Read more about weighted average method. The joint cost allocation using above methods is mostly not perfect, but is considered an arbitrary allocation. The information derived from such arbitrary allocation is therefore rarely helpful to the management. The method selected to allocate joint cost should be the most appropriate, easy to employ and defensible in case the auditors review and require any clarification of the joint cost allocation.
Skip to content Menu. Methods to allocate joint production cost A true joint cost has a characteristic of indivisibility. The four acceptable joint cost allocation methods are given below: 1. Market or sales value method The market or sales value method allocates a joint production cost on the basis of relative market or sales values of individual joint products.
Read more about market or sales value method 2. Quantitative or physical unit method This method uses some physical measurement units such as volume, weight etc. How do the concepts of joint products and joint costs help a lumber company establish a cost for each of its products?
Answer: Suppose Oregon Lumber Company takes a log the single input and mills it into two types of products: high quality Grade A lumber, and lower quality Grade B lumber.
Grade A lumber and Grade B lumber are examples of joint products, and the cost of the logs and related manufacturing process costs are examples of joint costs.
Figure 7. Notice that the split-off point is the point at which identifiable products emerge from the production process. Two methods are commonly used to allocate these joint costs to the joint products: the physical quantities method and the sales value method.
We discuss each of these methods next. Question: The physical quantities method allocates joint costs based on a physical measure of output. Although Grade B lumber appears to be unprofitable, elimination of Grade B lumber sales would not increase overall profit for Oregon Lumber.
Question: A different approach to allocating joint costs to joint products is the sales value method , which allocates joint costs based on the relative sales value of each product at the split-off point.
How would Oregon Lumber allocate joint production costs using this method? The sales value method assumes that profit as a percent of sales will remain the same across all products.
For example, Figure 7. This method also ensures that joint costs allocated to each product will not exceed sales revenue for each product unless total joint costs are higher than total revenue. As you review Figure 7. The issue is not with the overall results. In this case, the purpose, audience, and content criteria are not met.
All costs should be charged to fundraising. The activity does not include a call for specific action because it only educates the audience about causes. The audience criterion is not met because the audience is selected based on its ability or likelihood to contribute, rather than based on its need to use or reasonable potential for use of the action called for by the program component, or its ability to take action to assist the NFP in meeting the goals of the program component of the activity.
The audience is a broad segment of the population of a country that is not in need of or has no reasonable potential for use of the program activity.
If material, an auditor has the responsibility to perform procedures to obtain audit evidence about the amounts and disclosures for joint costs.
Together, scrutiny by NFPs and their auditors can help increase confidence in applying this standard. Properly applied, these accounting standards provide a framework for ensuring that the allocations are consistent and valid.
Not-for-profits NFPs often conduct activities that mix program activities and fundraising. Management is responsible for ensuring proper cost allocation for these activities to facilitate accurate reporting in NFP financial statements. Three criteria must be evaluated to identify valid activities that would require the allocation of joint costs.
These criteria are related to purpose, audience, and content. The allocation methodology should be rational, systematic, and applied consistently. Examples of allocation approaches include the physical-units, relative-direct-cost, and stand-alone joint-cost-allocation methods. Also required are a statement that such costs have been allocated, the total amount allocated during the period, and the portion allocated to each functional expense category.
If practical, an NFP is also encouraged to disclose the amount of joint costs for each kind of joint activity. Joseph W. Cruitt jcruitt nbome. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at ktysiac aicpa. For more information or to make a purchase or register, go to cpa2biz. Making the right moves now can help you mitigate any surprises heading into Worldwide leaders in public and management accounting.
Toggle search Toggle navigation. Breaking News. How NFPs should allocate joint costs Consistent application leads to fair depictions in financials. CRITERIA To identify valid activities that would require the allocation of joint costs, three criteria related to purpose, audience, and content must be evaluated.
Three tests to evaluate whether the purpose criterion is met are the compensation-or-fees test, the separate-and-similar-activities test, and the other-evidence test: Compensation-or-fees test. For example, if a commission-based fundraising consultant is used for any part of the activity, the activity would fail this test.
The compensation-or-fees test is a negative test. It either results in failing the purpose criterion or does not determine whether the purpose criterion is met. Separate-and-similar-activities test. The purpose criterion can be determined to be met under this test if a similar program or management and general activity is conducted separately and on a similar or greater scale. These tests may not always be determinative. Other-evidence test. All available evidence, both positive and negative, should be considered to determine whether, based on the weight of that evidence, the purpose criterion is met under this test.
Website Not-for-Profit Resource Center.
0コメント