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Unit One Cost II

1. The document discusses different methods for allocating joint costs between joint products produced from a single raw material, including the sales value at split-off point method, physical measure method, and net realizable value method. 2. The sales value at split-off point method allocates joint costs based on the relative total sales value of each product at the point they become separately identifiable. 3. The physical measure method allocates joint costs according to a physical attribute of each product such as weight or volume. 4. The net realizable value method allocates joint costs based on the expected final sales value of each product minus any additional processing costs beyond the split-off point.

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Khalid Muhammad
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205 views16 pages

Unit One Cost II

1. The document discusses different methods for allocating joint costs between joint products produced from a single raw material, including the sales value at split-off point method, physical measure method, and net realizable value method. 2. The sales value at split-off point method allocates joint costs based on the relative total sales value of each product at the point they become separately identifiable. 3. The physical measure method allocates joint costs according to a physical attribute of each product such as weight or volume. 4. The net realizable value method allocates joint costs based on the expected final sales value of each product minus any additional processing costs beyond the split-off point.

Uploaded by

Khalid Muhammad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Unit one

Cost Allocation :Joint Product and By Product


• Joint Product :a companies produce two product from one main
product (raw material) simultaneously
• Joint Cost :are the costs of a production process that yields
multiple products simultaneously.
• The split-off point is the juncture in a joint production process
when two or more products become separately identifiable.
• An example is the point at which coal becomes coke, natural gas,
and other products.
• Separable costs are all costs—manufacturing, marketing,
distribution, and so on—incurred beyond the split-off point that are
assignable to each of the specific products identified at the split-off
point
• At or beyond the split-off point, decisions
relating to the sale or further processing of
each identifiable product can be made
independently of decisions about the other
products
• Example
• Raw Milk can produce condensed milk, cream
Liquid skim
Main product and Joint product
• When a joint production process yields one product with a
high total sales value, compared with total sales values of
other products of the process, that product is called a main
product. When a joint production process yields two or
more products with high total sales values compared with
the total sales values of other products, if any, those
products are called joint products.
• The products of a joint production process that have low
total sales values compared with the total sales value of the
main product or of joint products are called byproducts
• Approaches to Allocating Joint Costs
• Two approaches are used to allocate joint costs.
Approach 1. Allocate joint costs using market-based data such as
revenues. This
• chapter illustrates three methods that use this approach:
1. Sales value at split-off method
2. Net realizable value (NRV) method

Approach 2. Allocate joint costs using physical measures, such as


the weight, quantity (physical units), or volume of the joint
products.
• To compare methods, we report gross-margin percentages
for individual products under each method.
Example 1: Farmers’ Dairy purchases raw milk from
individual farms and processes it until the splitoff point, when
two products—cream and liquid skim—emerge. These two
products are sold to an independent company, which markets
and distributes them to supermarkets and other retail outlets.
In May 2012, Farmers’ Dairy processes 110,000 gallons of
raw milk. During processing, 10,000 gallons are lost due to
evaporation and spillage, yielding 25,000 gallons of cream
and 75,000 gallons of liquid skim. Summary data follow:
1.Sales Value at Splitoff Method

• The sales value at splitoff method allocates


joint costs to joint products produced during
the accounting period on the basis of the
relative total sales value at the splitoff point.
2. Using Physical Measure Method
3. Net Realizable Value Method
• In many cases, products are processed beyond the split-off point to bring them to a
marketable form or to increase their value above their selling price at the split-off
point. For example, when crude oil is refined, the gasoline, kerosene, benzene, and
naphtha must be processed further before they can be sold. To illustrate, let’s
extend the Farmers’ Dairy example.
Example 2: Assume the same data as in Example 1 except that both cream and liquid
skim can be processed further:
Cream ➞ Buttercream: 25,000 gallons of cream are further processed to yield 20,000
gallons of buttercream at additional processing costs of $280,000. Buttercream, which
sells for $25 per gallon, is used in the manufacture of butter-based products.
Liquid Skim ➞ Condensed Milk: 75,000 gallons of liquid skim are further processed
to yield 50,000 gallons of condensed milk at additional processing costs of $520,000.
Condensed milk sells for $22 per gallon.
Sales during May 2012 are 12,000 gallons of buttercream and 45,000 gallons of
condensed milk.
• The net realizable value (NRV) method
allocates joint costs to joint products produced
during the accounting period on the basis of
their relative NRV—final sales value minus
separable costs.
End of Chapter one!!!!!

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