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“And welcome to the session. This is professor forehead in this session. We re going going to be looking at a topic that s called a joint product and by gosselin basically. It s two topics.
But they re interrelated. These topics are covered on the cpa exam. Vec section. As well as cma exam.
As well as in a managerial or cost. Accounting course now additional lectures and topics that are related to this session. Can be found on forehead lectures web website. Which is my website so let s start by talking about joint profit.
What is a joint product and when do we have a joint product or what does it look like so. What is the big picture here s the big picture. We have cost we incurred some cost here material. Labor and overhead and as a result of this this this coming this cost gave us three different product product.
A product b. In product c. The question becomes how do we allocate this cost how much of this cause. They were locate the product.
A product b. And product c. The best way to look at this is to look at an example to see what it looks like so here. We are talking about crude oil.
That s so here. We have a joint and port or joint cost. So let s assume we incurred here for the sake of the example 100 and 5000. In processing crude oil and as a result of this of this process.
We have we produced kerosene. Which is the gas for the airplanes regular gasoline and lubricant and you re gonna see why i put lubricant in a different color here s what we say this is the split off point simply put this is called the spur off point it means the point in the manufacturing in the manufacturing process. Where the joint product can be recognized a separate product. So up to this point up at this point.
We did not have a separate product. Once they start to separate into the crude oil and to kerosene gasoline and lubricant now. This is called the spur of point that s important now we call the kerosene and the gasoline those two those are our called join product. Ok now you re saying why didn t you include the lubricant for the sake of this illustration.
The lubricant. I m gonna be calling it a by product now how do i determine that lubricant is a byproduct well i m gonna assume that lubricant has a minor value camp in comparison to the gasoline and the kerosene. What does that mean so i m gonna put some numbers to tell you how i came up with it would be with the fact that i m assuming lubricant as a byproduct of this process so what the kerosene the kerosene i m gonna assume i m gonna be producing 100000 barrels okay and each barrel can be sold for 25 okay for the. Gasoline i m gonna be producing 150000.
Barrels and each barrel can be sold for 15. I mean ignore the reality here this is just the sake of the simplicity just to make them just to make the point. I m making up these numbers and for the lubricant. All the rubric on the right that i can produce from this process is worth 5000.
I m not gonna even put it number of barrels or any or any unit measurement on it i m gonna say i can sell all the lubricant that s left in the process for. 5000 so notice the kerosene if i take 100000. Times. 225.
That s gonna give me two hundred and fifty thousand dollars in value if i take 150. Now 150000. Barrels times 15 per barrel. That s equal to two hundred and twenty five thousand that s the sales value and the lubricant is five thousand because the lubricant has a minor value i m gonna say that it s a byproduct of the process.
So well that would not really produce a lubricant. But as a result of our production process. We came up with some lubricant. We can sell it for five thousand and that s the that s why we call it a by product.
Now the question. We haven t answered the question that we need to answer. Which is how do we allocate this 105 thousand to the kerosene gasoline and lubricant. The first thing.
We re gonna do is the following. What companies would do they would say the lubricant is basically a separate. Product so basically because we sold 5000. What the drupal.
Camp. Oh we re gonna do we re going to take the 105000. And. Subtract the.
Coaches the cost the joint cost and subtract from it the 5000. We get from the lubricant in other. Words the lubricant helped reduce our production costs now our cost is 5000. Why why did i do so because this is a byproduct now the most common way to allocate cost is something called relative sales value.
So what i m gonna do is this kerosene kay and gasoline. G we. Said the kerosene sales is. 250000 and for the.
Gasoline we said the sales is 225000. What i m gonna do now i m gonna add them up and that s gonna give me four hundred and seventy five thousand dollars in total. And what i would do i would find the relative value so. They the kerosene is 250 divided by four seventy five little bit over a little bit over fifty percent.
So 50 divided by four seventy five. That s fifty two point six three that s fifty two point six three percent and for the gasoline. It s 225. I m gonna put it right here 225 divided by four seventy.
Five. Which is twenty five divided by four seventy five. That s forty seven point three seven okay. It was forty seven point three seven percent.
All what i have to do now have this. Cost this is where i used the. 100000 as a number so what i m gonna do after 100000. I m gonna allocate to the kerosene fifty two point six three which is fifty two thousand six hundred and thirty thousand six hundred and thirty and thirty dollar.
Fifty fifty two thousand six hundred and fifty dollars and for the gasoline it s forty seven point three seven. I m gonna allocate to that forty seven thousand three hundred and seventy dollars. If i had this plus this it would up to one hundred thousand in other words. I allocated the cost and i m supposed to allocate now you might be asking can t i do the same thing for the five thousand there s another method to to treat the lubricant as a separate product.
Then you the same thing and the lubricant will be allocated a small amount of the cost she in other words you could use the lubricant as as as a separate as a separate product also what we used here is what we used in this method is called the market approach in other word. I use the dollar amount the dollar amount of. Sales some you could use the physical unit for example here i have 100000. Barrels which is 150000.
Barrels so i will do my my distribution based on you know 100000. Barrels plus. 150 equal to 250. Then what i m gonna do i would allocate them based on the physical unit.
The number of barrels you could also do that as well so this is called the sales. The sales method or the relative sales method. This is the most common method. But what happens sometime is this sometime.
We can do remember d. We have we can sell the kerosene for then you just make sure we have the numbers 25. And this is 15 per barrel. Here we can do sometimes sometime.
We can process our product a little bit further and when do we process the product. Further as long as the additional processing as long as the revenue from the additional processing exceeds. The cost so simply put if we spend let s assume we spent an additional 3 and the kerosene refine. It a little bit more then we can sell each barrel for 35 also for the gasoline.
If we spent let s assume an additional 10 okay for refining that gasoline better and we can sell also for let s make it 40 just different number then 35 okay 40. So are we going to do so. And the answer is yes and if we could if we can spend three dollars additional three dollars. We can sell each barrel for 35 here.
If we can sell if we can if we can if we can process the gas spent additional 10. We can sell each barrel for 40. It s it s a better product now the lubricant terms can. Assume it s only gonna give us 5000.
And the joint cost if we remember is 105. Why am. I doing so. Because i showed you the relative.
Si value. Now. There s another method called net realizable value. How do we compute the net realizable value and the net realisable value we are going to go backward.
We re going to go backward. What do i mean we re going to go backward for remember we have for the. Kerosene. 100000 barrels and for the.
Gasoline 150000. Barrels. This is the number of barrels. So and then the net realizable value.
We re gonna do that s another method for allocating the cost. But it s called the net realizable value. We re gonna go from the final sale. So we re gonna say for the for the kerosene.
Okay. We re gonna take 35. Minus. 3 the net realizable value is.
32 and for the gasoline gk. For the gasoline. It s 40 10. The net realizable value equal to 30.
Now. We re gonna do the same thing so the net realizable value is. 32 we have 100000. Barrels that s three hundred and twenty thousand and here we are selling.
150000. Barrels we re gonna take 30 times 150000. Barrels. That s four hundred and fifty thousand now we are ready to do the same what s the joint product.
When two or more product produced from a single raw material. They re called joint product again. The picture here is the kerosene and the gasoline are joint product. The lubricant is a byproduct.
Okay the point. What is the split off point the point in the manufacturing process where joint product and the recognized as a separate again this is the split off point here because they become separate and when do we sell or process. Further. A decision as to whether to a joint product should be sold at the store or process.
Further is known as sell or process further again when do you do so when do you do so you do so as long as the incremental revenue from such processing exceeds. The incremental processing cost. And again. Why do we have why do we allocate joint costs to compute.
Obviously inventory and cost of goods sold that s for sure you know gaap require us to report costing for inventory. And cost of goods sold determine constantly immersed and under contract. We need to know how much something cost us insurance settlement computation. If you have any insurance claim you want to know you know how much did something cost you to the 3d universe litigation purposes or hell you have that purpose.
There s no really specific reason. Why do we need this okay. And you need to know that joint costs are irrelevant and decision recording. And what to do with the product from the split off point forward.
Therefore. This constant should not be allocated to end product for decision making process. So here what we re trying to say is this the joint product. They are not related to what we called the separate product cause.
I forgot to mention this firm. That s the separate product cost here that additional three dollars in additional ten dollars per barrel. They re called separate product costs. The joint product cost has nothing to do with the decision of if we should sell or process.
Further. What matter is the separate product cost and as long as the incremental revenue more than the incremental cost will process. We will process further so what i m gonna do next is maybe work. A few multiple choice questions that are that you might see on the cpa or the cma exam.
That s going to help you reinforce the concept of joint product and by product costing. If you have any questions any comments by all means email. Me. If you re studying for your cpa or cma exam by all means.
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