Joint Cost

Allocation of Joint Costs and Accounting for By-

Products/ScrapPrepared by: Christianne Nicole Ramos

Joint processprocess that converts a single input into

multiple outputs

\ˈjoint-prä-ˌses\

Joint costthe cost to operate joint product processes

including the disposal of waste

\ˈjoint-ˈkost\

Outputs of a joint process• Joint products• By-products• Scrap

Allocation of joint cost• Physical measure• Monetary measure

Physical measureproration using a common physical

characteristic of the joint products

Monetary measure• Sales value at split-off• Net realizable value at split-off• Approximated net realizable value at split-off

Accounting for by-product and scrap• Net realizable value approach• Realized value approach

Exercises

Exercise 13Indianola Beef buys sides of beef to convert into three products: steaks, roasts, and ground beef. In April 2013, Indianola bought multiple sides of beef for P20,000 that were converted into the following products at a cost of P6,400:

Product # of Pounds Sales value at split-off

Steaks 3,312 P4.25 per pound

Roasts 6,210 P3.80 per pound

Ground beef 4,278 P0.90 per pound

Exercise 13The remaining 1,200 pounds were lost as waste.

Required:

a) Allocate the joint cost to the three products using the physical units method. What problem do you find with this method?

b) Allocate the joint cost to the three products using the sales value at split-off method. Does this allocation eliminate the problem identified in (a)?

Exercise 13 Required:

c) Assume that the ground beef could be processed into sausage that could be sold for P2.10 per pound to a distributor that wants a special label costing P0.15 per pound attached to the sausage. If Indianola Beef uses the sales value at split-off method to allocate joint cost, what is the maximum separate cost of processing that the company could incur to still appear to earn P0.40 per pound upon the sale? If this separate cost were incurred, would you consider the P0.40 per pound a “real” profit amount?

Exercise 13: a

Product # of Pounds Proportion Joint Cost Allocated

Joint Cost

Steaks 3,312 24% P26,400 P 6,336

Roasts 6,210 45% P 26,400 11,880

Ground beef 4,278 31% P26,400 8,184

Total 13,800 100% P26,400

Joint cost= cost of beef sides + conversion cost= P20,000 + P6,400=P26,400

Exercise 13: a

Product # of Pounds Proportion Joint Cost Allocated

Joint Cost

Steaks 3,312 24% P26,400 P 6,336

Roasts 6,210 45% P 26,400 11,880

Ground beef 4,278 31% P26,400 8,184

Total 13,800 100% P26,400

This method disregarded the revenue-generating ability of the individual joint products.

Exercise 13: b

Product# of

PoundsSV at

split-offTotal SV Proportion

Allocated Joint Cost

Steaks 3,312 P4.25/lb. P14,076 34% P 8,976

Roasts 6,210 P3.80/lb. 23,598 57% 15,048

Ground beef 4,278 P0.90/lb. 3,850 9% 2,376

Total P41,524 100% P26,400

Yes, because it used the sales value of the joint products.

Exercise 13: c

Selling price P 2.10

Allocated joint cost (0.56)

Special label (0.15)

Profit desired (0.40)

Allowable separate cost P 0.99

P2,376/4,278

Exercise 15All A-Buzz makes three products from a joint production process using honey. Joint cost for the process in 2013 is P123,200.

ProductUnits of output

Per unit selling price at split-

off

Incremental processing

cost

Final sales price

Honey butter

10,000 P4.00 P3.00 P 6.00

Honey jam 20,000 6.40 4.00 14.00

Honey syrup

1,000 3.00 0.40 3.60

Exercise 15Each container of honey butter, jam, and syrup respectively, contains 16 ounces, 8 ounces, and 3 ounces of product.Required:a) Determine which products should be processed

beyond the split-off point.b) Assume honey syrup should be treated as a by-

product. Allocate joint cost based on units produced, weight, and sales value at split-off. Use the net realizable value method in accounting for the by-product.

Exercise 15: a

ProductSales Value

SV at split-off

Incremental Revenue

Incremental Cost

Incremental Profit

Honey butter P 6.00 P 4.00 P2.00 P3.00 P(1.00)Honey jam 14.00 6.40 7.60 4.00 3.60Honey syrup 3.60 3.00 0.60 0.40 0.20

Honey jam and honey syrup are the only ones that need to be further processed.

Exercise 15: b b. Joint cost P123,200 Less NRV of syrup (P3.60 – P0.40) × 1,000 3,200 Joint cost to be allocated P120,000

Unit-based allocation

Product Units Proportion Joint CostAllocated Joint Cost

Honey butter 10,000 33% P120,000 P 40,000

Honey jam 20,000 67% 120,000 80,000

Total 30,000 P120,000

Exercise 15: b

Weight-based allocation

Product Weight Proportion Joint Cost Allocated Joint Cost

Honey butter 160,000 50% P120,000 P 60,000

Honey jam 160,000 50% 120,000 60,000

Total 320,000 P120,000

Exercise 15: b

Sales value at split-off allocation

ProductSV at Split-

offProportion Joint Cost

Allocated Joint Cost

Honey butter P 40,000 24% P120,000 P 28,800

Honey jam 128,000 76% 120,000 91,200

Total P168,000 100% P120,000

Exercise 19Bright Red Cannery makes three products from a single joint process. For 2013, the cannery processed all three products beyond split-off. The following data were generated for this year:

Product Incremental Separate Cost Total Revenue

Candied apples P26,000 P690,000

Apple jelly 32,000 775,000

Apple jam 15,000 271,000

Exercise 19Analysis of 2013 market data reveals that candied apples, apple jelly, and apple jam could have been sold at split-off for P670,000, P730,000, and P260,000, respectively.

a) Based on hindsight, evaluate management’s production decisions in 2013.

b) How much additional profit could the company have generated in 2013 if it had made optimal decisions at split-off?

Exercise 19: a

The company should not have processed the candied apples and the apple jam further because their incremental costs exceeded their incremental revenue.

19. a. Final Split-Off Increm. Increm. Increm. Product Revenues Sales Value Revenue Costs Profit Candied apples P690,000 P670,000 P20,000 P26,000 P(6,000) Apple jelly 775,000 730,000 45,000 32,000 13,000 Apple jam 271,000 260,000 11,000 15,000 (4,000)

Exercise 19: b

Candied apples= P6,000

Apple jam= P4,000

Exercise 20MediaForum has three operating groups: Games, News, and Documentaries. In May, the company incurred P24,000,000 of joint cost for facilities and administration. May revenues and separate production costs of each group are as follows:

Games News Documentaries

Revenue P34,040,000 P30,720,000 P189,320,000

Separate costs 31,040,000 16,320,000 110,720,000

Exercise 20Required:

a) What amount of joint cost is allocated to each operating group using the net realizable value approach? Compute the profit for each operating area after the allocation.

b) What amount of joint cost is allocated to each operating group if the allocation is based on revenues? Compute the profit for each operating group after the allocation.

c) Assume you are the head of the Games Group. Would the difference in allocation bases create significant problems for you when you report to the top management of the company? Develop a short presentation for top management if the allocation base in (b) is used to determine each operating group’s relative profitability. Be certain to discuss important differences in revenues and cost figures for the Games and Documentaries groups.

Exercise 20: aGames News Documentaries

Revenue P 34,040,000 P30,720,000 P 189,320,000

Separate costs (31,040,000) (16,320,000) (110,720,000)

NRV P 3,000,000 P 14,400,000 P 78,600,000

Group NRV Proportion Joint cost Allocated Joint Cost

Games P 3,000,000 3% P 24,000,000 P 720,000

News 14,400,000 15% 24,000,000 3,600,000

Documentaries 78,600,000 82% 24,000,000 19,680,000

Total P 96,000,000 100% P 24,000,000

Exercise 20: a

Games News Documentaries

Revenue P 34,040,000 P30,720,000 P 189,320,000

Separate costs (31,040,000) (16,320,000) (110,720,000)

Allocated costs (720,000) (3,600,000) (19,680,000)

Net profit P 2,280,000 P 10,800,000 P 58,920,000

Exercise 20: b

Revenue Proportion Joint Cost

Allocated Joint Cost

Games P 34,040,000 13% P 24M P 3,120,000

News 30,720,000 12% 24M 2,880,000

Documentaries 189,320,000 75% 24M 18,000,000

Total P 254,080,000 100% P 24,000,000

Exercise 20: b

Games News Documentaries

Revenue P 34,040,000 P30,720,000 P 189,320,000

Separate costs (31,040,000) (16,320,000) (110,720,000)

Allocated costs (3,120,000) (2,880,000) (18,000,000)

Net profit(loss) P (120,000) P 11,520,000 P 60,600,000

Exercise 20: c

Using revenues as the allocation base would create significant problems for the Games Group since it resulted to a net loss. The revenue alone is an arbitrary base for allocation .

Exercise 26You Carve Me Up manufactures wood statues,

which yields sawdust as a by-product. Selling costs associated with the sawdust are P250 per ton sold. The company accounts for sawdust sales by deducting the sawdust’s net realizable value from the major products’ cost of goods sold. Sawdust sales in 2013 were 1,200 tons at P355 each. If You Carve Me Up changes its method of accounting for sawdust sales to show the net realizable value as Other Revenue, how would its gross margin be affected?

Exercise 26

31. Total sales value (1,200 × P335) Less: costs (1,200 × P250) Reduction of joint cost

P 402,000 (300,000)

P 102,000