Decision Points

The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.

Decision

Guidelines

  1. What do the terms joint cost and splitoff point mean, and howdo joint products differ from by products?

A joint cost is the cost of a single production process that yields multiple products simultaneously. The splitoff point is the juncture in a joint production process when the products become separately identifiable. Joint products have high total sales values at the splitoff point. A byproduct has a low total sales value at the splitoff point relative to the total sales value of a joint or main product. 

  1. Why are joint costs allocated to individual products?

The purposes for allocating joint costs to products include inventory costing for financial accounting and internal reporting, cost reimbursement, insurance settlements, rate regulation, and product-cost litigation.

  1. What methods can be used to allocate joint costs to individual products?

The methods to allocate joint costs to products are the sales value at splitoff, physical-measure, NRV, and constant gross-margin percentage NRV methods. 

  1. When is the sales value at splitoff method considered preferable for allocating joint costs to individual products, and why? 

The sales value at splitoff method is preferred when market prices exist at splitoff because using revenues is consistent with the benefits-received criterion; moreover, the method is simple and does not depend on subsequent decisions made about further processing.

  1. Are joint costs relevant in a sell-orprocess- further decision? 

No, joint costs and how they are allocated are irrelevant because they are the same regardless of whether further processing occurs. 

  1. What methods can be used to account for byproducts, and which of them is preferable? 

The production method recognizes byproducts in financial statements at the time of their production, whereas the sales method recognizes byproducts in financial statements at the time of their sale. The production method is conceptually superior, but the sales method is often used in practice because the dollar amounts of byproducts are immaterial.