Alnajjar_pCap1_Winter_Products.pptx, Lecture notes of Community Health

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Cost Allocation:

Joint and By Product Costs

• (^) What two factors need to be present in

order for a cost to be relevant?

Review Relevant Cost

Illustration of Joint Product

FatsIntestines Hide & Hair Bones & Horns Manure Explosives Sausage casings Clothing Combs Fertilizer Gum Tennis racket strings Insulation Toothbrushes Methane gas Dog food Instrument strings Luggage Piano keys Tires Ice cream

Illustration of Joint Product

Physical Measure Method

– Uses physical measures (e.g., pounds) of volume

produced at the split off point to allocate the joint costs.

Sales-Value-at-Split-Off Method

– Allocates joint cost based on each product’s

proportionate share of sales value at split-off

Net Realizable Value Method

– Allocates joint cost based on hypothetical market price

(eventual market value of new product minus processing

costs beyond split-off)

Joint Cost Allocation Methods

Physical Measures & Sales Value Net Realizable Values

Physical Measure Method A sawmill processes logs into four grades of lumber and incurs total joint costs of $186,000:

Sales-Value-at-Split-Off Method A sawmill processes logs into four grades of lumber and incurs total joint costs of $186,000:

Sales value at split-off generally preferred

• (^) Generating revenues is the reason why company incurs joint

product cost in the first place

• (^) No need to anticipate subsequent management decisions

regarding processing costs after split-off

• (^) Common Basis (as opposed to physical units)
• (^) Simple Method NRV method when sales value at split-off not readily available Physical measure may be preferred in regulatory environments (cost-plus)
• (^) market prices cannot be used to set pricing (circular logic)

Choosing a method

Sonimad Sawmill manufactures two lumber products from a joint milling process: mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2.00 and each CBL sells for $4.00 per unit. Assuming that no further processing occurs after the split-off point, how much of the joint costs are allocated to commercial building lumber (CBL) on a physical measure method basis?

Sonimad Sawmill manufactures two lumber products from a joint milling process: mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2.00 and each CBL sells for $4.00 per unit. Assume that the CBL is not marketable at split-off but must be planed and sized at a cost of $200,000 per production run. During this process, 10,000 units are unavoidably lost and have no value. The remaining units of CBL are salable at $10 per unit. The MSB, although salable immediately at the split-off point, are coated with a tarlike preservative that costs $100,000 per production run. The braces are then sold for $5 each. Using the net realizable value basis, how much of the joint cost is allocated to the mine support braces (MSB)?

By-product is a secondary product recovered in the course of manufacturing a primary product (one product sales value are minor compared to the other).

• (^) Sales Method – only recognize by product when sold as other income. Inventory never recorded on the financial statements.
• (^) Production Method – records by-products as inventory at net realizable values (i.e., by product is recognized as a reduction in inventory when produced) By Product Costing

Sparta Company processes 15,000 gallons of direct materials to produce two products, Product B and Product M. Product B, the by-product, sells for $4 per gallon and Product M, the main product, sells for $50 per gallon. The following information is for August: Beginning Ending Production Sales Inventory Inventory Product B: 4,375 4,000 0 375 Product M: 10,000 9,000 0 1, The manufacturing costs totaled $150,000. What Gross Margin amount should Sparta Company report before making any adjustments for the value of the by-product inventory?

Sparta Company Main Product Calculation