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    Cost Allocation 2 - Allocating Joint Production Costs

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    musuota
    This document discusses allocating joint production costs across multiple products. It defines joint products as those produced simultaneously from one process. Several methods for allocating joint costs are presented, including relative sales value, physical units, constant gross margin, and net realizable value. While each method yields different product costs and profits, there is no universally correct approach since joint cost allocation is arbitrary. The allocated costs are unreliable for management decisions due to this arbitrary nature.

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    Cost Allocation 2 - Allocating Joint Production Costs

    Uploaded by

    musuota
    36 views24 pages
    This document discusses allocating joint production costs across multiple products. It defines joint products as those produced simultaneously from one process. Several methods for allocating joint costs are presented, including relative sales value, physical units, constant gross margin, and net realizable value. While each method yields different product costs and profits, there is no universally correct approach since joint cost allocation is arbitrary. The allocated costs are unreliable for management decisions due to this arbitrary nature.

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    Lecture Presentation

    Original Title

    AF201

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    This document discusses allocating joint production costs across multiple products. It defines joint products as those produced simultaneously from one process. Several methods for allocating joint costs are presented, including relative sales value, physical units, constant gross margin, and net realizable value. While each method yields different product costs and profits, there is no universally correct approach since joint cost allocation is arbitrary. The allocated costs are unreliable for management decisions due to this arbitrary nature.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    36 views24 pages

    Cost Allocation 2 - Allocating Joint Production Costs

    Uploaded by

    musuota
    This document discusses allocating joint production costs across multiple products. It defines joint products as those produced simultaneously from one process. Several methods for allocating joint costs are presented, including relative sales value, physical units, constant gross margin, and net realizable value. While each method yields different product costs and profits, there is no universally correct approach since joint cost allocation is arbitrary. The allocated costs are unreliable for management decisions due to this arbitrary nature.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 24

    Cost Allocation 2 - allocating

    joint production costs

    Lecture Week 4
    Reading: Chapter 19, mid-page
    865-mid-page 867 & Appendix

    06/02/19 AF201 Lecture, S1, 2018 1


    Recap
     Absorption and variable costing
    (Conventional costing methods)
     Major difference: treatment of Fixed
    manufacturing OH
    – Variable costing - Period cost
    – Absorption costing - Product cost

    06/02/19 AF201 Lecture, S1, 2018 2


    Learning Objectives
     At the end of this session you should be
    able to:
    – Define a joint product and give an example
    – Differentiate the different methods of
    allocating joint costs
    – Allocate joint costs using different methods
    to joint products for decision making

    06/02/19 AF201 Lecture, S1, 2018 3


    Introduction
     Decision to sell or process further a
    joint product is normally associated with
    manufacturing companies.
     Relevance of joint cost allocation:
    – Decision to sell at split-off or process
    further - irrelevant
    – Determine product costs & COGS -
    relevant
    06/02/19 AF201 Lecture, S1, 2018 4
    What are joint products?
     Joint products are “two or more
    products that are produced
    simultaneously from the one production
    process” (p865).

    06/02/19 AF201 Lecture, S1, 2018 5


    What are joint costs?
     “Joint cost all manufacturing costs
    incurred in the production of joint
    products” (p866)

    06/02/19 AF201 Lecture, S1, 2018 6


    Examples of Joint Products
     Oil-refining industry
    – petroleum, LPG, kerosene, & other
    products
     Chicken-processing industry
    – Various cuts of chicken: drumsticks, wings
    & breasts, chicken feet, feathers, &
    carcass

    06/02/19 AF201 Lecture, S1, 2018 7


    Cost allocation
     Dilemma - Inability to identify individual
    products during production results in
    unprecise determination of costs.
     Solution : Use of arbitrary methods to
    value inventory and COGS.
     Precaution: Joint production costs
    must be interpreted very carefully.

    06/02/19 AF201 Lecture, S1, 2018 8


    Joint production process
     Decision - sold joint-product at a split-
    off point or processed further.

     Split-off point - “the stage in the


    production process where the joint
    products are identifiable as separate
    product” (p865).

    06/02/19 AF201 Lecture, S1, 2018 9


    Lecture Illustration
     Consider Exhibit 19.15 (p865) -
    International Chocolate Company.
     Details:
    – Total joint cost - $1,100
    – Output: 750kg of Cocoa butter & 250kg of
    Cocoa powder
    – The total joint cost is an irrelevant cost for
    deciding whether to sell at split-off point or
    to process further.

    06/02/19 AF201 Lecture, S1, 2018 10


    Cost allocation
     Relative sales value method
    – “a method of allocating joint cost to joint
    products in proportion to their sales value
    at the split-off point” (p866).
    – The allocation of joint production does NOT
    make it a relevant cost because that cost
    remains fixed despite the decision to
    process it further.

    06/02/19 AF201 Lecture, S1, 2018 11


    Illustration - Relative sales value
    method

    06/02/19 AF201 Lecture, S1, 2018 12


    Other allocation methods
     Physical units method
     Constant gross margin method
     Net realisable value method

    06/02/19 AF201 Lecture, S1, 2018 13


    Physical units method
     Definition:
    – “a method of allocating joint costs to joint
    products based on some physical
    characteristic of the joint products at the
    split-off point” (p876).
    – In the illustrative example, weight of the
    product is used as the physical
    characteristic.

    06/02/19 AF201 Lecture, S1, 2018 14


    Illustration - Physical units
    method

    06/02/19 AF201 Lecture, S1, 2018 15


    Constant gross margin method
     Definition:
    – “a method of allocating joint costs to joint
    products so that the gross margin for each
    product is identical” (p876).
    – Steps:
    • 1 - Calculate gross margin for the entire
    production process
    • 2 - Calculate the required gross margin
    • 3 -Calculate the allocation of joint costs.
    06/02/19 AF201 Lecture, S1, 2018 16
    Illustration- Constant gross
    margin method.

    06/02/19 AF201 Lecture, S1, 2018 17


    Net realisable value method
     Definition:
    – “a method of allocating joint costs to the joint
    products according to the relative size of the final
    products’ net realisable values” (p876).
    – Steps:
    • 1 - Calculate the net realisable value of the
    individual products.
    • 2 - Calculate the relative proportion based on the
    net realisable value
    • 3 - Allocate joint costs to products

    06/02/19 AF201 Lecture, S1, 2018 18


    Illustration - Net realisable value
    method

    06/02/19 AF201 Lecture, S1, 2018 19


    Profitability under each method
     Profits differ under each method.
     Which method is more ‘accurate’?
    – None, because the methods are arbitrary
    cost allocation methods.

    06/02/19 AF201 Lecture, S1, 2018 20


    Evaluation of the methods
     Each method has different product costs
    and different profits.
     The nature of the joint-product cost
    makes it difficult to make preference on
    the methods.
     All methods are arbitrary methods
     There’s no correct way of allocating joint
    product costs.
    06/02/19 AF201 Lecture, S1, 2018 21
    Evaluation of methods
     Allocated joint costs are unreliable for
    pricing as well as any other
    management decisions because of their
    arbitrary nature.
     The nature of joint-product doesn’t
    allow the ‘discontinuation’ of producing
    a joint product

    06/02/19 AF201 Lecture, S1, 2018 22


    Lecture revision questions
     Refer to hand-out (past mid-semester
    papers)

    06/02/19 AF201 Lecture, S1, 2018 23


    Summary
     Joint products are products that are
    simultaneously produced in one production
    process.
     Joint product costs are irrelevant information
    for decision making - e.g. pricing decisions or
    sell @ split-off point or process further a joint
    product.
     Joint costs are normally used for estimating
    COGS and value of inventory.

    06/02/19 AF201 Lecture, S1, 2018 24

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