| | |Lilac Flour Mills | |Managerial Control and Accounting – II | |Session-12 | | | | | | |
Concepts to be known for analysis of the Case:
Joint Cost Basics:
Joint Costs: Joint costs are the costs of a production process that yields multiple products simulatenously. If we consider the distillation of coal, it yields coke, natural gas, and other products. The costs of this distillation are joint costs.
Splitoff Point: Splitoff point is the juncture in a joint production process when two or more products become separately identifiable.
Separable Costs: Separable costs are all costs –manufacturing, marketing, distribution and so on- incurred beyond the splitoff point that are assignable to each of the specific products identified at the splitoff point.
Main Products: The term product here refers to any output that has a positive total sales value. Main product, in a joint distribution process, is the product that has high total sales value compared with the total sales value of other products of the process.
Joint Products: When a joint production process yields two or more products with high total sales value compared with the total sales values of othe products, if any, those products are called joint products.
Byproducts: The products of a joint production process that have low total sales value compared with the total sales value of the main product or of joint products are called byproducts.
Why allocate Joints Costs?
• To determine inventory costs i.e. costs of goods sold and value of finished goods. • To determine costs for reimbursement and rate regulation (utilities) purposes. • Customer and product profitability analysis.
Approaches to Allocating Joint Costs:
There are two approaches to allocate joint costs:
Approach A: In this method of allocation joint costs are allocated using market-based data such as revenues.
A1. Sales Value at Splitoff Method: This method allocates joint costs ot joint products on the basis of relative total sales value at the splitoff point.
A2. Net Realizable Value Method:
The Net Realizable Value method allocates joint costs to joint products on the basis of relative NRV- final sales value minus separable costs. This method is typically used in preference to the sales value mehtod only when selling prices for one or more products at splitoff do not exist.
A3. Constant Gross-Margin Percentage NRV method:
This method allocates joint costs to joint products in such a way that each individual products achieves an identical gross-margin percentage. This method works backward in that the overall gross margin is computed first. Then, for each product, this gross-margin percentage and any separable costs are deducted from the final sales value of production in order to back into the joint cost allocation for that product.
There are 3 steps involved in allocating costs using the above...
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