Cost Account Joint Cost
11
Allocation of Joint Costs and Accounting for By-Product/Scrap
Objectives
After completing this chapter, you should be able to answer the following questions: LO.1 LO.2 LO.3 LO.4 LO.5 How are the outputs of a joint process classified? What management decisions must be made before beginning a joint process? How is the joint cost of production allocated to joint products? How are by-product and scrap accounted for? How should not-for-profit organizations account for the cost of a joint activity?
PANCAKETOM/DREAMSTIME.COM
475
476
Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap
Introduction
Most companies produce and sell multiple products. Some companies engage in multiple production processes to manufacture a variety of products; other companies have a single process that simultaneously generates different outputs. For example, a chicken processing plant generates whole chickens, chicken parts, ground chicken, and fertilizer from a single input. Similarly, crude oil refining can produce gasoline, motor oil, heating oil, and kerosene; mining can produce copper, silver, and gold. A joint process is one during which one product cannot be manufactured without producing others. Such processes are common in the food, extractive, agricultural, and chemical industries. Additionally, the process of producing first-quality merchandise and factory seconds in a single operation can be viewed as a joint process. For example, if a manufacturing process is unstable in that it cannot “maintain output at a uniform quality level, [then] . . . the products that emerge from the [process] vary across one or more quality dimensions.”1 This chapter discusses joint manufacturing processes, their related product outputs, and the accounting treatment of the costs of those processes. Costs incurred for material, labor, and overhead during a joint process are referred to as the joint cost of the production process. Joint cost is allocated only to the
Allocation of Joint Costs and Accounting for By-Product/Scrap
Objectives
After completing this chapter, you should be able to answer the following questions: LO.1 LO.2 LO.3 LO.4 LO.5 How are the outputs of a joint process classified? What management decisions must be made before beginning a joint process? How is the joint cost of production allocated to joint products? How are by-product and scrap accounted for? How should not-for-profit organizations account for the cost of a joint activity?
PANCAKETOM/DREAMSTIME.COM
475
476
Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap
Introduction
Most companies produce and sell multiple products. Some companies engage in multiple production processes to manufacture a variety of products; other companies have a single process that simultaneously generates different outputs. For example, a chicken processing plant generates whole chickens, chicken parts, ground chicken, and fertilizer from a single input. Similarly, crude oil refining can produce gasoline, motor oil, heating oil, and kerosene; mining can produce copper, silver, and gold. A joint process is one during which one product cannot be manufactured without producing others. Such processes are common in the food, extractive, agricultural, and chemical industries. Additionally, the process of producing first-quality merchandise and factory seconds in a single operation can be viewed as a joint process. For example, if a manufacturing process is unstable in that it cannot “maintain output at a uniform quality level, [then] . . . the products that emerge from the [process] vary across one or more quality dimensions.”1 This chapter discusses joint manufacturing processes, their related product outputs, and the accounting treatment of the costs of those processes. Costs incurred for material, labor, and overhead during a joint process are referred to as the joint cost of the production process. Joint cost is allocated only to the