The cost concept demands all assets to be recorded in the books of accounts of the prices at which they were bought. This involves the cost incurred for transportation, installation, and acquisition. Given are some essential MCQs on the cost concept to analyse your understanding of the topic. The American Accounting Association is the world’s largest association of accounting and business educators, researchers, and interested practitioners. A worldwide organization, the AAA promotes education, research, service, and interaction between education and practice. Formed in 1916 as the American Association of University Instructors in Accounting, the association began publishing the first of its ten journals, The Accounting Review, in 1925. Ten years later, in 1935, the association changed its name to become the American Accounting Association.
Generally, a same raw material is used to manufacture two or more products from the single process. Therefore, an increase in the output of one product will bring an increase in the output of other products from the same process or vice versa but not in direct proportion. Explain the effect that the different cost allocation methods have on the decision to sell the products at split off or to process them further. A new federal law has recently been passed that taxes crude oil at $30 \%$ of operating income. No new tax is to be paid on natural gas liquid or natural gas. Starting August 2012 , sinclair 0 il $\&$ Gas must report a separate product-line income statement for crude oil. One challenge facing sinclair 0il $\&$ Gas is how to allocate the joint cost of producing the three separate saleable outputs.
In the course of manufacturing a main product, 500 units of the by-product were produced. Further processing cost incurred for the by-product was Rs.4,000 and selling expenses incurred for sale of the by-product was Rs.2,500. PQR Ltd produces three joint products A, B and C and sells them at Rs.14, Rs.12 and Rs.9 respectively. Number of units produced are 1,500, 1,200 and 1,000 respectively. Processing cost incurred after split-off point are Rs.8,000, Rs.6,500 and Rs.5,000 respectively.
Coursecost Accounting: A Managerial Emphasis 16th Edition None
If division profits exceed the relevant corporate costs, the division should not be closed. To provide information for economic decisions including long-run decisions such as product pricing decision and short-run decisions such as make or buy decisions. Identify four purposes for allocating costs to cost objects. Independent of your answer to requirement , suppose Danny Dugard, the assistant controller, has completed an analysis that shows Ultra-Betalite should not be produced.
The NRV method assumes that all the markup or profit margin is attributable to the joint process and none of the markup is attributable to the separable costs. Profit, What is bookkeeping however, is attributable to all phases of production and marketing, not just the joint process. Measurement of the value of the joint products at the split off point.
When A Company Produces Two Different Products Through A Common Production Process The Factor?
Determination of relative selling prices of joint products itself a difficult and time consuming process. Selling prices of some joint products are fairly stable while others fluctuate and it makes allocation of joint costs difficult. It is equitable to allocate joint costs on the basis of physical weight without consideration of its sale value. The co-products can be produced in quantities and the production of one co-product will not affect the production of other co-product.
Automobile Manufacturing Industry, whose final products are Cars, Jeeps, Trucks, etc., provides another example of Co-products. Further, the output of one beverage say, Coffee can be increased by decreasing the output of another beverage say, Tea.
What Is Opportunity Cost And Joint Cost?
A common cost should be allocated to each user in a reasonable way. There are two methods of allocating common cost between two users i.e., the stand-alone method and the incremental method. Allocate joint costs using physical measures, such as the weight, quantity , or volume of the joint products. Final Sales Value of total production Deduct Gross Margin using overall gross-margin percentage of sales (29.927%) Total product costs Deduct separable costs Joint Costs Allocated e.
The following weights are assigned after a detailed survey – P – 5 points, Q – 3 points, R – 1 point and S – 2 points. Required – Apportion the joint costs using weights assigned. In the context of joint products, it is necessary to distinguish between joint products and co-products. The terms ‘joint products’ and ‘co-products’ have also become interchangeable.
Proctor & Gamble is an excellent example of a company that efficiently realizes economies of scope from common inputs since it produces hundreds of hygiene-related products from razors to toothpaste. The company can afford to hire expensive graphic designers and marketing assets = liabilities + equity experts who can use their skills across all of the company’s product lines, adding value to each one. If these team members are salaried, each additional product they work on increases the company’s economies of scope, because of the average cost per unit decreases.
- Fixed MO is included in the cost of each product b/c product cost includes all fixed and variable mfg. costs.
- This is due to higher input prices and yet the selling price of fitness equipment decreased.
- The costs of the single input and related manufacturing process costs must be allocated to each of the joint products.
- No new tax is to be paid on natural gas liquids or natural gas.
- Prevention costs are costs incurred to prevent the production of products.
- These products incur undifferentiated joint costs until a split-off point, after which each product incurs separate processing.
In case the products are sold to different markets, the adjusted market value, eliminating freight and brokerage or commission elements or any other cost is to be taken. The final product or service cost will reflect the full cost only if these common costs are allocated or apportioned in some way to the individual final product. This method is applied when value of by-products are of considerable value. Joint cost is apportioned between the by-product and main product on some suitable basis after carefully evaluating the various factors of production consumed by each product.
The advantage of this method is that it emphasises the fairness or equity criterion. In order to improve customer profitability, tracking price discounts by customer is required. For example, a company may restrict its volume-based price discounting policy or require its salespeople to obtain prior approval before giving large discounts to customers. Furthermore, a company can track the subsequent sales to customers who have been granted large price discounts based on their “high growth potential”. The objective of tracking is to justify that discount translates into higher future sales.
Joint Costs Definition
Sunny Day Juice Company produces oranges from various organic growers in Florida. The juice is extracted from the oranges and the pulp and peel remain. Sunny Day considers the pulp and peel byproducts of its juice production and can sell them to a local farmer for $\$ 2.00$ per pound.
The Cost Effectiveness Of Growing A Garden
The standard cost of by-product is credited to the process account. This method helps to exercise control over the cost of the main product. Under this method total joint cost is divided by total number of units of all joint products. The result obtained under this method is similar to the result obtained under physical unit’s method. The merits and demerits of this method are similar to that of physical unit’s method. Iridium Technologies manufactures a variety of flash memory chips at its main foundry in Anam, Korea.
Physical inputs required for the production process are obtained from suppliers. Comparing Smart Enterprise’s relevant total costs under the current purchasing policy and the JIT policy, and it shows net cost savings of RM24,240 per year by shifting to a JIT purchasing policy. Costs of quality are the costs involved when features and characteristics of a product or service do not satisfy the customer expectations.
The terminology, purposes, and the general process of cost allocation are discussed. The criteria to guide cost allocation decisions and the allocation of costs from one department to another, allocation of support department costs and allocation of common costs is highlighted. The terminology of joint products and by-products are also introduced.
A joint product can be the output of a process with fixed or variable proportions. One of the simplest methods to apportion joint cost is the average unit cost method. Here, the average cost per unit is calculated by simply dividing the total cost of all the joint products incurred before their splitting-off, by the total of the number of units produced all together. In the production of a joint products are outputs from common inputs and a common production process. main product, a by-product Y is obtained. In a certain period 500 units of the by-product are produced which are transferred to another process where the by-product is consumed. If the by-products were purchased from the market, the price would have been Rs.8 per unit. Calculate the amount to be credited to the main product in respect of the by-product under the replacement cost method.
Quality Chicken’s management wants to use the sales value at splitoff method. However, management wants you to explore the effect on ending inventory values of classifying one or more products as a byproduct rather than a joint product. A joint product is the term used when two or more products arise simultaneously in the course of processing, each of which has a significant sales value in relation to each other. When two or more products are simultaneously produced from common set of inputs by a single process, which are indistinguishable from each other up to the point of separation, are called ‘joint products’. Joint products are two or more products that are generated within a single production process; they cannot be produced separately and incur undifferentiated joint costs. Joint products cannot be separated until a specific ‘split-off point’ or ‘separation point’. Joint costs are incurred beyond the split-off point and are assignable to individual products.
From the material use, worker wage, how the machine performance, and the level of work difficulties, then we will decide the cost of each product base on our professional judgment. This method will compare all product selling prices as the percentage of total sales. normal balance We assume that the product will higher value should consume a higher cost. All of the output will measure by their physical weight or volume such as tones, kg, liter and so on. The cost of raw material will be proportion to all products base on each physical output.