JOINT AND BY-PRODUCT COSTING

ACTIVITY BASED COSTING

BACKFLUSH COSTING
SERVICE DEPARTMENT COST ALLOCATION
 Two or more products produced
together in a joint process

Joint Common industries that have joint

products: food processing, chemicals,

Products mining, lumber, and petroleum.

These products can be separately

identifiable at the split-off point
 Split-off point is the point of
production where the joint products
can be sold as is or be subject to
further processing

Joint Costs incurred in a joint process are

Products
allocated to the joint products

Sales value at split-off, estimated net

realizable value, physical measures
By-Products
• In contrast to joint products, have little market value
• Joint costs are usually not allocated to a by-product
• By-products are frequently valued at market or net realizable
value
• Accounted for as a contra-production cost, that is reduction in
the joint costs that will be allocated to joint products
• Alternatively, it could be recognized when sold and reflected as
ordinary sales, other income, or contra to cost of sales
 • Allocates overhead costs to
ACTIVITY products based on the resources
consumed by each activity
BASED • Accomplished through assignment
of costs to cost pools that
COSTING represent specific activities
• This may be used in conjunction
(ABC) with either job order or process
costing
 • Activities may be classified as
value-added and non-value-added
ACTIVITY • Value-added activities are
perceived by customers as
BASED increasing the worth of a product
or service that they are willing to
pay
COSTING • Non-value-added activities
increase cost but do not increase
(ABC) its value to customers
• Non-value-added activities may be
eliminated and/or restructured
 • Cost drivers are activities that have a
direct cause and effect relationship to
the incurrence of a particular cost
ACTIVITY • Traditional costing uses variable and
fixed or total overhead cost pools and
BASED views cost driver at output unit level
(labor hours, machine hours, etc.)
• Traditional costing use only volume
COSTING related cost drivers (output unit level)
• ABC uses both transaction related
(ABC) (batch level, process level, facility
level) and volume related cost drivers
(output unit level)
 • Used by companies who are implementing a
just-in-time (JIT) production system
• Backflush costing uses normal or standard

Backflush
costs to work backward or to “flush-out”
the costs of the goods finished or sold
• Backflush costing does not strictly adhere to
Costing generally accepted accounting principles
(GAAP)
• Difference is not often material due to the
negligible amount of inventories that is a
characteristic of a JIT production system
 • Large firms have several
production departments
Service • Companies with several
service (support) departments
Department incur costs and benefits
multiple production
Cost departments
Allocation • A problem arises on how the
costs of these service
departments must be allocated
to production departments
 • Basis for Apportionment of Service
Department Costs: Service
provided; services available;
Service benefits received; and equity
Department • Examples of apportionment bases:
Cost Square feet for building costs;
usage for electricity; employees
Allocation for cafeteria, personnel, and first
aid; and usage for materials
handling, maintenance, etc.
 Service •Direct method
Department
Cost •Step method
Allocation •Reciprocal method
 •Allocates the cost of
each service department
Direct to each of the producing
departments
Method •This method ignores use
of services by other
service departments
 • Allocates service department costs to other
service departments as well as production
departments
• Allocate first the service department that

Step serves the most service departments, when

there are more than one, choose the one
with highest costs

Method • Allocate the cost of the service department

to the production departments and other
service departments
• Cost of service departments are never
allocated back to departments whose costs
have already been allocated
 • Service department costs and service
department reciprocal relationships
are described by a linear equation
Reciprocal • Equations are solved simultaneously
providing a more precise allocation of
Method costs to production departments
• This is because this method considers
the mutual services provided among
the service departments
The end. J