Joint and by-product costing Flashcards
(11 cards)
What is job costing
when a customer orders a specific job, the job is costed separately, with all associated costs listed to arrive at a total cost.
What is Batch costing
the same as job costing except we cost out a batch of units.
What is service costing
service industries proved a service as opposed to manufacturing a product.
What is joint product and by - product costing
Joint products: when one process makes two or more main products that are all valuable
By-products: extra products made during the process that are not very valuable (sometimes even considered waste).
Production process for joint and by products
Joint products are not identifiable as different individual products until split off point. Which means they cannot be traced to individual products.
By-products emerge incidentally from the production of the major products and have very minor sale value.
Methods of allocating joint costs
- methods based on physical measures, such as weight.
- methods based on allocating joint costs relative to the market values of the products. (based on sales value)
- the net realizable value method
NRV = sales value - further processing costs
Constant gross profit percentage method:
- since three products are inseparable and arise from a single productive process they should earn identical gross profit percentage
Key: allocate joint costs so that gross profit is identical
*gross profit = sales value - COGS
COGS = allocated joint costs + further processing costs
Advantages and disadvantages of physical measurement method
+simple to operate where there is a common unit of measurement.
-can distort profit reporting and inventory valuation
-can be difficult to find a common unit of measurement
ADV and DISADV for sales value at split-off point
+provides more realistic inventory valuations
-assumes that sales value determines prior costs
-assumes that a sales value at split-off point can be determined
ADV and DISADV for net realizable value
+ takes further processing costs into account
+ simple to apply if there is only one split-off point
- can be difficult to calculate for a complex process with many split off points.
ADV and DISADV of constant gross profit percentage
+appropriate only if a constant gross profit for each joint product is a logical assumption
-only appropriate if a constant gross profit for each product makes sense
