Cost Accounting Methods: Valuation, Job Order, and Joint Production

Material Transfer Valuation Criteria

When materials are transferred to the next department, the valuation criteria can be applied by considering each batch of products or by using an average unit cost. The primary methods are:

• Weighted Average Price Criteria (WAP)

  Assuming one batch: The batch includes units in process at the beginning of the period (later completed) and units that have been initiated (completed or not). The unit cost is a weighted average of the unit costs from the previous period and the unit costs of the present period.

• First-In, First-Out Criteria (FIFO)

  Assuming different batches: The first batch includes units in process at the beginning of the period (later completed). The second batch includes units initiated in this period (completed or not). The unit cost of the first batch is a mix of costs from the previous period and the present one, while the second batch reflects only the costs of the present period.

Job Order Costing Systems

When a company's production system deals with small-size batches of different products that generally use varying amounts of resources, job costing systems solve the accounting problems derived from this lack of homogeneity. Costs are accumulated separately for each batch. As the batch moves through the manufacturing sequence, the work order moves with it, accumulating increments of direct material, direct labor, and applied overhead costs.

Joint Production Concepts

Key Definitions in Joint Production

• Joint Products: The outputs of a productive process that yields multiple products simultaneously.
• Main Products: The primary products that are the aim of the productive process. These hold the biggest share of the revenues relative to the rest of the joint products.
• By-products: Products that lack significant economic relevance. Accounting reports for these are generally less detailed than those for main products.
• Residual Outputs: These could be considered a particular case of by-products, although they might have a negative contribution to revenues when their disposal costs are considered. These costs should be added to the production costs of joint products.
• Split-off Point: The point of juncture in a joint production process when the products become separately identifiable.
• Joint Costs: The costs incurred before the split-off point.
• Separable Costs: Direct or indirect costs incurred after the split-off point.

Cost Assignment Methods

The costs incurred before the split-off point are $K$. Separable costs applied to each product are $K_i$. $Q_i$ is the number of units produced, and $V_i$ is the number of units sold.

We can consider different methods to assign the joint cost, such as:

1. Distributing them according to expected revenues.
2. Distributing them according to physical units.
3. Simplifying the calculations by not assigning joint costs or by not differentiating between joint and separable costs.

Another possible method is to assign the joint costs according to the expected contribution margin, calculated (where $P_i$ is the selling price of product $i$):

Contribution Margin ($m_i$): $Q_i P_i - K_i = m_i$

A rate ($k$) is calculated: $k = K / ( ext{Sum of } m_i)$