AFM481 Final Exam Material - Chapter 9 Summary (Thorough).docx

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Department
Accounting & Financial Management
Course
AFM 481
Professor
Grant Russell
Semester
Fall

Description
AFM481 - Advanced Cost Accounting Professor Grant Russell Final Exam Material Chapter 9: Joint Product and By-product Costing Joint Products: In the process of making one product, one or more other products are created. A main product has high sales value compared to the other joint products. A by-product has low sales value compared to the other joint products. Joint costs: costs incurred to jointly produce a group of goods (e.g. labour, insurance, property taxes) Split-off point: point at which individual products are identified Separable costs: costs incurred after the split-off point E.g. The join costs of processing maple sap were $2,000,000. Product Cases Sales Value at Separable Costs Selling Price (Total 120,000) Split-off Point Syrup 90,000 $24 per case $12 per case $38 per case Sugar 20,000 $26 per case $16 per case $46 per case Butter 10,000 $32 per case $14 per case $50 per case Methods of Allocating Joint Costs to Main Products 1. Physical Output Method  Allocates join costs using the relative proportion of physical output for each main product  Expressed using the same physical measure.  Each main product is allocated a proportion of joint costs, based on that product’s physical output (final product) divided by the total physical output of all main products.  Distortions are likely to occur when the incremental contribution (incremental revenue – incremental costs) of some products is relatively high. To Syrup = (90,000 cases / 120,000 total cases) * $2,000,000 join costs = $1,500,000 To Sugar = (20,000 cases / 120,000 total cases) * $2,000,000 joint costs = $333,333 To Butter = (10,000 cases / 120,000 total cases) * $2,000,000 joint costs = $166,667 2. Market-based Methods 1) Sales Value at Split-off Point  Joint costs are allocated based on the relative sales value of main products at the point where joint production ends. 1. Syrup (90,000 cases * $24) = $2,160,000 Sugar (20,000 cases * $26) = $520,000 Butter (10,000 cases * $32) = $320,000 Total $3,000,000 2. To Syrup ($2,160,000/$3,000,000) * $2,000,000 joint costs = $1,440,000 To Sugar ($520,000/$3,000,000) * $2,000,000 joint costs = $346,667 To Butter ($320,000/$3,000,000) * $2,000,000 joint costs = $213,333 2) Net Realizable Value (NRV)  Allocates join costs using the relative value of main products  NRV = Final Selling Price or Total Rev After Processing – Separable Costs 1. Syrup [90,000 cases * ($38 selling price - $12 separable costs)] = $2,340,000 Sugar [20,000 cases * ($46 selling price - $16 separable costs)] = $600,000 Butter [10,000 cases * ($50 selling price - $14 separable costs)] = $360,000 Total $3,300,000 2. To Syrup = ($2,340,000/$3,300,000) * $2,000,000 joint costs = $1,418,182 To Sugar = ($600,000/$3,300,000) * $2,000,000 joint costs = $363,636 To Butter = ($360,000/$3,300,000) * $2,000,000 joint costs = $218,182 3) Constant Gross Margin NRV  Allocates joint costs so that the gross margin % for the main products are identical.  First, the combined gross margin % for main products is calculated. o Combined Gross Margin = Sales - Joint Costs - Separable Costs o Gross Margin % = Combined Gross Margin / Combined Sales  Second, joint costs are allocated to each main product to achieve a constant gross margin. o Allocated Joint Costs = Sales – Gross Margin (Desired Gross Margin % * Sales) – Separable Costs  Allocates joint costs so that all joint products appear to have equal profitability. It best reflects the inseparability of the joint production process. 1. Calculate the combined gross margin %. Syrup $38 selling price * 90,000 cases = $3,420,000 Sugar $46 selling price * 20,000 cases = $920,000 Butter $50 selling price * 10,000 cases = $500,000 Total Combined Sales $4,840,000 Less Combined Product Costs:  Joint Costs ($2,000,000)  Separable Costs: Syrup $12 separable costs * 90,000 cases = ($1,080,000) Sugar $16 separable costs * 20,000 cases = ($320,000) Butter $14 separable costs * 10,000 cases = ($140,000) Total Combined Product Costs ($3,540,000) Combined Gross Margin $1,300,000 Combined Gross Margin % = $1,300,000 / $4,840,000 = 26.86% 2. Allocate the joint costs to achieve a constant gross margin of 26.86% Syrup Sugar Butter Total Sales $3,420,000 $920,000 $500,000 $4,840,000 Less Gross Margin 918,595 247,107 134,298 1,300,000 (0.2686 * Sales) Less separable 1,080,000 320,000 140,000 1,540,000 Costs Allocated Joint $1,421,405 $352,893 $225,702 $2,000,000 Costs Total gross margin is not affected by the joint cost allocation method. It only affects the relative gross margins for the individual products. A product could give the appearance that it is sold at a loss, when in fact the company profits from producing the joint product. Processing a Joint Product Beyond the Split-off Point  The joint costs are irrelevant because they are sunk costs.  The product with the highest incremen
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