p -pro rodu duct ct,, sc scra rap, p, or !a !ast ste. e.

d.

'a 'ana nage geme ment nt must must then then deci decide de !het !hethe herr any (o (orr all) all) of the joi joint proc proces ess s outpu outputt !ill !ill be sold sold (if  (if  mar$etable) at split-off or !hether it !ill be processed further.

'an 'anage agers rs m must ust hav have eas soun ound d es esti timat mate e of tthe he s sell elling ing pri price ce for for each each type type of join jointt pr proce ocess ss o outp utput ut iin n or order der to ma$e decisions at any potential point of sale. /&pected selling prices should be based on both cost and mar$et factors.

A++o$a#on of Jo#n Co" 1.

2.

P*("#$a+ %a"ur%%n a++o$a#on is a++o$a#on  is a method of allocating a common cost to products that uses a common physical characteristic as the proration base. a.

The p phy hysi sica call me meas asur urem emen entt allo alloca cati tion on meth method od trea treats ts each each unit unit of m mea easu sure re as e e7u 7ual ally ly desi desira rabl ble e and assigns the same per unit cost to each.

b.

hysical mea measurement all alloc ocat atiion, unl unli$e monetary measure allocation,  provides an unchanging yardstic$ of output.

c.

A primar primary y disad disadvan vantag tage e of the met method hod is that that it ignore ignores s the the re reven venueue-gen genera erati ting ng a abil bility ity of indi indivi vidual dual  joint products.

Mon%ar( %a"ur% a++o$a#on uses a++o$a#on uses the follo!ing steps to prorate joint costs to joint p products" roducts" a.

choose a monetary alloc oca ation base

b.

list list the the v val alue ues s ttha hatt com compr pris ise e the the ba base se for for ea each ch joi joint nt prod produc uct t

c.

sum sum the the valu values es in step step b tto o obt obtai ain n a ttot otal al valu value e ffor or the the llis ist t

d.

divi divide de each each iind ndiv ivid idual ual va valu lue e in ste step p b by the the tota totall in s ste tep p c to obt obtai ain n a numer numeric ical al pro propor porti tion on ffor  or  each value. The sum of these proportions should total 188 percent

e.

mu mult ltip iply ly the the join jointt cost cost by eac each h prop propor orti tion on to obt obtai ain n th the e amoun amountt to b be e all alloc ocat ated ed to eac each h produc product t and

f.

divi divide de the the pr pror orat ated ed jjoi oint nt cos costt fo forr each each pro produ duct ct b by y th the e numb number er o off e7ui e7uiva vale lent nt uni units ts of of pr prod oduc ucti tion on for  for  each product to obtain a cost per /9 for valuation purposes.

MT/ODS OF ACCOUNTING FOR JOINT PRODUCTS 1.

Mar,% a+u% or R%+a#% Sa+%" a+u% M%*o'M%*o' - This method of joint cost allocation uses the !eighted selling price of the product at split-off point. The r%+a#% "a+%" a+u% a "!+#-off a++o$a#on is a++o$a#on  is a method of assigning joint cost to joint products that uses the relative sales values of the products at the split-off point as the proration base use of this method re7uires that all joint products are mar$etable at split-off. /&le" roducts

 A-!an  Atu

9nits roduced

188 08

:elling rice er 9nit 128 =8

;atio< +raction

Allocated 6oint 3osts

12&& &&&

 

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The hypothetical mar$et value is the assumed mar$et value at point of split-off. ercentage to allocate joint production costs"   Total joint production cost< Total hypothetical mar$et value @ &&  Allocated joint cost to a specific specific product" ?ypothetical 'B multipli multiplied ed by && 2.

 

A A%rag% %rag% Un# Co" M%*o' 2or *% P*("#$a+ M%a"ur% M%*o'3 M%*o'3 CThis  CThis a method of joint cost allocation to various main products on the basis of an average unit cost computed as follo!s" To Total tal joint costs < To Total tal number of units produce produced d @ Average 9nit 3ost roducts 9nits roduced Average unit  Allocated 6oint 6oint cost (28,888< 3osts 108 units@ 1.)  A-!an  Atu

.

 

188 08

D1. D1.

1, , 28,888

)%#g*%' A%rag% M%*o'M%*o' - This method allocates joint cost to the different main products on the basis of  the 7uantity produced !eighted by factors or points assigned to individual products. +inished production of every $ind is multiplied by !eight factors assigned to the main products. 3ost per unit @ To Total tal joint productio production n costs< Total Total number of !eighted units @ &< unit /&le"

roducts

9nits roduced

#eiighted u #e un nits

3ost p pe er un unit (28,888