Cost Allocation：Joint Products and products.doc

cost allocation：joint products and byproductschapter 16cost allocation:joint products and byproductsjoint cost terminologyjoint costs costs of a single production process that yields multiple products simultaneouslysplitoff point the place in a joint production process where two or more products become separately identifiableseparable costs all costs incurred beyond the splitoff point that are assignable to each of the now-identifiable specific productsjoint cost terminologycategories of joint process outputs:outputs with a positive sales valueoutputs with a zero sales valueproduct any output with a positive sales value, or an output that enables a firm to avoid incurring costsvalue can be high or lowjoint cost terminologymain product output of a joint production process that yields one product with a high sales value compared to the sales values of the other outputsjoint products outputs of a joint production process that yields two or more products with a high sales value compared to the sales values of any other outputsjoint cost terminologybyproducts outputs of a joint production process that have low sales values compare to the sales values of the other outputsjoint process flowchartreasons for allocating joint costsrequired for gaap and taxation purposescost values may be used for evaluation purposescost-based contractinginsurance settlementsrequired by regulatorslitigationjoint cost allocation methodsphysical measures allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc1.market-based allocate using market-derived data (dollars):sales value at splitoffnet realizable value (nrv)constant gross-margin percentage nrvphysical-measure methodallocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the splitoff point of total production of the productsphysical-measure exampleconsider the following example of two products arising out of one joint process costing $500assumes 1 gallon of cream is equal to 1 gallon of skim-milksales value at splitoff methoduses the sales value of the entire production of the accounting period to calculate allocation percentageignores inventoriessales value at splitoff examplenet realizable value methodallocates joint costs to joint products on the basis of relative nrv of total production of the joint productsnrv = final sales value separable costsnrv exampleconstant gross margin nrv methodallocates joint costs to joint products in a way that the overall gross-margin percentage is identical for the individual productsjoint costs are calculated as a residual amountconstant gross margin nrv method examplemethod selectionif selling price at splitoff is available, use the sales value at splitoff methodif selling price at splitoff is not available, use the nrv methodif simplicity is the primary consideration, physical-measures method or the constant gross-margin method could be useddespite this, some firms choose not to allocate joint costs at allsell-or-process further decisionsin sell-or-process further decisions, joint costs are irrelevant. joint products have been produced, and a prospective decision must be made: to sell immediately or process further and sell later joint costs are sunkseparable costs need to be evaluated for relevance individually sell-or-process further flowchartbyproductstwo methods for accounting for byproductsproduction method recognizes byproduct inventory as it is crea