two problems on Costing allocation and Planning&Budgeting
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ise304.02-132-lec26-ch11-costallocation.pdf
Cost Allocation
Lecture 26
Chapter 11 * Modified from PPT slides of McGraw-Hill/Irwin
Joint Cost Allocation
Joint Cost
Joint Products
Split-Off Point
Cost of a manufacturing process
with two or more outputs
Outputs from a common input
and common production process
Stage of processing that
separates two or more products
Joint Cost
Recap of what we covered last class
Joint Cost, Continued. . .
Joint Cost Flows
Mining Costs:
$270,000
Split-off
Point Hi-Grade Coal: 15,000 units
Sales Value $300,000
Lo-Grade Coal: 30,000 units
Sales Value $450,000
Carlyle Coal Company
Recap of what we covered last class
Allocation of Joint Costs
Net realizable value method
Physical quantities method
Joint cost allocation based on the proportional
values of the products at the split-off point.
Joint cost allocation based on measurement of the volume,
weight, or other physical measure of the joint products at the split-off point.
Recap of what we covered last class
Example: NRV Method
Carlyle Coal Company Joint Cost Allocation NRV Method; no additional processing costs
Hi-Grade Lo-Grade Total
Final sales value 300,000$ 450,000$ 750,000$
Less additional processing costs -0- -0- -0-
Net realizable value at split-off point 300,000$ 450,000$ 750,000$
Porportionate share
$300,000/$750,000 40%
$450,000/$750,000 60%
Allocated joint costs
$270,000 x 40% 108,000$
$270,000 x 60% 162,000$
Recap of what we covered last class
Example: NRV Method, Continued. . .
Hi-Grade Lo-Grade Total
Sales value 300,000$ 450,000$ 750,000$
Less allocated joint costs 108,000 162,000 270,000
Gross margin 192,000$ 288,000$ 480,000$
Gross margin as a percent of sales 64% 64% 64%
Carlyle Coal Company Gross Margin Computations
Example: Estimating NRV
When no sales value exists for outputs at the split-off point, the
Estimated NRV should be determined.
Further Processing of Coal: Cost Flows
Mining
Costs:
$270,000
Split-off
Point
Hi-Grade Coal: 15,000 units
Sales Value $300,000
Lo to Mid-Grade Coal: 30,000 units
Mid-Grade Sales Value
$550,000
$50,000 Processing costs
Sales Value ?
Example: Estimating NRV, Continued. . .
Carlyle Coal Company Gross Margin Computations
Using NRV
Hi-Grade Lo-Grade Total
Sales value 300,000$ 550,000$ 850,000$
Less additional processing cost - 50,000 50,000
Estimated NRV at split-off 300,000$ 500,000$ 800,000$
Joint cost allocation: 101,250 a
101,250
- 168,750 b
168,750
Gross margin 198,750$ 331,250$ 530,000$
Gross margin as percent at sales 66% 60% 62%
a ($300,000/$800,000) x $270,000
b ($500,000/$800,000) x $270,000
Physical Quantities Method
Joint cost allocation based on measurement
of the volume, weight, or other physical
measure of the joint products at the split-off
point.
Significant processing occurs between the split-off point and
the first point of marketability.
Product prices are not set by the market.
Output product prices are unstable.
Example: Physical Quantities Method
Carlyle Coal Company Joint Cost Allocation
a (15,000 tons/45,000 tons) x $270,000 = 33.3% x $270,000
b (30,000 tons/45,000 tons) x $270,000 = 66.7% x $270,000
Physical Quantities Method
Hi-Grade Lo-Grade Total
Quantity (tons) 15,000 30,000 45,000
Allocation of joint costs 90,000 a
180,000 b
270,000
Sell or Process Further
Suppose CCC can sell lo-grade coal for
$450,000 at the split-off point or process it
further to make mid-grade coal. Mid-grade
coal would be sold for $550,000 and
additional processing costs would be
$50,000.
Sell Process Further Differential
Lo-Grade Mid-Grade Revenue/Costs
Revenues 450,000$ 550,000$ 100,000$
Less separate processing costs -0- 50,000 50,000
Margin 450,000$ 500,000$ 50,000$
$50,000 net gain from processing further
By-products
By-products are outputs of joint production
processes that are relatively minor in quantity
or value.
Joint Cost
Upstream
Costs:
$XXXXXX
Split-off
Point
Gasoline
Diesel Oil
Benzene
Jet A-1
Kerosene
Crude Oil
Gas
By-products
By-products are outputs of joint production
processes that are relatively minor in quantity
or value.
The net realizable value from sale of the
by-product is deducted from the joint
costs before allocation to the main
products.
The proceeds from sale of
the by-product are treated
as other revenue.
Method 1 Method 2
Example: By-products – Method One
Hi-Grade Lo-Grade By-product Total
Sales value 300,000$ 450,000$ 15,000$ 765,000$
Less additional processing costs -0- -0- -0- -0-
Net realizable value at split-off point 300,000$ 450,000$ 15,000$ 765,000$
Deduct sales value of by-product a
-0- -0- (15,000) (15,000)
Allocate remaining joint costs a
(102,000) b
(153,000) c
-0- (255,000)
Gross margin 198,000$ 297,000$ -0- 495,000$
Gross margin as a percent of sales 66% 66% 0% 65%
a Joint costs adjusted for sales value of by-product
b $300,000/$750,000 or 40% x ($270,000 - $15,000)
c $450,000/$750,000 or 60% x ($270,000 - $15,000)
Carlyle Coal Company By-Product
Example: By-products – Method Two
Hi-Grade Lo-Grade By-product Total
Sales value 300,000$ 450,000$ 15,000$ 765,000$
Less additional processing costs -0- -0- -0- -0-
Net realizable value at split-off point 300,000$ 450,000$ 15,000$ a
765,000$
Allocated joint costs (108,000) b
(162,000) c
-0- (270,000)
Gross margin 192,000$ 288,000$ 15,000$ 495,000$
Gross margin as a percent of sales 64% 64% 100% 65%
Carlyle Coal Company By-Product
a Value of by-product reported as other income
b $300,000/$750,000 or 40% x $270,000
c $450,000/$750,000 or 60% x $270,000
Service Department Cost Allocation
Practice Problems
Joint Cost Allocation
Service Department Cost Allocation, Continued. . .
Carlyle Coal Company (CCC)
Service Department:
Information Systems (S1)
Service and User Departments of
Service Department:
Administration (S2)
User Department:
Hilltop Mine (P1)
User Department:
Pacific Mine (P2)
Recap of what we covered last class
Service Department Cost Allocation, Continued. . .
Information Systems (S1) Total S1 Costs $800,000
Allocation Base: Computer Hours
User Department Number of Hours Used Percent of Total
Administration (S2) 100,000 50%
Hilltop Mine (P1) 20,000 10%
Pacific Mine (P2) 80,000 40%
Totals 200,000 100%
Recap of what we covered last class
Administration (S2) Total S2 Costs $5,000,000
Allocation Base: Employees
User Department Employees Percent of Total
Information Systems (S1) 2,000 20%
Hilltop Mine (P1) 5,000 50%
Pacific Mine (P2) 3,000 30%
Totals 10,000 100%
Service Department Allocation Method:
1. Direct method.
2. Step method.
3. Reciprocal method.
Recap of what we covered last class
Information Systems (S1) Allocation Base: Computer Hours
User Department Number of Hours Used
Administration (S2) 100,000 Hilltop Mine (P1) 20,000
Pacific Mine (P2) 80,000
Totals 100,000
Number of Hours Used Percent of Total
50%
10% 20%
40% 80%
100%
Recap of what we covered last class
Allocation Base: Employees User Department Employees
Information Systems (S1) 2000 Hilltop Mine (P1) 5,000
Pacific Mine (P2) 3,000
Totals 8,000
Employees Percent of Total
20%
50% 62.5%
30% 37.5%
100%
Administration (S2)
Cost Allocation: Direct Method
Service Department Cost Allocation
Service Department Direct Cost P1 P2 Total
S1 800,000$ 20.0% a
80.0% 100.0%
S2 5,000,000 62.5% b
37.5% 100.0%
Percent Allocable to
S1 800,000$ 160,000$ c
640,000$ 800,000$
S2 5,000,000 3,125,000 d
1,875,000 5,000,000
Total allocated 5,800,000$ 3,285,000$ 2,515,000$ 5,800,000$
Recap of what we covered last class
Cost Allocation: Step Method
Service Department Direct Cost S1 S2 P1 P2 Total
S1 800,000$ 0% 50% a
10.0% b
40.0% c
100.0%
S2 5,000,000 0% 0% 62.5% d
37.5% e
100.0%
Percent Allocable to
From S1 S2 P1 P2 Total
800,000$ 5,000,000$ 5,800,000$ k
S1 (800,000) 400,000 f
80,000 g
320,000 h
-0-
S2 -0- (5,400,000) 3,375,000 i
2,025,000 j
-0-
Total $ -0- $ -0- 3,455,000$ 2,345,000$ 5,800,000$ k
To
Recap of what we covered last class
28
Practice Problem 1: Cost Allocation: Direct Method
0.625 0.375
0.5
29
Practice Problem 2: Allocating service department costs first to Production Departments and Then Jobs
Refer to Practice problem 1
30
Practice Problem 2: Allocating service department costs first to Production Departments and Then Jobs
$149,596
$210,404
31
Practice Problem 3: Cost Allocation: Step Method
Refer to Practice problem 1
32
Practice Problem 3: Cost Allocation: Reciprocal Method
Refer to Practice problem 1
Total Service
Department
Direct cost of the
service department
Cost allocated from other
service departments = +
33
Practice Problem 3: Cost Allocation: Reciprocal Method
Refer to Practice problem 1
34
Practice Problem 4: Joint Costs: NRV Method
35
Practice Problem 5: Joint Costs: NRV Method
36
Practice Problem 6: Joint Costs: Estimated NRV Method
Diagram the processing cost flows
37
Practice Problem 6: Joint Costs: Estimated NRV Method
38
Practice Problem 7:
Joint Costs: NRV Method to Solve for Unknowns
By-products
By-products are outputs of joint production
processes that are relatively minor in quantity
or value.
The net realizable value from sale of the
by-product is deducted from the joint
costs before allocation to the main
products.
The proceeds from sale of
the by-product are treated
as other revenue.
Method 1 Method 2
40
Practice Problem 8:
Joint Costs: NRV Method with By-Product
Total joint costs = 351,000
Total sales value at split-off for main products = 675,000
41
Total joint costs = 351,000
Total sales value at split-off for main products = 675,000
= 195,000
Practice Problem 8:
Joint Costs: NRV Method with By-Product
42
Practice Problem 9: Joint Cost: Physical Quantities Method
Given
Amount Allocated
from joint cost
43
Practice Problem 9: Joint Cost: Physical Quantities Method
Given
Amount Allocated
from joint cost
44
Practice Problem 10:
Joint Cost: Physical Quantities Method with By-Product
The net processing costs to be allocated = 270,000 – 10,000 = 260,000
