Joint Products

Joint ProductsJoint Products

Allocation of Costs to Joint Products

CommonCosts

Split-offPoint

SeparableCosts

30 lb.s of loin

20 lb.s of belly

50 lb.s of other meat products

250 lb.s

Allocation of Costs to Joint Products

Questions:

1. How much does it cost to produce

1 lb of loin?

2. How much does it cost to produce

1 lb of bacon?

2. Why is this information useful?

Allocation of Costs toJoint Products

Common Costs: $100

Split-off Point

100 lb.s of meat (excluding bone)

1 lb of belly sells for $1.20

1 lb of loin sells for $1.50

30 lb.s loin 20 lb.s belly

50 lb.s of everything else sells for $1/lb on average

Allocation of Costs to Joint Products

Non-Financial

- Physical Measure

Financial

- Sales Value at Split-off Point - Net Realizable Value

Allocation of Costs toJoint Products

Common Costs: $100

Split-off Point

100 lb.s of meat (excluding bone)

30 lb.s loin 20 lb.s belly

50 lb.s of other product

Allocation using Physical Measure

$100 to bring to slaughter

÷ 100 lb.s of marketable meat

= $1.00 per lb.

At $1 per lb., loin appears very profitable, since it sells for $1.50 per lb.

$1 per lb. for each cut of meat: pork, belly, etc.

Allocation of Costs toJoint Products

Non-Financial Measures

- Physical Measure

Financial Measures

- Sales Value at Split-off Point - Net Realizable Value

Allocation of Costs toJoint Products

Common Costs: $100

Split-off Point

100 lb.s of meat (excluding bone)

1 lb of belly sells for $1.20

1 lb of loin sells for $1.50

30 lb.s loin 20 lb.s belly

50 lb.s of everything else sells for $1/lb on average

Allocation using Sales Value at Split-off

Total sales value at split-off: loin: 30 lb.s x $1.50 = $45 belly: 20 lb.s x $1.20 = $24 Everything else: 50 lb.s x $1.00 = $50 Total sales value = $119Allocate $100 common costs: 45/119 or 38% to loin: $38 24/119 or 20% to belly: $20 50/119 or 42% to other stuff $42

Allocation using Sales Value at Split-off

From the previous slide: 45/119 or 38% to loin: $38 24/119 or 20% to belly: $20 50/119 or 42% to other stuff $42

Cost per pound: Loin: $38 ÷ 30 lb.s = $1.26 per lb. Belly: $20 ÷ 20 lb.s = $1.00 per lb. Other: $42 ÷ 50 lb.s = $0.84 per lb.

Allocation using Sales Value at Split-off

Cost per pound (from previous slide): Loin: $38 ÷ 30 lb.s = $1.26 per lb. Belly: $20 ÷ 20 lb.s = $1.00 per lb. Other: $42 ÷ 50 lb.s = $0.84 per lb.

With a sales price of $1.50 per lb., loin still looks profitable, but not as profitable as before, when common costs were allocated using weight.

The belly is also profitable, since it sells for $1.20.

Allocation of Costs toJoint Products

Non-Financial

- Physical Measure

Financial

- Sales Value at Split-off Point - Net Realizable Value

Allocation of Costs toJoint Products

Common Costs: $100

Split-off Point

100 lb.s of meat (excluding bone)

1 lb of belly sells for $1.20

20 lb.s belly

“value added”

1 lb of belly cured to make 1 lb of bacon

branded product

Allocation of Costs toJoint Products

Common Costs: $100

Split-off Point

1 lb of belly sells for $1.20

20 lb.s belly

1 lb of bacon sells for $2.20

Additional processing costs: $0.50 per lb.

Separable Costs:

Allocation using Net Realizable Value

Net Realizable Value: loin: 30 lb.s x $1.50 = $45 belly: 20 lb.s x ($2.20 - $0.50) = $34 Everything else: 50 lb.s x $1.00 = $50 Total sales value =$129Allocate $100 common costs: 45/129 or 35% to loin: $35 34/129 or 26% to belly: $26 50/129 or 39% to other stuff $39

Allocation using Net Realizable Value

From the previous slide: 45/129 or 35% to loin: $35 34/129 or 26% to belly: $26 50/129 or 39% to other stuff $39

Cost per pound: Loin: $35 ÷ 30 lb.s = $1.17 per lb. Belly: $26 ÷ 20 lb.s = $1.30 per lb. Other: $39 ÷ 50 lb.s = $0.78 per lb.

Allocation using Net Realizable Value

Cost per pound (from previous slide): Loin: $35 ÷ 30 lb.s = $1.17 per lb. Belly: $26 ÷ 20 lb.s = $1.30 per lb. Other: $39 ÷ 50 lb.s = $0.78 per lb.

Belly sells for $1.20 per lb., but costs $1.30 per lb to produce!?

If the belly is cured into bacon, the total cost is $1.80 per lb ($1.30 common + $0.50 separable), and sells for $2.20, so it is profitable after all.

Allocation of Costs toJoint Products

Summary of the three methods:

Allocation based on

Physical measure:

Sales value at split-off:

Net realizable value:

loin belly other

$1.00 $1.00 $1.00

$1.26 $1.00 $0.84

$1.17 $1.30 $0.78

Allocation of Costs toJoint Products

2. Why is this information useful?

Managerial Decision-making:

Which products to make.

What price to charge for those products.

Whether to stay in business.

Financial reporting:

Calculate ending inventory and C.O.G.S.

Here are some possibilities:

Allocation of Costs toJoint Products

• Which products to make.• What price to charge for

those products.• Whether to stay in business.• Financial reporting:

calculation of ending inventory and C.O.G.S.

• No

2. Why is this information useful?

• No

• No

• Yes

Allocation of Costs toJoint Products

WARNING:

Any method for assigning joint costs is used mainly for product costing. It is almost always useless for control or decision-making purposes.