Cost Separability and the Need for Allocation
Costs are either separable or not. Separable costs are easily traced to individual products and offer no particular problem. If not separable, they must be allocated to various products for various reasons. Cost allocations are arbitrary. That is, there is no well-accepted theoretical way to determine which product incurs what part of the joint cost. In reality, all joint products benefit from the entire joint cost. The objective in joint cost allocation is to determine the most appropriate way to allocate a cost that is not really separable.The primary reason for joint cost allocation is that financial reporting (GAAP) and federal income tax law require it. In addition, these product costs are somewhat useful in calculating the cost of special lots or orders including government costtype contracts and in justifying prices for legislative or administrative regulations. It is important to note that the allocation of joint costs is not appropriate for certain types of management decisions.
There are two important differences between costs incurred up to the split-off point in joint product situations and those indirect costs incurred for products that are produced independently. First, certain costs such as direct materials and direct labor, which are directly traceable to products when two or more products are separately produced, become indirect and indivisible when used prior to the split-off point to produce joint products. For example, if ore contains both iron and zinc, the direct material itself is a joint product. Since neither zinc nor iron can be produced alone prior to the split-off point, the related processing costs of mining, crushing, and splitting the ore are also joint costs. Second, manufacturing overhead becomes even more indirect in joint product situations. Consider the purchase of pineapples. A pineapple, in and of itself, is not a joint product. However, when pineapples are purchased for canning, the initial processing or trimming of the fruit results in a variety of products (skin for animal feed, trimmed core for further slicing and dicing, and juice). The processing (conversion)costs to the point of split-off, as well as the cost of the original pineapples, are mutually beneficial to all products produced to that point. Both of these phenomena are caused either because the material itself is a joint product or because processing results in the simultaneous output of more than one product. Or the differences could be due to some combination of both. As a result, joint processing may limit the extent to which activity drivers in an activity-based costing system can effectively indicate a cause-andeffect relationship between overhead costs and joint products.
Distinction and Similarity between Joint Products and By-Products
The distinction between joint products and by-products rests solely on the relative importance of their sales value. A by-product is a secondary product recovered in the course of manufacturing a primary product. It is a product whose total sales value is relatively minor in comparison with the sales value of the main product(s). This is not a sharp distinction, but rather one of degree. Thus, the first distinction that a manufacturer must make is whether the operation is characterized by joint production. Then any by-products must be distinguished from main or joint products. By-products can be characterized by their relationship to the main products in the following manner:
Costs are either separable or not. Separable costs are easily traced to individual products and offer no particular problem. If not separable, they must be allocated to various products for various reasons. Cost allocations are arbitrary. That is, there is no well-accepted theoretical way to determine which product incurs what part of the joint cost. In reality, all joint products benefit from the entire joint cost. The objective in joint cost allocation is to determine the most appropriate way to allocate a cost that is not really separable.The primary reason for joint cost allocation is that financial reporting (GAAP) and federal income tax law require it. In addition, these product costs are somewhat useful in calculating the cost of special lots or orders including government costtype contracts and in justifying prices for legislative or administrative regulations. It is important to note that the allocation of joint costs is not appropriate for certain types of management decisions.
There are two important differences between costs incurred up to the split-off point in joint product situations and those indirect costs incurred for products that are produced independently. First, certain costs such as direct materials and direct labor, which are directly traceable to products when two or more products are separately produced, become indirect and indivisible when used prior to the split-off point to produce joint products. For example, if ore contains both iron and zinc, the direct material itself is a joint product. Since neither zinc nor iron can be produced alone prior to the split-off point, the related processing costs of mining, crushing, and splitting the ore are also joint costs. Second, manufacturing overhead becomes even more indirect in joint product situations. Consider the purchase of pineapples. A pineapple, in and of itself, is not a joint product. However, when pineapples are purchased for canning, the initial processing or trimming of the fruit results in a variety of products (skin for animal feed, trimmed core for further slicing and dicing, and juice). The processing (conversion)costs to the point of split-off, as well as the cost of the original pineapples, are mutually beneficial to all products produced to that point. Both of these phenomena are caused either because the material itself is a joint product or because processing results in the simultaneous output of more than one product. Or the differences could be due to some combination of both. As a result, joint processing may limit the extent to which activity drivers in an activity-based costing system can effectively indicate a cause-andeffect relationship between overhead costs and joint products.
Distinction and Similarity between Joint Products and By-Products
The distinction between joint products and by-products rests solely on the relative importance of their sales value. A by-product is a secondary product recovered in the course of manufacturing a primary product. It is a product whose total sales value is relatively minor in comparison with the sales value of the main product(s). This is not a sharp distinction, but rather one of degree. Thus, the first distinction that a manufacturer must make is whether the operation is characterized by joint production. Then any by-products must be distinguished from main or joint products. By-products can be characterized by their relationship to the main products in the following manner:
- By-product resulting from scrap, trimmings, and so forth, of the main products in essentially nonjoint product types of undertakings (e.g., fabric trimmings from clothing pieces)
- Scrap and other residue from essentially joint product types of processes (e.g., fat trimmed from beef carcasses)
- A minor joint product situation (fruit skins and trimmings used as animal feed)
Relationships between joint products and by-products change, as do the classes of products within each of these classifications. When the relative importance of the individual products changes, the products need to be reclassified and the costing procedures changed. In fact, many by-products began as waste materials, became economically significant (and thus become by-products), and grow in importance to finally become fullfledged joint products. For example, sawdust and chips in sawmill operations were originally waste, but over the years, they have gained value as a major component of particle board. The various methods of accounting for by-products reflect this development. Generally, accounting for by-products began as an extension of accounting for waste material. Revenue from the sale of the by-products is recorded as separate income, when the amount of income is so small that it has little impact on either overall cost or sales. As the value of by-product revenues becomes more significant, the cost of the main product is reduced by recoveries, and finally the by-products achieve near main product status and are allocated a share of the joint cost incurred prior to split-off.
There are a number of ways to account for by-products. Typically, joint costs are not allocated to by-products because the products themselves are considered to be immaterial. Instead, revenue for the sale of the by-product is accounted for as “revenue from by-products” or as “other income.” Any further processing costs needed (beyond the split-off point) are deducted from revenue. On occasion, net revenue from the sale of the by-product is accounted for as a deduction from the cost of goods sold of the joint products.Also read accounting for joint product costs
There are a number of ways to account for by-products. Typically, joint costs are not allocated to by-products because the products themselves are considered to be immaterial. Instead, revenue for the sale of the by-product is accounted for as “revenue from by-products” or as “other income.” Any further processing costs needed (beyond the split-off point) are deducted from revenue. On occasion, net revenue from the sale of the by-product is accounted for as a deduction from the cost of goods sold of the joint products.Also read accounting for joint product costs
.
0 comments:
Post a Comment