Managerial Accounting: Joint Cost Allocation Methods

Sales Value at Split off Point Method

Ans. To Question No.1

Before going into the calculation, it is better to have a brief idea of the of the sales value at split off point methods of joint cost allocation.

Split off point is the state at which the joint costs of producing the joint product ends and the cost of further processing that is separate to each joint product begins. As per this method the joint cost is allocated based on the sales value of each joint product at the point of split off. 

Statement showing the allocation of joint cost of Sweet and Sugar Company for the month of March using sales value at Split off point method 

Product Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Sugar ($)	Sugar Syrup ($)	Fructose Syrup ($)
Total Joint Cost – $240,000 (to be allocated in the ratio of ($80:$70:$50) [ See Note No. 1 below]	$96000	$84000	$60000
Total	$96000	$84000	$60000

Working Note:

1. Allocation of Joint cost using sales value at split off point
2. Sugar

= $240000*$80/$200

=$96000

1. Sugar syrup

=$240000*$70/$200

=$84000

1. Fructose Syrup

=$240000*$50/$200

=$60000

Ans. To Question No.2

As per this method the joint cost is allocated based on some physical measurement of the joint products generated from the respective process which can be like volume, weight or quantity of the joint product. In this case the costs allocated to each unit of every joint product remain same or equal. 

Statement showing the allocation of joint cost of Liquid high, Nil for the month of June using Physical Measure method

Product	Turpentine	Paint Thinner	Spot Remover
Total Joint Cost-$240,000 (to be allocated in the ratio of 30:30:15) [See note no. 1 below]	$96000	$96000	$48000
Total	$96000	$96000	$48000

Working Note:

1. Allocation of Joint cost using Physical measure method

1. Turpentine

=$240000*$30/$75

=$96000 

1. Paint Thinner

=$240000*$30/$75

=$96000 

1. Spot Remover

=$240000*$15/$75

=$48000 

Ans. To Question No.3

As per the Constant Gross Margin Percentage of NRV method of joint cost allocation at first the overall gross profit margin of the entity is computed, then this gross profit margin is applied separately to each and every joint product so that to trace out the total production cost of each joint product, then out of this total production cost the separate cost of further processing is deducted so that to obtain the joint cost of such product as a balancing figure. At times it results into the negative allocation of the joint cost too just because of keeping the constant gross profit margin on each joint product. 

1. Statement showing the allocation of joint cost of Enviro Green Company for the month of May using Constant Gross Margin Percentage of NRV Method

Product	Paper	Cardboard	Total
Final Sales	$338750	$297600	$636350
Less: Gross margin on Sales @ 16.24% [see note no. 1 below]	$55013	$48337	$103350
Total Production cost	$283737	$249263	$533000
Less: Separate Cost	$221000	$262000	$483000
Joint cost allocated	$62737	($12737)	$50000

In the above case it is quite evident that the joint Product Cardboard received the negative joint cost allocation of $12737, that reflects an unusual feature of Joint cost allocation under the of Constant Gross Margin Percentage of NRV. 

Working Notes:

1. Computation of Constant Gross Margin Percentage of NRV for Enviro Green Company

Product             Units(Kg) Final Selling price per unit        Total Sales Value

Paper                125,000                 $2.71/kg                               $338750

Cardboard        96,000                   $3.10/kg                               $297600

Total                                                                                            $636350

Less: Total joint Cost                                                                 $50000

Less: Total Separate Cost ($221000+$262000)                        $483000

Gross Margin                                                                           $103350

Gross Margin Percentage of sales                                           =$103350/636350*100

=16.24%

1. Statement showing the allocation of joint cost of Enviro Green Company for the month of May using Physical Measure method

Product	Paper	Cardboard
Total Joint Cost- $50000 (to be allocated in the ratio of 125:96) [See note no. 2. below]	$28281	$21719
Total	$28281	$21719

Working Note no. 2

Allocation of joint cost under physical measure method

1. Paper

= $50000*$125/$224

=$28281

1. Cardboard

=$50000*$96/$221

=$21719

1. Statement showing whether further processing of the product is profitable or not

Product	Paper	Cardboard
Incremental Sales [ See Note No.1 below]	$275750	$251600
Less: Further processing cost	$221000	$262000
Net Benefit	$54750	($10400)

From the above analysis it is quite clear that it is beneficial to process paper beyond the split off point that shall accrue a net benefit of $54750 in total, but it is recommended not to process the cardboard further that result into the net loss of $10400.

It is further to be noted that irrespective of the method chosen for the allocation of the Joint cost it won’t any difference in the decision made above, as while taking decision about further processing, there is no need to consider for the joint cost allocation as these are the costs which are mandatorily to be incurred (Covaleski, Evans, Luft, & Shields, 2003). Had there been the case of main product and byproduct then they would have been taken into consideration.

Working Note 

1. Incremental sales

1. Paper

=$338750-$63000

=$275750

1. Cardboard

=$297600-$46000

= $251600

Ans. To Question No.4

The decision of further processing a product or not largely depends on the fact that whether the products we are considering for further processing are joint product having almost similar value or they are main product and by product in which the value of one product seems to be largely higher than the other (Bennouna, Meredith, & Marchant, 2010).

1. Statement showing the analysis whether it is more profitable for YGMC to continue selling raw bulk coal or to process it further to sizing and cleaning (Ignoring Coal fines)

Particulars	Amount ($)
A. Incremental Revenue from further processing (See Working Note No. 1 Below)	$8,46,00000
B. Less: Incremental cost
Direct Labor	$800000
Supervisory Personnel	$200000
Heavy Equipment: rental, Operating and maintenance costs ($25000*12)	$300000
Contract sizing and cleaning ($3.50*10000000)	$35000000
Outbound rail freight	Nil
Total (B)	$37600000
Net Benefit	$48300000

Statement showing Net Benefit from the sale of raw Coal

Particulars	Amount ($)
Sale of Raw Coal [10000000 tones*$27/ton)	$270000000
Less Cost of Producing Raw Coal (10000000 tones*$22/Ton)	$220000000
Net Benefit	$50000000

Hence from the above analysis it is quite evident that processing of raw coal into cleaned and sized coal would cause a reduction of Net benefit of $1700000($50000000-$10700000), Thus it is suggested not to process it further (Eddy, Filip,R, & Warlop, 2004).

Working Notes:

1. Net Output of Coal after sizing and Cleaning

Input of Raw coal – 10,000,000 tones

Less: loss @ 6% of input- 6,00,000 tones

Net Output of coal sized and cleaned- 9400000 tones

Value of incremental Output – 9400000 Tones ($36-$27) = $84600000

1. Outbound rail freight is a selling expenditure not to be considered in the further processing cost of raw coal into sizing and cleaning.

1. The impact of reduction of cost of producing Coal from $22/ton to $20/ton

 In this case the resultant benefit from selling and producing coal shall increase by [10000000($22-$20)] $20000000 and total net befit would be $70000000, hence the overall net benefit would be $21700000 from the producing and selling of raw coal (Awasthi, Omrani, & Gerber, 2018).

1. Considering the value of Coal fines in the calculation made in 1

Total quantity of material loss in the process of sizing and cleaning- 600000 tones

Total extracted quantity of Coal fines from the above loss- (600000*75/100) = 450000 tones

Sale value of coal fines [450000*($15-$2)] = $5850000

Add: Net Benefit from sale of Processed Raw coal = $48300000

Total Net Benefit = $54150000

Or

Sales Value of Coal fines [450000($24-$4)] =$9000000

Add: Net Benefit from sale of Processed Raw coal = $48300000

Total Net Benefit =$57000000

In the first case the net benefit from the further processing would be [$54150000-$50000000] $4150000 and in the second case it would be [$57000000-$50000000] = $7000000.

Thus, in both cases our decision would change and would suggest for further processing.

Conclusion

From the above it is quite clear that allocation of joint cost plays a major role in decision making process of an entity and is required to evaluate the prospect of further processing of a product.       

References

Awasthi, A., Omrani, H., & Gerber, P. (2018). Investigating ideal-solution based multicriteria decision making techniques for sustainability evaluation of urban mobility projects. Transportation Research Part A: Policy and Practice, 116(2), 247-259.

Bennouna, K., Meredith, G., & Marchant, T. (2010). Improved capital budgeting decision making: evidence from Canada. Journal of Mnagement Decisions, 48(2), 225-247.

Covaleski, M., Evans, J., Luft, J., & Shields, M. (2003). Budegting Research Three Theoretical Prespectives and Criteria for selective Integration. Journal of Management Accounting Research, 15(3), 3-49.

Eddy, C., Filip,R, & Warlop, L. (2004). The Value of Activity-Based Costing in Competitive Pricing Decisions. Journal of Management Accounting Research, 16, 133-148.