Chapter 16 Cost Allocation Joint Products and Byproducts Joint Cost cost of production process that yields multiple products simultaneously Situation examples include Hog Bacon ham ribs pork roast Turkey Breast wings drumsticks Split off Point In a joint production where two or more products become seperably identifiable Joint Costs must be allocated to individual products or services for several purposes including Computation of inventoriable costs and cost of goods sold for financial accounting Reimbursing companies with products under cost plus contracts Regulating the rates and prices of one or more jointly produced product Litigation or insurance settlements Two approaches to allocating joint costs and taxes 1 Market Based allocate using market derived data Sales value at split off NRV Constant gross margin percentage NRV 2 Physical Measures allocating using tangible attributes of the products such as pounds gallons barrels etc Sales value at split off method Allocates joint costs to joint products produced during the accounting period on the This method uses the sales value of the entire production of the accounting period Follows the benefits received criterion of cost allocation basis of the relative total sales value at split off point not just the quantity sold Net Realizable Value Method Allocates joint costs to joint products produced during the accounting period of the NRV Final Sales Value Separable Costs basis of relative NRV In many cases products are processed beyond the split off point to bring them to a marketable form or to increase their value above their selling price at split off Constant Gross Marin NRV Method The constant gross margin percentage NRV method allocates joint costs to joint products produced during the accounting period in such a way that each individual product achieves an identical gross margin percentage The method works backwards in that the overall gross margin is computed first Joint costs are calculated as a residual amount by subtracting the separable costs and gross margin from the final sales value This method can be broken down into three steps 1 Compute the overall gross margin percentage 2 Compute the total production costs for each product 3 Compute the allocated joint costs Physical Measure Method Allocates joint costs to joint products produced during the accounting period on the basis of a comparable physical measure such as the relative weight quantity or volume at the split off point Choosing an allocation method Sell or Process Further Decisions If selling price at splitoff is available the sales value at splitoff is the preferred method even if further processing is done Reasons for this are that it is the best measure of benefits received it is independent of further processing decisions simplicity and common allocation basis If selling prices are not available the NRV method is the best alternative 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 costs Don t assume all seperable costs in joint costs allocations are always incremental Some seperable costs may be fixed costs Accounting for By Products 1 Production Method recognizes byproduct inventory as it is created and sales and 2 Sales Method Recognizes no byproduct inventory and recognizes only sales at the costs at the time of sale time of sales byproduct costs are not tracked separately Chapter 11 Decision Making and Relevant Information Five step Decision Making Process 1 Identify the problem and uncertainties 2 Obtain information 3 Make predictions about the future 4 Make decisions by choosing among alternatives 5 Implement the decision evaluate performance and learn 1 It occurs in the future 2 It differs among the alternative courses of action Choose the product that produces the highest contribution margin per unit of the constraining resource not the highest contribution margin per unit of the product Product Mix Decisions with Capacity Constraints Relevant Information has two characteristics Chapter 19 Balanced Scorecard Quality and Time Theory of Constraint Two basic aspects of quality 1 Design Quality refers to how closely the characteristics of a product or service meet the needs and wants of customers 2 Conformance Quality refers to the performance of a product or service relative to its design and product specifications Machines that break down fail to satisfy the conformance quality The Balanced Scorecard Balances the use of financial and nonfinancial long term and short term internal and external performance Translates an organization s mission and strategy into a set of performance measures that provides the framework for implementing its strategy Four perspectives include Financial Customer Internal Business Perspective and Learning Growth Prevention Costs Costs incurred to preclude the production of products that do not conform to specifications Examples include Preventive equipment maintenance design engineering technical support to suppliers Appraisal Costs Costs to detect which of the individual units of products do not conform to specifications Examples depreciation of test equipment plant utilities in the inspection area Internal Failure Costs Costs on defective products before they are shipped Examples Spoilage retesting reworked products rework direct manufacturing overhead and labor net cost of spoilage External Failure Costs Costs on defective products after they are shipped Examples Liability claim Examples warranty repairs lost sales from reputation for poor quality Nonfinancial measures of customer satisfaction include market share number of complaints average delivery days on time delivery rate percentage of highly satisfied customers etc Opportunity Costs include Lost sales forgone contribution margin and lower production Three techniques for identifying and analyzing quality problems 1 Control Charts Control charts are a graph of a series of successive observations of a particular step procedure or operation taken at regular intervals of time Each observation is plotted relative to specified ranges that represent the limits within which observations are expected to fall Only those observations that fall outside the control limits are regarded as nonrandom and worth investigating diagrams A chart that indicates how frequently each type of defect occurs ordered from