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Chapter 9 Joint Product and By-Product Costing

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Net realizable value. Constant gross margin NRV. Physical Output Method ... Net Realizable Value Method ... proportion to the net realizable value for each main ... – PowerPoint PPT presentation

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Title: Chapter 9 Joint Product and By-Product Costing


1
Chapter 9Joint Product and By-Product Costing
  • Key Topics
  • Joint processes and common costs
  • Main products and byproducts
  • Allocation methods
  • Choosing a method
  • Using joint cost allocation information
  • Decisions to process further
  • Choosing a method
  • Uses of joint costing information

2
Joint Processes and Common Costs
  • Jointly produce more than one product
  • Joint (common) costs cannot be traced to
    individual products
  • Joint production ends at the split-off point
  • Individual products might or might not be
    processed beyond the split-off point

3
Main Products and Byproducts
4
Allocation Methods
  • Physical output
  • Sales at split-off point
  • Net realizable value
  • Constant gross margin NRV

5
Physical Output Method
  • Allocate joint costs in proportion to the
    physical output for each main product
  • Examples of physical measures meters, pounds,
    gallons
  • All main products must be expressed in the same
    physical measure

6
Sales at Split-Off Method
  • Allocate joint costs in proportion to the sales
    value for each main product at the point where
    joint production ends
  • Not always possible to measure sales value at the
    split-off point

7
Net Realizable Value Method
  • Allocate joint costs in proportion to the net
    realizable value for each main product, taking
    into account the final selling price and
    separable costs
  • Same as the sales value at split-off method if
    there is no additional production beyond the
    split-off point

8
Constant Gross Margin NRV Method
  • Allocate joint costs so that the gross margin for
    all main products is the same
  • First, calculate combined gross margin for all
    main products
  • Second, calculate joint cost allocation that
    will result in the same gross margin for all main
    products, taking into account the final selling
    price and separable costs

9
Allocating Joint Costs
10
Allocating Joint Costs
11
Decisions About Processing Further
12
Choosing a Method
  • Major Goal
  • Avoid distortion of individual main product
    values

13
Uses of Joint Cost Information
  • Financial statements
  • Income tax returns
  • Government regulatory reports
  • Other external reports

14
Estimations (Uncertainties) in Allocations
  • Physical quantities
  • Sales value at split-off point
  • Sales prices if processed further
  • Separable costs
  • Joint costs are irrelevant for many types of
    decisions
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