9 1 Joint Costs and By Products Cost Accounting

The company has hired you as a consultant to help its accountant1. Show journal entries at the time of production and at the time of sale assuming the Mat Place accounts for the byproduct using the production method.2. Show journal entries at the time of production and at the time of sale assuming the Mat Place accounts for the byproduct using the sales method. This method is suitable when physical quantity of joint products does not reflect their value and a reliable estimate of their sale value can be easily made. Give two limitations of the physical-measure method of joint-cost allocation.

  • You can also allocate your marketing budget and resources to promote the products or services that have the highest demand and profitability.
  • It allows investors and analysts to understand what the surface information really depicts.
  • You also see the physical measures method of allocating joint costs.
  • What is the ending inventory cost for each product and gross margin for Mat Place?

Regardless of the allocation method used, total joint costs and total profit remain the same. Companies must often decide whether to process a joint product further. If as a result of processing the product further, additional sales revenue exceeds additional costs, the wise decision is to process further. Joint cost allocation can be used to support pricing and marketing decisions in a variety of ways. For instance, a petroleum refinery may use the net realizable value method to allocate joint costs based on the market prices and separable costs of each product.

By knowing the cost of each product or service, you can set prices that cover your costs and generate a desired profit margin. You can also allocate your marketing budget and resources to promote the products or services that have the highest demand and profitability. That’s because the joint cost allocation isn’t related to cost because it uses the physical measure method. Because you’re allocating based on number of units, the cost attached to all units is the same. An average unit cost is obtained by dividing the total number of units produced into the total joint production cost. The methods are ways of splitting the total joint costs between products.

physical measurement

The method is really a weighted market value basis using the total market or sales value of each unit (quantity sold multiplied by the unit sales price). However, when the units produced are not measured in like terms, the method cannot be applied. As long as all units produced are measured in terms of the same unit and do not differ substantially, this method is simple and easy to apply. This method apportions the total production cost to the various products on the basis of a predetermined standard or index of production. Thus based on the heuristic above, physical measures are those measures that one can approximate well by choosing a random point “with one’s eye” and computing the time averages along its trajectory.

The SI units together with the SI prefixes provide a logical and interconnected framework for measurements in science, industry, and commerce. Why might the number of products in a joint-cost situation differ from the number of outputs? Management may have decided, however, that it is more profitable to process certain products further before they are sold. The contention is that if one product sells for more than another, it is because it cost more to produce. Then the natural follow-up question would be to single out some invariant measures as special, as far as dynamics is concerned. The basic unit of length in the decimal metric system was defined as one ten-millionth of the Earth’s polar quadrant (as determined from latitude surveys), and is termed the meter.

  • They all use some measure of production to do this, for example number or volume.
  • Accounting is often quantified in terms of money but can also be recorded in terms of alternative units, number of labor hours, number of jobs created, etc.
  • The company has hired you as a consultant to help its accountant1.
  • When such products are further processed after split-off, their total costs also include further processing cost.
  • This states that all reported data presented in a currency must be consistently reported in that same currency, regardless of the currency the business has been transacted in.

Assume that Mat Place allocates the joint costs to floor mats and car mats using the sales value at splitoff method and accounts for the byproduct using the sales method. Discuss the difference between the two methods of accounting for byproducts, focusing on what conditions are necessary to use each method. Two or more products made from a single input are called joint products. The costs of the single input and related manufacturing process costs must be allocated to each of the joint products. The physical quantities method allocates joint costs based on a physical measure of output (e.g., pounds or yards of material). The sales value method allocates joint costs based on the relative sales value for each of the joint products.

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When such products are further processed after split-off, their total costs also include further processing cost. Describe a situation in which the sales value at splitoff method cannot be used but the NRV method can be used for joint-cost https://personal-accounting.org/physical-measurement-metrology/ allocation. The United States has adopted the Metric Conversion Act, declaring that “the policy of the U.S. shall be to coordinate and plan the increasing use of the metric system in the United States,” and established the U.S.

The basic unit for mass was defined as the mass of a cubic decimeter of water, to be called the kilogram. This can suggest that Company ABC has high administrative costs or that Company XYZ is a more efficient business. For this reason, weight factors are often assigned to each unit based on unit size, manufacturing difficulty, manufacturing time, differences in the type of labor employed, the amount of material used, and so on. There are multiple ways in which one can do this, and one way is a claim of “physicality”. Two companies have weekly sales of $20,000, but Company ABC achieves this with four salespeople and Company XYZ achieves it with eight. In this case, Company ABC’s sales team is much more productive, bringing in $5,000 per salesperson per week versus only $2,500 per salesperson per week for Company XYZ.

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One method of allocating joint costs is to allocate costs based on the benefits received from the expense. In cost accounting, the matching principle matches revenue with the expenses related to it. You tie the revenue from selling a unit to the cost of making a unit.

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Generally accepted accounting principles (GAAP) does not specifically state accounting measurement standards, but it does specify the types of accounting methods that need to be used. Accounting is often quantified in terms of money but can also be recorded in terms of alternative units, number of labor hours, number of jobs created, etc. Different accounting measurements provide different views on the overall state of a corporation. By using a variety of different accounting measurements, a person can gain a more comprehensive perspective of a company’s operations and more easily compare them with those of other companies. Note that even though invariant measures are always guaranteed, physical measures may fail to exist, and even if they exist they may fail to be unique. See the papers linked above and references therein for theorems that guarantee both existence and uniqueness.

The physical measure method of cost accounting

Similarly, a furniture manufacturer may use the physical measure method to allocate joint costs based on the volume of wood used for each product. Finally, a pharmaceutical company may use the sales value method to allocate joint costs based on the selling prices of each product at the split-off point. This information can be used to determine the break-even point and margin of safety for each product, as well as design its pricing and marketing mix based on the elasticity and competition of each product.

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The simplest method is just to allocate costs on a pro rata basis based on an agreed set of criteria (for example, number of employees). More advanced methods give weightings to the units based on other criteria such as market value. Nevertheless, this condition does not destroy the usefulness of the sales value at the split-off point for the allocation of the joint production cost. The Mat Place’s accountant needs to record the information about the i joint and byproducts in the general journal, but is not sure what the entries should be.