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Impacts Cost Accounting "- Chapter 16
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Impacts Cost Accounting "- Chapter 16
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CHAPTER 16COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS
16-1 Exhibit 16-1 presents many examples of joint products from four different general
industries. These include:
Industry Separable Products at the Splitoff Point
Food Processing:
• Lamb • Lamb cuts, tripe, hides, bones, fat
• Turkey • Breasts, wings, thighs, poultry meal
Extractive:
• Petroleum • Crude oil, natural gas
16-2 A joint cost is a cost of a production process that yields multiple products simultaneously.
A separable cost is a cost incurred beyond the splitoff point that is assignable to each of the
specific products identified at the splitoff point.
16-3 The distinction between a joint product and a byproduct is based on relative sales value.
A joint product is a product from a joint production process (a process that yields two or more
products) that has a relatively high total sales value. A byproduct is a product that has a relatively
low total sales value compared to the total sales value of the joint (or main) products.
16-4 A product is any output that has a positive sales value (or an output that enables a
company to avoid incurring costs). In some joint-cost settings, outputs can occur that do not have
a positive sales value. The offshore processing of hydrocarbons yields water that is recycled back
into the ocean as well as yielding oil and gas. The processing of mineral ore to yield gold and
silver also yields dirt as an output, which is recycled back into the ground.
16-5 The chapter lists the following six reasons for allocating joint costs:
1. Computation of inventoriable costs and cost of goods sold for financial accounting
purposes and reports for income tax authorities.
2. Computation of inventoriable costs and cost of goods sold for internal reporting purposes.
3. Cost reimbursement under contracts when only a portion of a business's products or
services is sold or delivered under cost-plus contracts.
4. Insurance settlement computations for damage claims made on the basis of cost
information of joint products or byproducts.
5. Rate regulation when one or more of the jointly-produced products or services are subject
to price regulation.
6. Litigation in which costs of joint products are key inputs.
16-6 The joint production process yields individual products that are either sold this period or
held as inventory to be sold in subsequent periods. Hence, the joint costs need to be allocated
between total production rather than just those sold this period.
16-7 This situation can occur when a production process yields separable outputs at the splitoff
point that do not have selling prices available until further processing. The result is that selling
prices are not available at the splitoff point to use the sales value at splitoff method. Examples
include processing in integrated pulp and paper companies and in petro-chemical operations.
16-1
, 16-8 Both methods use market selling-price data in allocating joint costs, but they differ in
which sales-price data they use. The sales value at splitoff method allocates joint costs to joint
products on the basis of the relative total sales value at the splitoff point of the total production of
these products during the accounting period. The net realizable value method allocates joint costs
to joint products on the basis of the relative net realizable value (the final sales value minus the
separable costs of production and marketing) of the total production of the joint products during
the accounting period.
16-9 Limitations of the physical measure method of joint-cost allocation include:
a. The physical weights used for allocating joint costs may have no relationship to the
revenue-producing power of the individual products.
b. The joint products may not have a common physical denominator––for example, one
may be a liquid while another a solid with no readily available conversion factor.
16-10 The NRV method can be simplified by assuming (a) a standard set of post-splitoff point
processing steps, and (b) a standard set of selling prices. The use of (a) and (b) achieves the same
benefits that the use of standard costs does in costing systems.
16-11 The constant gross-margin percentage NRV method takes account of the post-splitoff
point “profit” contribution earned on individual products, as well as joint costs, when making
cost assignments to joint products. In contrast, the sales value at splitoff point and the NRV
methods allocate only the joint costs to the individual products.
16-12 No. Any method used to allocate joint costs to individual products that is applicable to
the problem of joint product-cost allocation should not be used for management decisions
regarding whether a product should be sold or processed further. When a product is an inherent
result of a joint process, the decision to process further should not be influenced by either the
size of the total joint costs or by the portion of the joint costs assigned to particular products.
Joint costs are irrelevant for these decisions. The only relevant items for these decisions are the
incremental revenue and the incremental costs beyond the splitoff point.
16-13 No. The only relevant items are incremental revenues and incremental costs when
making decisions about selling products at the splitoff point or processing them further.
Separable costs are not always identical to incremental costs. Separable costs are costs incurred
beyond the splitoff point that are assignable to individual products. Some separable costs may
not be incremental costs in a specific setting (e.g., allocated manufacturing overhead for post-
splitoff processing that includes depreciation).
16-14 Two methods to account for byproducts are:
a. Production method—recognizes byproducts in the financial statements at the time
production is completed.
b. Sales method—delays recognition of byproducts until the time of sale.
16-15 The sales byproduct method enables a manager to time the sale of byproducts to affect
reported operating income. A manager who was below the targeted operating income could
adopt a “fire-sale” approach to selling byproducts so that the reported operating income exceeds
the target. This illustrates one dysfunctional aspect of the sales method for byproducts.
16-2
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