Joint Production Cost Allocation Methods and Assessment of Byproducts and Defective Products

Posted on Aug 2, 2024 in Economy

Joint Production Cost Allocation Methods

A) Imputation Method Based on Market Value of Production Obtained

This procedure has been used with products with a very different market value based on the premise that the higher the sale price of a product in a market, the greater the production cost is. Therefore, it is a commercial basis, which consists of allocating joint costs in proportion to the sales prices in the market for each product.

The main criticism that is made to this procedure is the following: The sale price obtained for a product to market is a consequence of a joint production process, but its production process for self-termination is not. Therefore, this price is strategically influenced by the joint costs and autonomous costs.”This way of allocating joint costs ignores the values generated in the production process or autonomous addition” Therefore, it can occur that a higher selling price is because the stand-alone cost of a product has a higher proportion of the total cost of the product than the joint costs.

So, say if two products are obtained simultaneously, and that one needs a higher stand-alone cost than the other. In this case, this product will receive a greater proportion of joint costs, without really knowing if it is due or not.

Accordingly, this procedure is used for products having no stand-alone cost or where they are very similar. Therefore, the total cost of product “i” is: CT (i) = CA (i) + (CC / ZPsXNs) x (Pi x Ni) and the unit cost of product “i” is the total cost previous amount, divided by the number of units produced of product “i”

B) Grinding 2.Method of Market Values

This allocation procedure is to reduce the drawbacks of the previous amount procedure, especially in the event that the product alone costs are quite different. By this method, the joint cost is allocated as a function of net realizable value or sale (production valued at the purchase price, less costs autonomous)

C) Method of Gross Margin Percentage of Global Sales

The process of allocating joint costs is as follows:

  1. Determine the total sales value of total production-joint.
  2. He subtracts the value of the joint costs and the total autonomous recorded to determine the margin average gross (%)
  3. You use this average gross margin (%) for the joint costs allocated among different products.

D) Alternative Method of Costs

This method allocates joint costs according to the alternative costs that would arise if, instead of making her products, bought the exterior.

Byproducts and Wastes

Besides the main production, it is normal to get products relative to smaller firms, without any possibility of removal. No criteria objectives to determine which products are the major, and what are the secondary or secondary production accessories. Within, one must distinguish between:

A) Waste

That product is obtained in a joint production process, capable of being sold, but with a lower relative importance than the main product.

B) Residues

Are those products that are taken together with other leading products, salable, but whose relative importance is very small (less than q-products) example: sawdust

C) Waste

They are those products obtained in a production process that have no realizable value in the market, and that typically cause costs for evacuation. Example: wastewater treatment.

The potential costs of waste assessment is as follows:

  1. If they are a result of all productions, be considered an indirect cost to distribute to other productions worth realization.
  2. If there are difficulties in carrying out the above distribution is carried directly to income statement.

Procedure for Assessing the High Productions

To proceed to evaluate the products produced in conjunction with a main product there are several procedures:

A) Do Not Assign to the Production Cost High

This implies the following:

  1. The cost of the product obtained is null.
  2. Principal production to absorb all costs and joint production, secondary production will not appear inventoried.
  3. The income from the sale of secondary production will have no consideration for cost, so it will be considered in its entirety, as profit.

Therefore, that income (income = profit) is applied to reduce production costs of primary production (sold or not)

B) Assessed by Their Stand-Alone Cost

This procedure involves the following:

  1. It is considered zero cost of production to the point where it produces the separation of production principal. That is, all joint costs will be borne by the production principal.
  2. Rate Production autonomous. Therefore, secondary production costs alone will bear the costs of additional treatment specific.
  3. The profit from the sale of secondary production (revenue-cost autonomous) applied to reduce the production cost major products.

C) Measure Your Price High Production Market

In this case, “Secondary production is going to value the price of the market. The difference between the market price and production costs and marketing autonomous secondary production will be their net realizable value (profit or loss found in secondary production)

-The net realizable value is applied to reduce the cost of production-principal. Therefore, appear inventory valued at their net realizable value (retail price)

-At the time of sale, profits will not occur unless there is a difference between the market price and actual expected.

D) Procedure Sunk Cost

This procedure calls for the following:

  1. Knowing the value of sales secondary production, and set a profit margin on the part of management, the difference will be the cost that such production is valued high. (SELLING PRICE = PRICE + COST BENEFIT)
  2. The sale price is set by the market and the profit margin is set by the company.

E) Ideal Approach

The ideal approach is to keep separate accounts for the principal products, byproducts and waste from the start of the production process. That is, it is conducting an individual analysis of each production. Thus, this procedure allows:

  1. A greater degree of control and analysis
  2. A more reasonable fuel consumption figures, but close to making it. This return is used when a secondary production has a relative importance to justify such treatment, as this poses to the company a higher cost (principle of cheapness)

Defective Products

Are those products that are completely finished, but are of such a defect subsanable. Due to default, its realizable value will be lower than normal. Normally product, these products are typically valued at its probable price of performance, 2 things can happen:

  1. That the likely realizable value covers the total costs and get some profit.
  2. That does not cover the total costs and accounting treatment are obtained losses. The accounting treatment of such losses is as follows:
  1. Increase the manufacturing cost of the products of the same range.
  2. Increase the cost of manufacture of all products manufactured during the same period.
  3. Take it directly to an income statement (in the event that the imperfection is due to special causes).

Defective Products

These products are completely finished, but he shows some rectifiable or corrected, by adding more cost factors. In this case, the company either:

“Do not correct the error and try to sell the products as están.En this case the products would be trying as imperfectos.-Engaging in some additional consumption to offset these treatment defecto.El such additional consumption is as follows: 1.Imputarlos just this batch of products defectuosos.2.Imputarlo or distribute it among all manufactured between gama.3.Distribuirlo that all production of the period.