Cost - Chapter 6, Cost Allocation Joint Cost.pptx

So next time you want something done in a certain way, rather than telling people what to do, show them the behaviour you expect from them. This way, you will have more engaged, happier employees and clients.

6.Speaking of change, embrace it!

And one of my favourites — embrace change! Being a leader means knowing and accepting that nothing is forever. Even liking the idea: Change is a given in anything we do in life. In business, change brings with it opportunities and challenges more than it brings trouble.

So be flexible, be adaptable, enjoy change when it comes, and from time to time, search for it yourself — it will be worth it.

Misconceptions About Leadership

Like so many other things, leadership has its own myths and misconceptions.

I have found 3:

1.You can not be a leader if you aren’t in an authority position.

False! You can be a leader if you are a manager, but if you are a leader, you don’t have to be a manager as well. Setting positive examples, guiding the people around you, being their voice when the situation arises — that is the job of a true leader, no matter his daily job description.

2.You can not be a leader if you are an introvert.

False! Character traits are so different in people that we simply can not put a label on it and say that introverts aren’t good leaders. Sometimes, thinking more on the inside than on the outside proves even more beneficial than we think. Introverts aren’t masters of public speech, but that doesn’t mean they can not guide and inspire people toward great goals.

3.If everyone is a leader, who will follow?

False! The truth is, nobody leads in everything. The best leaders have their „specialties” and also, they step in and out of their role as leader gracefully.

The best estimates offered by research are that leadership is about one-third born and two-thirds made. How does this reflect into real life? Well, we can consider that leadership is a set of innate traits, completed by another set of qualities that are refined and perfected in time, with education, training, and experience.

I believe being a leader isn’t usually a job that you find, but rather one that finds you. Although it is not easy, it has a certain *je ne sais quoi* that draws one like a moth to a flame. As a leader, you need to make smart decisions about products and services, marketing, financing, and other operational issues, but you also have to maximize the full potential of your employees. There is a lot to do, but allow me to let you in on another little secret — leadership skills are great even for those who don’t want to lead. All the qualities I have depicted above will serve you well no matter your position at a job and in your personal life — you will be ready to step in, lead and make things smoother and better for many other people.

Once again remember “…be not afraid of greatness. Some are born great, some achieve greatness, and some have greatness thrust upon them”. Get your five buckets filled, and that wi

1. CHAPTER 6 Cost Allocation: Joint Products and Byproducts

2. learning objectives Identify the split-off point in a joint-cost situation and distinguish joint products from byproducts Explain why joint costs are allocated to individual products Allocate joint costs using the four methods Selling at split off point or further processing decision

3. Joint Cost Terminology Joint costs —costs of a single production process that yields multiple products simultaneously Split-off point —the place in a joint production process where two or more products become separately identifiable Separable costs —all costs incurred beyond the split-off point that are assignable to each of the now-identifiable specific products

4. Product: any output with a positive sales value. Sales Value can be high or low Main product : output of a joint production process that yields one product with a high sales value compared to the sales values of the other outputs Joint products : are main products of a joint production process that yields two or more products with a high sales value compared to the sales values of any other outputs Byproducts : outputs of a joint production process that have low sales values compare to the sales values of the other outputs . By-products do not receive any joint cost allocation Joint Cost Terminology Cont…

5. Examples of Joint Products

6. reasons for allocating joint costs Computation of inventorial costs and cost of goods sold for financial accounting and tax reporting Internal analysis of divisional profitability Cost-based contracting Insurance settlements Required for rate and price regulations Litigation

7. By Product Cost Accounting Accounting for cost of by-products differs from accounting for cost of main products. By-products do not receive any joint cost allocation( their product cost is zero) They are reported at NRV( sales less selling cost) in one of the following two options: Treat by-product net realizable value as other revenue. Deduct by-product’s net realizable value from joint costs of main products so as to reduce the process costs .

8. Joint Cost Allocation Methods There are four methods of Joint Cost allocation 1. Physical measure Method —allocate joint cost using physical attributes of the products, such as pounds, gallons, barrels, and so on Market-based Methods —allocate joint cost using market-derived data (birr): Sales value at split-off Net realizable value (NRV) Constant gross-margin percentage

9. Illustration- Example Assume the following data of 2010 for Shola Milk Share Company Allocate joint cost to joint products using the 4 methods Prepare income statement using joint costs

10. Illustration date at Split-off point Item Joint Cost Joint Cost( Cost of 110,000 gallons raw milk & processing to split off point) Birr 400,000 Joint Product at split off point Item Cream Liquid Skim Beginning Inventory (in gallon) Production ( in gallon) 25,000 75,000 Sales (in gallon) 20,000 30,000 Ending Inventory ( in gallon) 5,000 45,000 Selling price per gallon Birr 8 Birr 4

11. Joint Cost Illustration Overview

12. 1. Physical-Measure Method It allocates joint costs to joint products on the basis of the relative physical weight, volume..etc at the split-off point of total production of the products For Shola Milk the number of gallon produced will be the bases of allocation. Solution Ratio of physical Measure Joint Product Cream Liquid Skim Total Production 25,000 75,000 100,000 Ratio 25% 25,000/100,000 75% 75,000/100,000

13. Joint Cost Allocation Joint Cost 400,000 Allocation Cream Liquid Skim To Cream (0.25*400,000) Br100,000 To Liquid Skim(.75 *400,000) Br. 300,000 Cost Per Unit Cream Birr 100,000/25,000g = Br4/g Liquid Skim Birr 300,000/75,000g = Br 4/g

14. Shola milk s.C income statement For the yearended sene30,2010 Product Cream Liquid Skim Total Sales (20,000*8,30,000*4) Br 160,000 Br. 120,000 Br 280,000 CGS( 20,000*4,30,000*4) 80,000 120,000 200,000 Gross profit 80,000 80,0000 GP %( GP/Sales) 50%

15. 2. Sales Value at Split-off Method Uses the sales value of the entire production of the accounting period to calculate allocation percentage Product Cream Liquid Skim Total Production in gallons 25,000 75,000 100,000 Unit selling price 8 4 Sales of total production Br200,000 Br300,000 Br500,0000 Ratio 40% 60%

16. Joint Cost Allocation Joint Cost 400,000 Allocation Cream Liquid Skim To Cream (0.4*400,000) Br160,000 To Liquid Skim(.6 *400,000) Br. 240,000 Cost Per Unit Cream Birr 160,000/25,000g = Br6.4/g Liquid Skim Birr 240,000/75,000g = Br 3.2/g

17. Shola milk s.C income statement For the yearended sene30,2010 Product Cream Liquid Skim Total Sales (20,000*8,30,000*4) Br 160,000 Br. 120,000 Br 280,000 CGS ( 20,000*6.4,30,000*3.2) 128,000 96,000 224,000 Gross profit 32,000 24,000 56,0000 GP %( GP/Sales) 20% 20% 20%

18. Net Realizable Value Method and Constant Gross Margin NRV Method Used only when we assume that joint product are further processed beyond split off point

19. Assume the following data beyond split off point Cream is further processed to butter cream and sold at birr 25 per gallon Liquid skim is further processed to condensed milk sold at birr 22 per gallon Butter cream Condensed milk Production 20,000g 50,000g Sales 12,000g 45,000g

20. 3. Net Realizable Value Method Allocates joint costs to joint products on the ratio of NRV of total production . NRV = Final Sales Value – Separable Costs

21. NRV- Method Ratio of NRV Final Product Butter Cream Condensed Milk Total Final sales of total Production (20,000*25,50,000*22) 500,000 1,100,000 1,600,000 Less : Separable Cost 280,000 520,000 800,000 NRV 220,000 580,000 800,0000 NRV Ratio 27.5% 72.5%

22. Joint Cost Allocation Joint Cost 400,000 Allocation Butter Cream Condensed Milk To Better cream (0.275*400,000) Br110,000 To Condensed Milk(.725*400,000) Br. 290,000 Cost Per Unit ( Joint cost + Separable cost/ Production) Butter Cream Birr 110,000+280,000/20,000g = Br19.5/g Condensed Milk Birr 290,000+520,000/50,000g = Br 16.2/g

23. Shola milk s.C income statement For the year ended sene30,2010 Product Butter Cream Condensed Milk Total Sales (12,000*25,45,000*22) Br 300,000 Br. 990,000 Br 1,290,000 CGS ( 12,000*19.5,45,000*16.2) 234,000 729,000 963,000 Gross profit 66,000 261,000 327,000 GP %( GP/Sales) 22% 26.36% 25.34%

24. 4. Constant Gross Margin Method Allocates joint costs to joint products in a way that the overall gross-margin percentage is identical for the individual products. Joint costs are calculated as a residual amount . Total Product Cost(JC+SC) = Total Production sales – Total Production GP Thus, JOINT COST(JC) = Product Cost – Separate cost Or JC = Total sales – Total GP- Separable Cost

25. 4. Constant Gross Margin Method Solution: Overall gross-margin percentage Item Total Over all sales( 20,000*25+50,000*22) 1,600,000 Over all cost ( JC +SC)( 400,000 +280,000+520,000) 1,200,000 Overall Gross profit 400,000 Overall GP percentage(400,000/1,600,000) 25%

26. Final Product Butter Cream Condensed Milk Total Final sales of total Production (20,000*25,50,000*22) 500,000 1,100,000 1,600,000 Less : Gross Profit(25% of sales) 125,000 275,000 400,000 Total Production Cost 375,000 825,000 1,200,0000 Less : Separable Cost 280,000 520,000 800,000 Joint Cost 95,000 305,000 400,000 Joint Cost Allocation

27. Cost Per Unit ( Joint cost + Separable cost/ Production) Butter Cream Birr 95,000+280,000/20,000g = Br18.75/g Condensed Milk Birr 305,000+520,000/50,000g = Br 16.5/g

28. Shola milk s.C income statement For the year ended sene30,2010 Product Butter Cream Condensed Milk Total Sales (12,000*25,45,000*22) Br 300,000 Br. 990,000 Br 1,290,000 CGS ( 12,000*18.75,45,000*16.5) 225,000 742,500 967,500 Gross profit 75,000 247,500 322,500 GP %( GP/Sales) 25% 25% 25%

29. Method Selection If selling price at splitoff is available, use the sales value at splitoff method. If selling price at splitoff is not available, use the NRV method. If simplicity is the primary consideration, physical-measures method or the constant gross-margin method could be used. Despite this, some firms choose not to allocate joint costs at all.

30. Sell-or-Process Further Decisions In sell-or-process further decisions, joint costs are irrelevant. Joint products have been produced, and a prospective decision must be made: to sell immediately or process further and sell later. Joint costs are sunk costs. Don’t assume all separable costs in joint-cost allocations are always incremental costs. Some separable costs may be fixed costs. Separable costs need to be evaluated for relevance individually .

31. Sell-or-Process Further Flowchart

32. End