Joint Product Cost Analysis for Managerial Decisions and Profitability
Analysis:
Learning Objectives:
- What is the importance of joint
product cost analysis for management.
The Securities and Exchange Commission requires
that annual reports to stock holders include data by lines of business.
Likewise, the Federal Trade Commission requires that certain business
furnish cost and profit data for a wide range of specific product
categories. The financial Accounting Standards Board requires business
enterprise, excluding nonpublic enterprises, to report in their annual
external financial statements the revenue, operating each significant
industry segment of their operations. "Significant" generally means 10
percent or more of the total of respective amounts. Aggregate depreciation,
depletion, amortization expense, and the amount of capital expenditures must
also be reported for each segment. Furthermore, the FASB requires
information about foreign operations, export sales, and major customers, who
need not be identified. Also, methods used for cost allocations to segments
must be disclosed. Interim financial statements are exempt from these
requirements. The SEC's discloser requirements are consistent with the
provisions contained in FASB statements, yet they call for more information
than the FASB.
Companies generally resist such requirements.
One of their main arguments is that cost allocation today is fraught with
great danger of improper interpretation caused by an arbitrary allocated
joint cost. Of course, there are acceptable ways of allocating joint product
cost. Thus the choice of method makes a difference. The decision determines
the degree of profitability of the various individual products.
joint cost
allocation methods indicate only too forcefully that the amount of the cost
to be apportioned to the numerous products emerging at the point of
split-off is difficult to establish for any purpose. Furthermore, the
acceptance of an allocation method for the assignment of the joint
production cost does not solve the problem. The thought has been advanced
that no attempt should be made to determine the cost of individual products
up to the
split-off point: rather, it seems important to calculate the profit
margin in terms of total combined units. Of course, costs incurred after the
split-off point will provide
management with information needed for decisions relating to the
desirability of further processing to maximize profits.
Production of
joint products is greatly
influenced by both the technological characteristics of the processes and by
the markets available for the products. This establishment of a product mix
which is in harmony with customer demands appears profitable but is
often physically impossible. It is interesting to note that cost accounting
in the meat packing industry serves primarily as a guide to buying, for
aggregate sales realization values of the various products that will be
obtained from cutting operations are considered in determining the price
that a packer is willing to pay for livestock. Sales realization values are
also considered when deciding to sell hams or other cuts in a particular
stage or to process them further.
A
joint cost is often incurred for products that
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