Ch 09 Joint Cost Allocations

7/29/2019 Ch 09 Joint Cost Allocations

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Concept:

In some industries, a number of products areproduced from a single raw material input.

Key terms:

Joint products products resulting from aprocess with a common input.

Split-off point

the stage of processing wherejoint products are separated.

Joint product cost costs of processing jointproducts prior to the split-off point.

Joint Product Cost Allocation


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Joint ProductCosts

Product A

Product B

Product C



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Consider the following

example of an oilrefinery.

We will assume only

two products,gasoline and oil.



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SeparateProcessing Costs

FinalSale

SeparateProcessing

FinalSale

SeparateProcessing


JointInput

JointProduction

Process

Split-OffPoint

JointProductCosts Oil

Gasoline



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Allocation based onthe relative valuesof the products atthe split-off point.

Allocation based on aphysical measure of the

joint products at thesplit-off point.

Allocation based onfinal sales values lessseparable processing

costs.

Relative-Sales-Value Method

Physical-UnitsMethod

Net-Realizable-Value Method

Allocation to equate thegross margin percentacross all products.

Constant grossMargin %


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Lets look at anexample illustrating

the joint cost

allocation methods.

Allocating Joint Costs


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240,000 gallons

360,000 gallons

JointProduction

Process

Split-OffPoint

Oil

Gasoline

Joint material

cost = $275,000

Joint conversioncost = $225,000



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Product

Oil Gasoline Total

Output quantities in gallons 240,000 360,000 600,000

Proportionate share:240,000 600,000 40%

360,000 600,000 60%

Allocated joint costs:

$500,000 40% 200,000$

$500,000 60% 300,000$

$225,000 joint conversion cost plus$275,000 joint material cost



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Assume that the company will incur after-splitcosts of $200,000 for oil and $500,000 for gas.

The oil will be sold for $500,000 and the gaswill be sold for $1,200,000.

Based on this information, prepare product

line income statements using the physicalunits method of joint cost allocation.



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Prepare product line income statementsusing this method of joint cost allocation.Include the gross margin percentage for eachproduct, as well as for the entire batch of joint

production.OIL

(240,000 gals.)

GAS

(360,000 gals.)

TOTAL

Revenues $500,000 $1,200,000 $1,700,000

After-split costs $200,000 $500,000 $ 700,000

Net realizable value $300,000 $700,000 $1,000,000

Joint costs $500,000

Gross margin $500,000

Gross margin

percent

29.4%



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production.OIL

(240,000 gals.)

GAS

(360,000 gals.)

TOTAL

Revenues $500,000 $1,200,000 $1,700,000



Joint costs $200,000 $300,000 $500,000Gross margin $100,000 $400,000 $500,000

Gross margin

percent

20% 33 1/3 % 29.4%



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$200,000sales value atsplit-off point

$600,000

sales value atsplit-off point

JointProduction

Process

Split-OffPoint

Oil

Gasoline

Joint material

cost = $275,000




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Product

Oil Gasoline Total

Sales value at split-off point 200,000$ 600,000$ 800,000$

Proportionate share:$200,000 $800,000 25%

$600,000 $800,000 75%

Allocated joint costs:

$500,000 25% 125,000$

$500,000 75% 375,000$

$225,000 joint conversion cost plus$275,000 joint material cost



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production.OIL

(240,000 gals.)

GAS

(360,000 gals.)

TOTAL

Revenues $500,000 $1,200,000 $1,700,000



Joint costs $125,000 $375,000 $500,000Gross margin $175,000 $325,000 $500,000

Gross margin

percent

35% 27 % 29.4%



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If products require further processing beyondthe split-off point before they are marketable,

we may estimate the net realizable value

(NRV) at the split-off point.

EstimatedNRV

FinalSalesValue

AddedProcessing

Costs

=



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JointProduction

Process

Oil

GasolineSeparate

Processing

SeparateProcessing

Joint material

cost = $275,000


SalesValue

$500,000

Sales

Value$1,200,000


$500,000


$200,000



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Product

Oil Gasoline Total

Sales value 500,000$ 1,200,000$ 1,700,000$

Less additional processing costs 200,000 500,000 700,000

Estimated NRV at split-off point 300,000$ 700,000$ 1,000,000$

Proportionate share:

$300,000 $1,000,000 30%

$700,000 $1,000,000 70%

Allocated joint costs:$500,000 30% 150,000$

$500,000 70% 350,000$



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OIL

(240,000 gals.)

GAS

(360,000 gals.)

TOTAL

Revenues $500,000 $1,200,000 $1,700,000

After-split costs $200,000 $500,000 $ 700,000Net realizable value $300,000 $700,000 $1,000,000

Joint costs $150,000 $350,000 $500,000

Gross margin $150,000 $350,000 $500,000

Gross margin

percent

30% 29 % 29.4%

Prepare product line income statementsusing this method of joint cost allocation.Include the gross margin percentage for eachproduct, as well as for the entire batch of jointproduction.



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Prepare product line incomestatements using a method of joint

cost allocation that equates thegross margin percentage across allmain products.

Constant grossMargin %


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Prepare product line income statementsusing this method of joint cost allocation.Include the gross margin percentage for each

product, as well as for the entire batch of jointproduction.

OIL

(240,000 gals.)

GAS

(360,000 gals.)

TOTAL

Revenues $500,000 $1,200,000 $1,700,000


Joint costs ? ? $500,000

Gross margin $147,000 $353,000 $500,000

Gross margin

percent

29.4% 29.4 % 29.4%

Constant grossmargin

%


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Prepare product line income statementsusing this method of joint cost allocation.Include the gross margin percentage for each

product, as well as for the entire batch of jointproduction.

OIL

(240,000 gals.)

GAS

(360,000 gals.)

TOTAL

Revenues $500,000 $1,200,000 $1,700,000


Joint costs 153,000 347,000 $500,000

Gross margin $147,000 $353,000 $500,000

Gross margin

percent

29.4% 29.4 % 29.4%

Constant grossmargin

%


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We have developed four separate

allocations of the joint costs.Which of the joint cost allocationsdeveloped above is most useful to

management? Explain.


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By-Products

JointInput

JointProduction

Process

Split-OffPoint

JointCosts

By-products

MajorProduct

Relatively lowvalue or quantity

when compared tomajor products

MajorProduct


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Joint Products and By-Products

Sales Value

HighLow

Main Products

Joint Products By-Products


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Accounting for By-productsMethod A:

The productionmethod recognizes byproductsat the time their production is completed. The

value of the byproducts usually is credited

to costs of producing the mainproducts.

Method B:

The salemethod delays recognition ofbyproducts until the time of their sale.The

proceeds usually are credited to sales.


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Accounting for ByproductsQuary Company produces granite countertops and generates by-products during

production. In a recent period the company purchased granite for a total cost of

$1,000,000. The company produced countertops with a sales valueof $1,200,000 and by-products with a sales value of $300,000. Eighty percent

of the countertops and all of the by-products were sold during the period. The

Firm had no beginning inventories.

Required: Provide journal entries to recognize the following events, using (a)the sales method and (b) the production method of accounting for by-products.

1. Purchase of granite.

2. Production of by-products.

3. Sale of 80% of the main products.

4. Sale of all of the by-products.

5. Recording of cost of goods sold.

For each of the two methods of accounting for by-products, determine the

following: (1) Total sales; (2) Cost of goods sold; (3) Gross margin; (4) Gross

margin percent; and (5) Valuation of the ending inventory


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Extension of Joint CostDiscussion: Allocation

of Joint Costs to Several

Different Time Periods


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$2,487,000Joint cost

$1,000,000Benefit, year 1




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A. Assume that on January 1st of 2011 a firm invests in a notereceivable that promises to repay the holder $1,000,000 peryear at the end of each of the next three years.The currentmarket rate of interest on similar debt is 10 percent, and thefirm pays $2,487,000 for the note receivable. You haveobtained the following information regarding present valuefactors for an ordinary annuity:

Periods Present Value Factor(rounded)

1. .909

2. 1.7363. 2.487

Based on the above information, determine the following:(a) Total interest income to be recognized over the three-yeartime span.

(b) Amount of interest to be recognized in each of the threeperiods.

(c) Portion of each annual payment that represents a return ofthe firms investment.


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A. Assume that on January 1st of 2011 a firm invests in a machine that promisesto earn cash flows of $1,000,000 per year at the end of each of the nextthree years.The firms cost of capital is 10 percent, and the firm pays

$2,487,000 for the machine. You have obtained the following informationregarding present value factors for an ordinary annuity:

Periods Present Value Factor(rounded)

1. .909

2. 1.7363. 2.487

Based on the above information, determine the following:(a) Total income to be recognized over the three-year time span.

(b) Amount of income to be recognized in each of the three periods.

(c) Portion of each annual payment that represents a return of the firms

investment (i.e., depreciation)..


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Handout 9 (a)Joint Costs,

Alternative Methods


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Exurbia Company purchases pine bark in ten-ton lots at a cost of $ 6.6 million per lot, andrefines the bark into three main products. Relevant cost and revenue information is provided

below, assuming that all units produced are sold in the current period, i.e. the firm has nobeginning or ending inventories.

Products: Alpha Beta Chi TotalNumber of tons 3 2 5 10Sales value at split point $3,000,000 $2,000,000 $ 1,000,000 $6,000,000After-split additional

processing costs $ 480,000 $ 480,000 $ 240,000 $1,200,000

Sales price after additionalprocessing $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000

Joint cost ? ? ? $ 6,600,000Gross Margin ? ? ? $ 2,200,000Gross Margin % ? ? ? 22%

Products: Alpha Beta Chi TotalN b f t 3 2 5 10


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Number of tons 3 2 5 10

Sales value at split point $3,000,000 $2,000,000 $ 1,000,000 $6,000,000

After-split additionalprocessing costs $ 480,000 $ 480,000 $ 240,000 $1,200,000


Joint cost ? ? ? $ 6,600,000Gross Margin ? ? ? $ 2,200,000

Gross Margin % ? ? ? 22%

Required: Determine the amount of joint cost that would be allocated to Product Alpha usingeach of the following allocation methods:

(a) Physical output (3/10) x $ 6,600,000) $_1,980,000__to Alpha

Products: Alpha Beta Chi Total


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Joint cost ? ? ? $ 6,600,000Gross Margin ? ? ? $ 2,200,000


Required: Determine the amount of joint cost that would be allocated to Product Alpha usingeach of the following allocation methods:

(a) Physical output (3/10) x $ 6,600,000) $_1,980,000__to Alpha


Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000

After-split costs $ 480,000 $ 480,000 $ 240,000 $1,200,000

Net realizable value (NRV) $ 3,520,000 $ 3,520,000 $ 1,760,000 $ 8,800,000

Joint cost (based on tons) $1,980,000 $1,320,000 $3,300,000 $ 6,600,000

Gross Margin $1,540,000 $2,200,000 ($1,540,000) $ 2,200,000

Gross Margin % 38.5% 55.0% (77%) 22%

Products: Alpha Beta Chi TotalNumber of tons 3 2 5 10


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(b) Sales value at split-off(3/6) x $ 6,600,000) $_3,300,000__to Alpha





Joint cost ? ? ? $ 6,600,000

Gross Margin ? ? ? $ 2,200,000




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(b) Sales value at split-off(3/6) x $ 6,600,000) $_3,300,000__to Alpha





Sales price after additional

processing $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000Joint cost ? ? ? $ 6,600,000

Gross Margin ? ? ? $ 2,200,000



Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000



Joint cost (based on split value) $3,300,000 $2,200,000 $1,100,000 $ 6,600,000

Gross Margin $220,000 $1,,320,000 $660,000 $ 2,200,000

Gross Margin % 5.5% 33.0% 33.0% 22%



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Sales price after additional

processing $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000

Joint cost ? ? ? $ 6,600,000

Gross Margin ? ? ? $ 2,200,000


(c) Net realizable value (3,520/8,800) x $ 6,600,000) $_2,640,000__to Alpha


Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000



Joint cost (based on NRV) $2,640,000 $2,640,000 $1,320,000 $ 6,600,000

Gross Margin $880,000 $880,000 $440,000 $ 2,200,000

Gross Margin % 22.0% 22.0% 22.0% 22%


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(b) Constant gross margin percentage NRV22% x $ 4,000,000 or 3,520,000 880,000$_2,640,000 _to Alpha

Note: We first compute the dollar amount of the gross margin that is needed in order for each othe products to show a gross margin of 22%. For each product, this required gross margin isubtracted from the net realizable value to plug the joint cost allocation. The above example is a

special case because the same joint cost allocation was obtained for the NRV-based and thgross margin-based allocations.


Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000



Joint cost (based on NRV) $2,640,000 $2,640,000 $1,320,000 $ 6,600,000

Gross Margin $880,000 $880,000 $440,000 $ 2,200,000Gross Margin % 22.0% 22.0% 22.0% 22%


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Assume instead that the company had no beginning inventory, and that the ending inventory ofinished goods consists of one ton ofBeta. There are no ending raw materials or work in processinventories. The joint costs have been allocated based on physical output (number of tons).


Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000




Gross Margin $1,540,000 $2,200,000 ($1,540,000) $ 2,200,000Gross Margin % 38.5% 55.0% (77%) 22%


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Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000




Gross Margin $1,540,000 $2,200,000 ($1,540,000) $ 2,200,000

Gross Margin % 38.5% 55.0% (77%) 22%

(1) Cost assigned to the ending inventory


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Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000




Gross Margin $1,540,000 $2,200,000 ($1,540,000) $ 2,200,000

Gross Margin % 38.5% 55.0% (77%) 22%


($ 480,000 + 1,320,000) = $ 900,000

One half of the Beta is in the finished goods inventory, and is valued at one-half of the total cost (joint and after-split costs)assigned to Beta.

(2) Total cost of goods manufactured (completed)


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Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000




Gross Margin $1,540,000 $2,200,000 ($1,540,000) $ 2,200,000

Gross Margin % 38.5% 55.0% (77%) 22%


($ 480,000 + 1,320,000) = $ 900,000


(2) Total cost of goods manufactured (completed) $ 6,600,000 + $ 1,200,000

= $ 7,800,000

All production has been completed, so the goods completed are measured as the sum of the total joint cost and the total after-split

cost.

(3) Total cost of goods sold


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Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000




Gross Margin $1,540,000 $2,200,000 ($1,540,000) $ 2,200,000

Gross Margin % 38.5% 55.0% (77%) 22%


($ 480,000 + 1,320,000) = $ 900,000


(2) Total cost of goods manufactured (completed) $ 6,600,000 + $ 1,200,000

= $ 7,800,000


cost.

(3) Total cost of goods sold $ 7,800,000 - $ 900,000 = $ 6,900,000

Total (joint plus after-split) costs, minus the ending inventory, equals cost of goods sold.

(4) Total Gross margin

A i d h h h d b i i i d h h di i


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Sales $ 4,000,000 $ 4,000,000 $ 2,000,000 $10,000,000




Gross Margin $1,540,000 $2,200,000 ($1,540,000) $ 2,200,000

Gross Margin % 38.5% 55.0% (77%) 22%


($ 480,000 + 1,320,000) = $ 900,000


(2) Total cost of goods manufactured (completed) $ 6,600,000 + $ 1,200,000= $ 7,800,000


cost.

(3) Total cost of goods sold $ 7,800,000 - $ 900,000 = $ 6,900,000

Total (joint plus after-split) costs, minus the ending inventory, equals cost of goods sold.

(4) Total Gross margin ($ 10,000,0002,000,000) - $ 6,900,000 = $ 1,100,000

Sales minus cost of goods sold equals gross margin. Note that the units of BETA in the ending inventory have a total sales

value of $2 million, so the total sales are $8 million. When the Beta in the ending inventory is subsequently sold, the grossmargin for that sale will be $1,100,000 ($2,000,000900,000).


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Handout 9 (b):Joint Costs, By-Products

and Inventories


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Wilburs Mill buys spruce logs directly from local logging camps. The logs are

milled into dimension lumber and several by-products including bark, wood

chips, and sawdust. The average cost per log is $ 700, and additional costs of

about $ 500 per log are incurred before and during the milling process,including costs of transportation, handling, trimming, and chemical cleansing.

After milling, the rough- cut dimension lumber from each log has a market

value of $ 1.000, and the by-products have a total market value of $ 500. In

the most recent period, Wilburs Mill purchased and milled 1,000 spruce logs.

One quarter of the milled dimension lumber and one-half of the milling by-

products remain in inventory at the end of the period. The firm had no

beginning inventories, and has no ending inventories of raw materials or work

in process.

Required: Determine the periods gross margin, gross margin percentage, and the

total valuation of the ending inventories (dimension lumber and by-products) under

each of the following alternative assumptions: Also write out the journal entries

related to the production and sale of the firms main products and by-products.

Required: Determine the periods gross margin gross margin percentage and the total


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Required: Determine the period s gross margin, gross margin percentage, and the total

valuation of the ending inventories (dimension lumber and by-products) under each of the

following alternative assumptions: Also write out the journal entries related to the production

and sale of the firms main products and by-products.

1. Assume that the firm does not assign any inventory value to the by-products at the time

of production. Instead, revenues from the sale of the by-products is recorded as these

items are sold, and the sales amount is credited to miscellaneous revenues (and included

in total sales reported in the income statement).

Required: Determine the periods gross margin gross margin percentage and the total


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Required: Determine the period s gross margin, gross margin percentage, and the total

valuation of the ending inventories (dimension lumber and by-products) under each of the

following alternative assumptions: Also write out the journal entries related to the production

and sale of the firms main products and by-products.

1. Assume that the firm does not assign any inventory value to the by-products at the time

of production. Instead, revenues from the sale of the by-products is recorded as these

items are sold, and the sales amount is credited to miscellaneous revenues (and included

in total sales reported in the income statement).

2. Assume that the firm values the by-products as they are produced, at their estimated

sales value. The sales value of the by-products is also credited to the manufacturing costof the main products, as a reduction of the joint costs incurred.

Joint costs with by-products and inventories: Solution


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Event No value assigned to by-

product

By-product inventoried

1.Purchase oflogs

2.Additional

pre-split costs

3.Recognitionof by-product

4.Sale of by-product

5.Sales ofmain product

6.Cost ofsales (75%main)7.

Sales:Main

By-productTotal

Cost of salesGross marginGM %

Endinginventory.



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product


1.Purchase oflogs

Dr. InventoryCr. A/P

$700,000$700,000

Same

2.Additional

pre-split costs





Sales:Main

By-productTotal


Endinginventory.



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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same





Sales:Main

By-productTotal


Endinginventory.



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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same


N/A Dr. Inventory-BPrCr. Inventory-Main

$500,000$500,000




Sales:Main

By-productTotal


Endinginventory.



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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same



$500,000$500,000


Dr. A/RCr. Sales (BP)

$250,000$250,000

Dr. A/RCr. Inventory-BPr

$250,000$250,000



Sales:Main

By-productTotal


Endinginventory.



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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same



$500,000$500,000



$250,000$250,000


$250,000$250,000


Dr. A/RCr. Sales

$750,000$750,000 Same


Sales:Main

By-productTotal


Endinginventory.



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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same



$500,000$500,000



$250,000$250,000


$250,000$250,000


Dr. A/RCr. Sales

$750,000$750,000 Same

6.Cost ofsales (75%main)

Dr. CGSCr. Inventory

$900,000$900,000


$525,000$525,000

7.

Sales:Main

By-productTotal


Endinginventory.



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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same



$500,000$500,000



$250,000$250,000


$250,000$250,000


Dr. A/RCr. Sales

$750,000$750,000

Same



$900,000$900,000


$525,000$525,000

7.Sales:

MainBy-productTotal


$ 750,000$ 250,000$1,000,000$ 900,000$ 100,000

10 %8.Ending

inventory.


E t N l i d t b B d t i t i d


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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same



$500,000$500,000



$250,000$250,000


$250,000$250,000


Dr. A/RCr. Sales

$750,000$750,000 Same



$900,000$900,000


$525,000$525,000

7.

Sales:Main

By-productTotal


$ 750,000

$ 250,000$1,000,000$ 900,000

$ 100,000

10 %

Endinginventory.

$300,000 (main product, 25% of$1,200,000)




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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same



$500,000$500,000



$250,000$250,000


$250,000$250,000


Dr. A/RCr. Sales

$750,000$750,000 Same



$900,000$900,000


$525,000$525,000

7.

Sales:Main

By-productTotal


$ 750,000

$ 250,000$1,000,000$ 900,000

$ 100,000

10 %

$ 750,000

$ -0-$ 750,000$ 525,000

$ 225,000

30 %

8.Endinginventory.

$300,000 (main product, 25% of$1,200,000)




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product


1.Purchase oflogs


$700,000$700,000

Same

2.Additional

pre-split costs

Dr. Inventory

Cr. Sundry

$500,000

$500,000

Same



$500,000$500,000



$250,000$250,000


$250,000$250,000

5.Sales ofmain product Dr. A/RCr. Sales $750,000$750,000 Same



$900,000$900,000


$525,000$525,000

7.

Sales:MainBy-productTotal


$ 750,000$ 250,000$1,000,000$ 900,000

$ 100,000

10 %

$ 750,000$ -0-$ 750,000$ 525,000

$ 225,000

30 %

8.Endinginventory

$300,000 (main product, 25% of$1 200 000)

$425,000 (main product, 25% of$700 d b d t 50% f

Documents

Ch 09 Joint Cost Allocations