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What is a joint cost? What is a separable cost?

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A joint cost is a shared cost incurred during the production of multiple co-products or joint products simultaneously, allocated based on a specific method. A separable cost, on the other hand, is associated with a specific product or service and identifiable after the split-off point, when the joint products become distinct. The key difference between the two lies in their allocation and the point in the production process at which they are incurred.
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Step 1: Definition of Joint Cost

A joint cost is the cost incurred when a production process or operation produces two or more co-products or joint products at the same time. They are the shared costs that are allocated to these multiple products based on a specific allocation method, such as an equal distribution of the cost, based on actual output volumes, or using market values.

Step 2: Definition of Separable Cost

A separable cost, on the other hand, is a cost associated with a particular product or service that can be separately identified and assigned. These costs are not shared with other products or services and are incurred after the split-off point, which is the stage in the production process when joint products become distinct from each other.

Step 3: Distinguishing Joint Costs and Separable Costs

The key difference between joint costs and separable costs lies in their allocation and the point in the production process at which they are incurred. Joint costs are shared by multiple products being produced simultaneously, while separable costs are specific to individual products. Joint costs are incurred before the split-off point, whereas separable costs are incurred after the split-off point.

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Most popular questions from this chapter

Chapter 16

Mountainair Construction Company (MCC) crushes boulders to obtain decorative rock, which they sell through various outlets. The process produces three grades of rock, which are viewed as joint products: Red Rock, a high-end decorative rock; White Rock, commonly used for landscaping purposes; and Gravel, used for driveway filler. For each 2,000 pounds of boulder, MCC produces 400 pounds of Red Rock, 600 pounds of White Rock, and 1,000 pounds of Gravel. Data for August are provided below: Joint costs are \(\$ 190,000\); there was no beginning or ending inventory. Because the Red Rock is sold at a premium, it is processed further to ensure uniformity of the rocks. The process costs an additional \(\$ 100\) per batch of 2,000 pounds of boulders used. The finished Red Rock product is sold for \$15 per pound. 1\. Allocate joint costs under each of the four methods. For the physical measure, use pounds of production. 2\. Mr. Green, the president of MCC, wants to understand which method is bestto use. Explain to Mr. Green the basis for each method and its effect on the financial statements. Also provide your recommendation for MCC and a rationale for that recommendation.

Chapter 16

(CMA, adapted) Liverpool Sawmill, Inc. (LSI) purchases logs from independent timber contractors and processes the logs into three types of lumber products: \(\bullet\) Studs for residential buildings (walls, ceilings) \(\bullet\) Decorative pieces (fireplace mantels, beams for cathedral ceilings) \(\bullet\) Posts used as support braces (mine support braces, braces for exterior fences on ranch properties) These products are the result of a joint sawmill process that involves removal of bark from the logs, cutting the logs into a workable size (ranging from 8 to 16 feet in length), and then cutting the individual products from the logs. The joint process results in the following costs of products for a typical month: Product yields and average sales values on a per-unit basis from the joint process are as follows: The studs are sold as rough-cut lumber after emerging from the sawmill operation without further processing by LSI. Also, the posts require no further processing beyond the splitoff point. The decorative pieces must be planed and further sized after emerging from the sawmill. This additional processing costs \(\$ 90,000\) per month and normally results in a loss of $10 \%$ of the units entering the process. Without this planing and sizing process, there is still an active intermediate market for the unfinished decorative pieces in which the selling price averages \(\$ 55\) per unit. 1\. Based on the information given for Liverpool Sawmill, allocate the joint processing costs of \(\$ 1,010,000\) to the three products using: a. Sales value at splitoff method b. Physical-measure method (volume in units) c. \(\mathrm{NRV}\) method 2\. Prepare an analysis for Liverpool Sawmill that compares processing the decorative pieces further, as it currently does, with selling them as a rough- cut product immediately at splitoff. 3\. Assume Liverpool Sawmill announced that in six months it will sell the unfinished decorative pieces at splitoff due to increasing competitive pressure. Identify at least three types of likely behavior that will be demonstrated by the skilled labor in the planing-and-sizing process as a result of this announcement. Include in your discussion how this behavior could be influenced by management.

Chapter 16

Joint-cost allocation, insurance settlement. Quality Chicken grows and processes chickens. Each chicken is disassembled into five main parts. Information pertaining to production in July 2017 is as follows: $$\begin{array}{lcc} & & \text { Wholesale Selling Price per Pound When } \\\\\text { Parts } & \text { Pounds of Product } & \text { Production Is Complete } \\\\\hline \text { Breasts } & 100 & \$ 0.55 \\\\\text { Wings } & 20 & 0.20 \\\\\text { Thighs } & 40 & 0.35 \\\\\text { Bones } & 80 & 0.10 \\\\\text { Feathers } & 10 & 0.05\end{array}$$ Joint cost of production in July 2017 was \(\$ 50\) A special shipment of 40 pounds of breasts and 15 pounds of wings has been destroyed in a fire. Quality Chicken's insurance policy provides reimbursement for the cost of the items destroyed. The insurance company permits Quality Chicken to use a joint-cost- allocation method. The splitoff point is assumed to be at the end of the production process. 1\. Compute the cost of the special shipment destroyed using the following: a. Sales value at splitoff method b. Physical-measure method (pounds of finished product) 2\. What joint-cost-allocation method would you recommend Quality Chicken use? Explain.

Chapter 16

The Tempura Spirits Company produces two products-methanol (wood alcohol) and turpentine- by a joint process. Joint costs amount to \(\$ 124,000\) per batch of output. Each batch totals 9,500 gallons: \(25 \%\) methanol and \(75 \%\) turpentine. Both products are processed further without gain or loss in volume. Separable processing costs are methanol, \(\$ 4\) per gallon, and turpentine, \(\$ 2\) per gallon. Methanol sells for \(\$ 22\) per gallon. Turpentine sells for \(\$ 16\) per gallon. 1\. How much of the joint costs per batch will be allocated to methanol and to turpentine, assuming that joint costs are allocated based on the number of gallons at splitoff point? 2\. If joint costs are allocated on an NRV basis, how much of the joint costs will be allocated to methanol and to turpentine? 3\. Prepare product-line income statements per batch for requirements 1 and 2 . Assume no beginning or ending inventories. 4\. The company has discovered an additional process by which the methanol (wood alcohol) can be made into a pleasant-tasting alcoholic beverage. The selling price of this beverage would be \(\$ 55\) a galIon. Additional processing would increase separable costs \(\$ 12\) per gallon (in addition to the \(\$ 4\) per \(g\) alIon separable cost required to yield methanol). The company would have to pay excise taxes of \(20 \%\) on the selling price of the beverage. Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol (using the NRV method)? Should the company produce the alcoholic beverage? Show your computations.

Chapter 16

Why might managers seeking a monthly bonus based on attaining a target operating income prefer the sales method of accounting for byproducts rather than the production method?

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