Cost Accounting (14th Edition)

APPROACHES TO ALLOCATING JOINT COSTS 581
Joint Costs
$400,000
Cream
25,000 gallons
Exhibit 16-2
Example 1: Overview of
Farmers’ Dairy
Raw Milk
110,000
gallons
Processing
Liquid
Skim
75,000 gallons
Splitoff
Point
are allocated to individual products to calculate cost per gallon of cream and liquid skim
for valuing ending inventory. This method uses the sales value of the entire production of
the accounting period (25,000 gallons of cream and 75,000 gallons of liquid skim), not
just the quantity sold (20,000 gallons of cream and 30,000 gallons of liquid skim). The
reason this method does not rely solely on the quantity sold is that the joint costs were
incurred on all units produced, not just the portion sold during the current period.
Exhibit 16-3, Panel B, presents the product-line income statement using the sales value at
splitoff method. Note that the gross-margin percentage for each product is 20%, because
the sales value at splitoff method allocates joint costs to each product in proportion to
the sales value of total production (cream: $160,000 , $200,000 = 80%; liquid skim:
$240,000 , $300,000 = 80%). Therefore, the gross-margin percentage for each product
manufactured in May 2012 is the same: 20%. 5
Note how the sales value at splitoff method follows the benefits-received criterion of
cost allocation: Costs are allocated to products in proportion to their revenue-generating
Exhibit 16-3
Joint-Cost Allocation and Product-Line Income Statement Using Sales Value at Splitoff
Method: Farmers’ Dairy for May 2012
A
B
C
D
1
2
3
PANEL A: Allocation of Joint Costs Using Sales Value at Splitoff Method
Sales value of total production at splitoff point
( 25,000 gallons × $8 per gallon; 75,000 gallons × $4 per gallon)
Cream
$ 200,000
Liquid Skim
$ 300,000
Total
$ 500,000
4 W eighting ($200,000 ÷ $500,000; $300,000 ÷ 500,000)
0.40 0.60
5 J oint costs allocated (0.40 × $400,000; 0.60 × $400,000)
$ 160,000 $ 240,000 $ 400,000
6 Joint production cost per gallon
7 ( $160,000 ÷ 25,000 gallons; $240,000 ÷ 75,000 gallons)
$ 6.40 $ 3.20
8
9 PANEL B: Product-Line Income Statement Using Sales Value at Splitoff Method for May 2012 Cream Liquid Skim Total
10 R evenues (20,000 gallons × $8 per gallon; 30,000 gallons × $4 per gallon)
$ 160,000 $ 120,000 $ 280,000
11 Cost of goods sold (joint costs)
12 P roduction costs (0.40 × $400,000; 0.60 × $400,000)
160,000 240,000 400,000
13 Deduct ending inventory (5,000 gallons × $6.40 per gallon; 45,000 gallons × $3.20 per gallon) 32,000 144,000 176,000
14 C ost of goods sold (joint costs)
128,000 96,000 224,000
15 Gross margin $ 32,000 $ 24,000 $ 56,000
16 Gross margin percentage ($32,000 ÷ $160,000; $24,000 ÷ $120,000; $56,000 ÷ $280,000) 20% 20% 20%
5 Suppose Farmers’ Dairy has beginning inventory of cream and liquid milk in May 2012 and when this inventory is sold,
Farmers’ earns a gross margin different from 20%. Then the gross-margin percentage for cream and liquid skim will not be the
same. The relative gross-margin percentages will depend on how much of the sales of each product came from beginning
inventory and how much came from current-period production.