/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 14 Describe two major methods to ac... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 16: Problem 14

Describe two major methods to account for byproducts.

Short Answer

Expert verified
The two major methods to account for byproducts in cost accounting are the Sales Method and the Production Method. The Sales Method, or Byproducts Credited to Cost of Production Method, credits the revenue from the sale of byproducts to the main product's production cost, thus reducing the overall cost of production. The process involves determining total production costs, calculating revenue generated from byproducts, deducting the revenue from total production costs, and allocating the adjusted production costs to the main product. The Production Method, or Byproducts Inventoried Method, recognizes byproducts as inventory and allocates their costs based on the cost of producing the main product. This involves determining the total production costs of the main product and byproducts, allocating costs between them, recording the cost of byproducts as inventory on the balance sheet, and eventually recognizing the value of byproducts as revenue when they are sold.

Step by step solution

01

1. Introduction to Byproducts Accounting

Byproducts are secondary products that result from the production process of a primary product. In cost accounting, it is important to account for these byproducts to determine the total cost of the primary product and allocate costs accordingly. There are two major methods used in accounting for byproducts - the Sales Method and the Production Method. We will explore each method separately.
02

2. The Sales Method

The sales method, also known as the Byproducts Credited to Cost of Production Method, is an accounting technique in which the revenue derived from the sale of byproducts is credited to the cost of production of the main product. This method reduces the cost of production of the main product by considering the revenue generated from byproducts. The process can be divided into a few steps: Step 1: Determine the total production costs of the main product. Step 2: Calculate the revenue generated from the sale of byproducts. Step 3: Deduct the revenue from the byproducts from the total production costs of the main product. Step 4: Allocate the adjusted production costs to the main product. By using the Sales Method, the cost of production for the main product is reduced, which helps in determining the true cost of production, considering the value generated from the byproducts.
03

3. The Production Method

The production method, also known as the Byproducts Inventoried Method, is an accounting technique in which the byproducts are recognized as inventory and their costs are allocated based on the cost of producing the main product. The byproducts are valued at either their net realizable value or their cost of production. Here are the steps involved in the Production Method: Step 1: Determine the total production costs of the main product and byproducts. Step 2: Allocate the costs between the main product and byproducts based on a predetermined basis such as the physical quantities produced, sales value, or net realizable value. Step 3: Record the cost of byproducts as inventory on the balance sheet. The cost of the main product would include the allocated cost of the byproduct. Step 4: When the byproducts are eventually sold, their value is recognized as revenue, and the corresponding inventory value is removed from the balance sheet. This method focuses on allocating the costs between the main product and byproducts appropriately and recognizing the value of byproducts when they are eventually sold. In conclusion, the two major methods to account for byproducts are the Sales Method and the Production Method. Both methods focus on different aspects, with the Sales Method reducing the production cost of the main product through byproducts revenue and the Production Method allocating costs between main product and byproducts and valuing byproducts as inventory.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

sales method
In cost accounting, the sales method offers a way to handle byproducts by giving them a clear financial role in the accounting process. This method is advantageous since it simplifies how byproducts influence the cost of the main product. Here's how it works:

The sales method takes the revenue from selling byproducts and uses it to decrease the cost of making the main product. This is why it's sometimes called the "Byproducts Credited to Cost of Production Method."

  • First, calculate the total production cost of the main product.
  • Next, account for any revenue made from selling byproducts.
  • Subtract this byproduct revenue from the total production costs to get the adjusted production cost of the main product.
  • The resulting figure, which is lower, represents a more accurate cost of producing the main product.
The major advantage of this method is its simplicity to implement and the clear reduction it offers on the production cost of the main product. However, it's important to note that this method does not assign any separate value to byproducts as inventory, which some may consider a drawback.
production method
The production method contrasts with the sales method by involving byproducts more directly in the accounting process. Here, byproducts are not just an afterthought but are treated as tangible inventory.

This approach is often referred to as the "Byproducts Inventoried Method." It steps away from directly reducing costs and instead focuses on cost allocation across products.

  • Firstly, determine the production costs for both the main product and the byproducts.
  • Allocate these costs between the main product and byproducts based on methods like physical quantities produced or net realizable value.
  • Treat byproducts as inventory, logging them on the balance sheet.
  • When sold, the inventory value of the byproducts recognizes revenue, and the inventory value is removed from the balance sheet.

This system ensures accurate cost allocation, reflecting the genuine economic contributions of both the main product and byproducts. The result? Byproducts are seen both as a cost and a future revenue source through their inventory status.
cost allocation
Cost allocation is a vital part of accounting that ensures expenses are fairly distributed across all products. When dealing with byproducts, cost allocation becomes critical in accurately reflecting the true cost and potential revenue.

Under both the sales method and production method, the approach to cost allocation varies:

- **Sales Method**: Here, byproduct revenue is used to diminish the production cost of the main product. While no specific cost is allocated directly to byproducts, this approach helps streamline costs.
- **Production Method**: This method allocates costs to byproducts, treating them as inventory. It is more conventional in accounting practices as it gives a more realistic economic portrayal of resource use.

Determining how costs should be allocated often depends on the business's nature and how it perceives the role of byproducts.
byproducts as inventory
Recognizing byproducts as inventory changes the perspective of how they contribute financially to a business. In essence, it gives them a more permanent place in accounting records.

By treating byproducts as inventory, they are granted a value that lasts until they are sold. This approach is used chiefly in the production method.

- **Inventory Treatment**: Byproducts are entered into the balance sheet as inventory. This recognizes them as assets with value that will eventually translate into revenue.
- **Future Revenue**: By having a recorded value, byproducts demonstrate potential future income when sold.

The key advantage is capturing the byproduct's value accurately, reflecting it as a future income source. This practice aligns well with companies seeking a comprehensive approach to cost accounting.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The Cook Company operates a simple chemical process to convert a single material into three separate items, referred to here as \(X, Y,\) and \(Z\) All three end products are separated simultaneously at a single splitoff point. Products \(X\) and \(Y\) are ready for sale immediately upon splitoff without further processing or any other additional costs. Product \(Z\), however, is processed further before being sold. There is no available market price for \(Z\) at the splitoff point. The selling prices quoted here are expected to remain the same in the coming year. During 2017 , the selling prices of the items and the total amounts sold were as follows: \(\bullet\) \(X-68\) tons sold for \(\$ 1,200\) per ton \(\bullet\) \(\mathrm{Y}-480\) tons sold for \(\$ 900\) per ton \(\bullet\) \(\mathrm{Z}-672\) tons sold for \(\$ 600\) per ton The total joint manufacturing costs for the year were \(\$ 580,000\). Cook spent an additional \(\$ 200,000\) to finish product Z. There were no beginning inventories of \(X, Y\), or \(Z\). At the end of the year, the following inventories of completed units were on hand: \(X, 132\) tons; \(Y, 120\) tons; \(Z, 28\) tons. There was no beginning or ending work in process. 1\. Compute the cost of inventories of \(X, Y\), and \(Z\) for balance sheet purposes and the cost of goods sold for income statement purposes as of December 31,2017 , using the following joint-cost-allocation methods: a. NRV method b. Constant gross-margin percentage NRV methodd 2\. Compare the gross-margin percentages for \(X, Y\), and \(Z\) using the two methods given in requirement 1

Why is the constant gross-margin percentage NRV method sometimes called a "joint-cost-allocation and a profit-allocation" method?

Provide three reasons for allocating joint costs to individual products or services.

Select Manufacturing Co. produces three joint products and one organic waste byproduct. Assuming the byproduct can be sold to an outside party, what is the correct accounting treatment of the byproduct proceeds received by the firm? a. Apply sale proceeds on a prorated basis to the joint products' sales. b. Use the sale proceeds to reduce the common costs in the joint production process. c. Apply the sale proceeds to the firm's miscellaneous income account. d. Either "b" or "c" can be used.

What is a joint cost? What is a separable cost?
See all solutions

Recommended explanations on Math Textbooks

Pure Maths

Read Explanation

Logic and Functions

Read Explanation

Mechanics Maths

Read Explanation

Decision Maths

Read Explanation

Calculus

Read Explanation

Theoretical and Mathematical Physics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.