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Int. Acc. MA LECT 3: Cost allocation part 4: chapter6: Cost allocation:…
Int. Acc. MA LECT 3: Cost allocation part 4: chapter6: Cost allocation: joint-cost situations
Joint-cost basics
Examining methods for allocating costs to jointly produced products.
Joint costs
are the costs of a single production process that yields multiple products simultaneously.
Situation in which companies produce two or more products at the same time during a single production process.
Separable costs:
All costs (manufacturing, marketing, distribution, etc.) incurred beyond the split-off point that are assignable to one or more individual products.
Split-off point:
The critical point in the production process where one or more products in a joint-cost setting become separately identifiable.
2 categories: outputs of a joint production process
1. joint product/main product
Main product:
Result of a joint production process that yields only one product with a relatively high sales value.
E.g. beef steak, minced meat
Joint products:
Have relatively high sales value at the split-
off point (if multiple product have relatively high sales values)
2. By-products
Incidental products resulting from the processing of another product, relatively low sales value
E.g. parts of a cow that humans do not eat and are converted into dog food
Estimated NRV Method (I)
: 2 basic approaches to allocate joint costs
Approach 1:
Allocate costs using market-based data such as profits.
The sales value at split-off method.
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The constant gross-margin percentage NRV method.
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The estimated net realisable value (NRV) method
Approach 2: Allocate costs in some physical measure- based data such as weight or volume.
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Exercise 6.21 in tutorial 3