Cost Allocation and Product Costs

Accounting for Joint Production Processes

Joint products are two or more products produced simultaneously by the same process up to a “split-off” point.

• the split-off point is when the joint products become separate and identifiable.

Separable costs are easily traced to individual products and offer no particular problem

The distinction between joint and by-products rests solely on the relative importance of their sales value.

A by-product is a secondary product recovered in the course of manufacturing a primary product.

Sawdust went from being a by-product to being a joint product.

Physical Units Method - physically measure the output of the joint products and allocate costs accordingly

Sales Value at Split-Off Method - proportionate share of sales value at split-off

Net-Realizable Value at Split-Off - based on hypothetical market price (eventual market value minus processing costs beyond split-off)

Weighted Average Method

Responsibility Accounting

Strategic-Based Responsibility Accounting

The balanced scorecard is a strategic-based performance management system that typically identified objectives and measures from four different perspectives:

• The Financial Perspective
• The Customer Perspective
• The Process Perspective
  • using innovation to create new revenue streams
  • redesign of products to enhance customer value
  • improve operational efficiency or throughput
  • reducing cycle time (total time of production)
  • increasing velocity (amount of output over a given period of time)
• The Learning and Growth Perspective
  • employee training and capabilities
  • alignment of employee activities with corporate strategies
  • enhanced information systems capabilities

Contribution Margin Format Income Statement

Traditional: Sales - COGS = Gross Margin - Period Costs (SG & A) = profit/loss Based on Cost Behavior: Sales - Variable Costs = Contribution Margin - Fixed Costs = profit/loss

Profit = Sales(x) - Variable Cost(x) - FC Profit = Contribution Margin(x) - FC y = m(x) + b => slope is contribution margin, intercept is fixed costs

Uses of the Cost Behavior format income statement

1. Determine Sales Break-Even Point
2. Determine level of sales needed to achieve a target profit
3. Calculate Margin of Safety
4. Determine amount of financial leverage employed
5. Determine price points and pricing strategies
6. Determine impact of product mix fluctuations
7. Perform Sensitivity Analysis
8. Make outsourcing decisions
9. provide special order pricing
10. determine most efficient utilization of limited resources
11. Determine whether to sell or process further
12. Evaluate financial effect from changes in inventory levels

Break Even Point: BEP = FC/CM (dollars? use % CM, units? per unit CM)