Joint Product and By-Product Costing
After studying this chapter, you should be able to:
Identify the characteristics of the joint production process. 2.
Allocate joint product costs according to the benefits-received approaches and the relative market value approaches. 3.
Describe methods of accounting for by-products.
Explain why joint cost allocations may be misleading in management decision making. 5.
Discuss why joint production is seldom found in service industries. This chapter describes the joint production processes and their outputs—joint products and by-products. Several methods are developed to allocate joint costs to joint products. By-products are not usually allocated any of the joint costs. Instead, noncost methods are frequently used to account for by-products. This chapter concludes with the caution that allocated joint costs are not useful for output and pricing decisions. Further processing costs are used in management decision making.
General Characteristics of Joint Production
Joint products are two or more products produced simultaneously by the same process. Joint products become separate and identifiable at the split-off point. A.
Cost Separability and the Need for Allocation
Joint costs are the total of the raw material, labor, and overhead costs incurred up to the initial split-off point. a.
Joint costs can be allocated to the final product only in some arbitrary manner because such costs cannot be traced directly to the products they benefit. b.
Joint cost allocation is performed to meet the requirements of financial reporting (GAAP) and federal income tax law for income measurement and inventory valuation. In addition, joint cost allocation is useful in costing for government cost-type contracts and in justifying prices for legislative or administrative regulations. c.
Joint cost allocation is much less useful for cost control and managerial decision making. 2.
Separable costs are those costs incurred after the split-off point; they can be easily traced to individual products. B.
Distinction and Similarity between Joint Products and By-Products 1.
The distinction between joint products and by-products rests solely on the relative importance of their sales value. 2.
A by-product is a secondary product whose total sales value is relatively minor in comparison with the sales value of the main product (joint product). 3.
Relationships between joint products and by-products change over time as technology and markets change. a.
By-products may become more and more important, eventually becoming joint products. b.
When the relative importance of individual products changes, the products need to be reclassified and the costing procedures need to be changed. II.
Accounting for Joint Product Costs
Joint cost allocations must be done for financial reporting purposes: to value inventory and to determine income. An allocation method must be found, though arbitrary, to allocate the joint costs as reasonably as possible. 2.
The joint cost allocation approaches include the following: a.
Benefits-received approaches, which include the following methods: Physical units method
Weighted average method
Allocation based on the relative market value, using the following methods: Sales-value-at-split-off method
Net realizable value method
Constant gross margin percentage method
Physical Units Method
Under the physical units method, units of physical output, such as heat content, volume, or weight, that measure the benefits received are used to distribute joint costs. This method allocates to each joint product the same proportion of joint costs as the underlying proportion of units. Example: Manufacturers of forest products use the physical units method to apply the average conversion cost to all finished products, regardless of their type, grade, or...
Please join StudyMode to read the full document