Cost allocation - Joint cost situations

nguyp035's version from 2016-05-18 19:13

Section 1

Question Answer
Joint costs are...the cost of a single production process that yields multiple products simultaneously (two or more products)
e.g. industry (agriculture)Lamb, raw milk, turkey (breast wing milk drumstick,feathers)
e.g. industry (mining)Coal, copper ore, petroleum, salt
Tomatoes > tomato juice, sauce, paste

Section 2

Question Answer
Two general categories of joint production1) joint product 2) by-product
Split off point is the...juncture in production process where one or more products in a joint cost setting becomes separately identifiable
Separable costs are..all costs (marketing,distribution) incurred beyond the split off point assignable to one or more products

Section 3

Question Answer
Joint products tend to have relatively high sales value at..split off point.
Main product is the result of...a joint production process that yields only one product with a relative high sales value
By productsare incidental products resulting from the processing of another product (relatively low sales compared to joint or main product)
some outputs of joint product process have 0 sales value

Section 4

Question Answer
Products can change from by products to joint products when..their relative sales values increase (e.g. sawdust) and change from joint products to by products when their relative sales values decrease
Why do we allocate joint products?IMPORTANT TOPIC
1) stock costingstock costing and COGS computations are important for financial accounting
2) cost reimbursement contractscost allocation is required for cost reimbursement purposes under contracts when only a portion of a business's products/service is sold or delivered to a single customer
3) insurance settlementinsurance settlement computations require cost allocation when damage claims are made by businesses with joint products - based on cost information
4) Rate (price regulation)allocation of joint cost required if one or more of joint products are subject to price regulation
5) litigationjoint cost allocation is important in litigation (legal action) involving one or more joint prods

Section 5

Question Answer
Allocating joint cost methods
Physical unit methodsallocation based on a physical measure of the joint products at the split off point
Relative sales value methodallocation based on the relative values of the products at the split off point
Net realizable value methodallocation based on final sales values - separable processing costs
Which method of allocating joint cost should be chosen?Sales value at split off method is widely used where market prices exist at split off for the intermediate product
Why? it is objective, does not anticipate subsequent management decisions of further processing, uses meaingful common denominator, SIMPLE
Physical measure method is appropriate to use rate (price regulation), insurance settlement?
Some companies refrain from..allocating joint cost entirely - instead they carry their inventory at estimated NRV although...
accountants ordinarily criticise carrying inventories at estimated net realisable values (because income recognised before sales made)

Section 6

Question Answer
Joint costs incurred up to split off point are..sunk costs and are irrelevant to the decision to sell a joint product at the split off point or to process further
They are..unavoidable as they will be inccured irrespective of your decisions

Section 7

Question Answer
Sell at split off or process further..You would find Incremental profit - Incremental cost = gain/loss
If loss, should be sold at split off point
Incremental profit = (selling price at process X Units) - (selling price at split off x units)

Section 8

Question Answer
Two common methods for accounting for by products are..(by products are not main products)
By-product deducted from cost of joint process before allocation
By product NRVis deducted from cost of main product
Although by products have lowers sales value...than joint of main products, the presence of by product can affect allocation of joint cost
by product accounting methods differ on whether by products are recognised in the financial statement at the time of production or time of sale

Section 9

Question Answer
Accounting for by products
Method A- production by productrecognises by products in financial statements at the time their production is completed
Method B - sale by product methoddelays recognition of by product until time of their sale