CostAccountingSeventeenthEdition,GlobalEditionChapter17CostAllocation:JointProductsandByproductsLearningObjectives17.1Identifythesplitoffpointinajoint-costsituationanddistinguishjointproductsfrombyproducts17.2Explainwhyjointcostsareallocatedtoindividualproducts17.3Allocatejointcostsusingfourmethods17.4Identifysituationswherethesalesvalueatsplitoffmethodispreferredwhenallocatingjointcosts17.5Explainwhyjointcostsareirrelevantinasell-or-processfurtherdecision17.6AccountforbyproductsusingtwomethodsJointCostTerminology(1of3)Jointcosts—thecostsofaproductionprocessthatyieldsmultipleproductssimultaneouslySplitoffpoint—thejunctureinajointproductionprocesswhentwoormoreproductsbecomeseparatelyidentifiableSeparablecosts—allcosts(manufacturing,marketing,distribution,andsoon)incurredbeyondthesplitoffpointthatareassignabletoeachofthespecificproductsidentifiedatthesplitoffpointJointCostTerminology(2of3)CategoriesofjointprocessoutputsOutputswithapositivesalesvalueOutputswithazerosalesvalueProduct—anyoutputwithapositivesalesvalue,oranoutputthatenablesafirmtoavoidincurringcostsSalesvaluecanbehighorlow.JointCostTerminology(3of3)Mainproduct—outputofajointproductionprocessthatyieldsoneproductwithahighsalesvaluecomparedtothesalesvaluesoftheotheroutputsJointproducts—outputsofajointproductionprocessthatyieldstwoormoreproductswithahighsalesvaluecomparedtothesalesvaluesofanyotheroutputsByproducts—outputsofajointproductionprocessthathavelowsalesvaluescomparedtothesalesvaluesoftheotheroutputsExamplesofJointCostSituationsExhibit17.1ExamplesofJoint-CostSituationsAllocatingJointCostsBeforeamanagerisabletoallocatejointcosts,heorshemustfirstlookatthecontextfordoingso.Jointcostsmustbeallocatedtoindividualproductsorservicesforseveralpurposes:ComputationofinventoriablecostsandcostofgoodssoldforfinancialaccountingandtaxreportingReimbursingcompaniesthathavesome,butnotall,oftheirproductsorservicesreimbursedundercost-pluscontractsRegulatingtheratesorpricesofoneormoreofthejointlyproducedproductsorservicesLitigationorinsurancesettlementsituationsTwoApproachestoAllocatingJointCostsMarket-based—allocateusingmarket-deriveddata(dollars)SalesvalueatsplitoffmethodNetrealizablevalue(NRV)methodConstantgross-marginpercentageNRVmethodPhysicalmeasures—allocateusingtangibleattributesoftheproducts,suchasweight,quantity,orvolumeofthejointproductsJointCostIllustrationOverviewExhibit17.2Example1:OverviewofFarmlandDairyJointCostExampleDataExhibit17.2Example1:OverviewofFarmlandDairySalesValueatSplitOffMethodThesalesvalueatsplitoffmethodallocatesjointcoststojointproductsproducedduringtheaccountingperiodonthebasisoftherelativetotalsalesvalueatthesplitoffpoint.Thismethodusesthesalesvalueoftheentireproductionoftheaccountingperiod,notjustthequantitysold.Thesalesvalueatsplitoffmethodfollowsthebenefits-receivedcriterionofcostallocation.SalesValueatSplitOffExampleExhibit17.3Joint-CostAllocationandProduct-LineIncomeStatementUsingSalesValueatSplitOffMethod:FarmlandDairyPhysical-MeasureMethodThephysical-measuremethodallocatesjointcoststojointproductsproducedduringtheaccountingperiodonthebasisofacomparablephysicalmeasure,suchastherelativeweight,quantity,orvolumeatthesplitoffpoint.Physical-MeasureMethodExampleExhibit17.4Joint-CostAllocationandProduct-LineIncomeStatementUsingPhysical-MeasureMethod:FarmlandDairyNetRealizableValueMethodAllocatesjointcoststojointproductsproducedduringtheaccountingperiodonthebasisofrelativeNRV.NRV=FinalSalesValue–SeparableCosts.Inmanycases,productsareprocessedbeyondthesplitoffpointtobringthemtoamarketableformortoincreasetheirvalueabovetheirsellingpriceatthesplitoffpoint.NetRealizableValueMethodOverviewExhibit17.5Example2:OverviewofFarmlandDairyNetRealizableValueMethodExample

(1of2)Exhibit17.5Example2:OverviewofFarmlandDairyNetRealizableValueMethodExample(2of2)Exhibit17.6Joint-CostAllocationandProduct-LineIncomeStatementUsingNRVMethod:FarmlandDairyConstantGrossMarginPercentageNRVMethod:ThreeStepsTheconstantgrossmarginpercentageNRVmethodcanbebrokendownintothreesteps:Computetheoverallgrossmarginpercentage.Computethetotalproductioncostsforeachproduct.Computetheallocatedjointcosts.ConstantGrossMarginNRVMethodExampleExhibit17.7Joint-CostAllocationandProduct-LineIncomeStatementsUsingConstantGross-MarginPercentageNRVMethod:FarmlandDairyChoosinganAllocationMethodIfsellingpriceatsplitoffisavailable,thesalesvalueatsplitoffmethodispreferredeveniffurtherprocessingisdone.Reasonsincludethefollowing:BestmeasureofbenefitsreceivedIndependentoffurtherprocessingdecisionsCommonallocationbasis(revenue)SimplicityIfsellingpricesarenotavailable,theNRVmethodisthebestalternative.However,somefirmschoosenottoallocatejointcostsatall.Sell-or-ProcessFurtherDecisions(1of2)InChapter12,weintroducedtheconceptsofrelevantrevenues,whichareexpectedfuturerevenuesthatdifferamongalternativecoursesofaction.Wealsodiscussedrelevantcosts,whichareexpectedfuturecoststhatdifferamongalternativecoursesofaction.Theseconceptscanbeappliedtodecisionsonwhetherajointproductormainproductshouldbesoldatthesplitoffpointorprocessedfurther.Sell-or-ProcessFurtherDecisions(2of2)Insell-or-processfurtherdecisions,jointcostsareirrelevant.Jointproductshavebeenproduced,andaprospectivedecisionmustbemade:tosellimmediatelyorprocessfurtherandselllater.Jointcostsaresunkcosts.Don’tassumeallseparablecostsinjoint-costallocationsarealwaysincrementalcosts.Someseparablecostsmaybefixedcosts.Separablecostsneedtobeevaluatedforrelevanceindividually.Decision-MakingandPerformanceEvaluation:OtherIssuestoConsiderThepotentialconflictbetweencostconceptsusedfordecision-makingandcostconceptsusedforevaluatingtheperformanceofmanagersoftenariseswhensell-or-processfurtherdecisionsarebeingmade.Firmsshouldbewaryofusingthefullcostofajointproductasthebasisformakingpricingdecisions(potentiallackofcause-and-effectrelationship).AccountingforByproductsTwomethodsforaccountingforbyproductsused:Productionmethodrecognizesbyproductinventoryasitiscreatedandsalesandcostsatthetimeofsale.Salesmethodrecognizesnobyproductinventory,andrecognizesonlysalesatthetimeofsales:byproductcostsarenottrackedseparately.ByproductsIllustrationOverviewExhibit17.8Example3:OverviewofWestlakeCorporationComparativeIncomeStatementsforAccountingforByproductsExhibit17.9IncomeStatementsofWestlakeCorporationUsingtheProductionandSalesMethodsforByproductAccountingSelectinganAccountingMethodforByproductsTheproductionme