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Chapter 11

Cost Allocation for Joint Products and By- Products

Questions

1. Joint processing output is based on the sales value of each type of output. Joint products are those resulting from a joint process that has a relatively greater sales value for each type of output. By-products are output of insufficient sales value to justify undertaking the joint process. Scrap output has little sales value. Thus, the distinction among the three product groups is their relative sales value. Joint products have the highest value followed by by-products.

Usually, the classification of output is determined before production. Management decides whether a joint process output is a joint product, a by-product, or scrap based on judgment. Output from a joint process is subjectively classified according to management's assessment of the relative sales value of each type. The classification of outputs of a joint process is usually decided before the process is undertaken. However, in unusual cases, the actual outputs of the joint process may not result as planned. In such cases, management may classify them differently than originally intended.

2. All processing of joint production does not

always stop at the split-off point. Some products may not have a saleable product at the split-off point. Rather, the product must be processed further before it can be sold.

3. The three decision points are (1) before

the joint process is undertaken, (2) at the split-off point, and (3) after the split-off point. The criterion for proceeding at any point is whether the anticipated incremental revenues will exceed the anticipated incremental costs.

4. Cost allocation refers to the assignment of

an indirect cost to a cost object using some reasonable method. Since

production costs are incurred in a joint process to produce several outputs, those costs are indirect to the individual output produced and must be assigned to the output because of the cost principle. This is necessary in order to have appropriate inventory valuations for the joint products produced in the joint process. Accountants allocate fixed production costs to products produced within a period, and allocate certain plant and equipment costs to the time periods during which those assets are used through depreciation. Amortization and allocation of intangible costs are other examples.

5. Approaches to allocating joint process

costs are classified into two general categories: (1) physical measures and (2) monetary measures. Physical measures (e.g., tons, barrels, feet) are unchanging yardsticks; monetary measures change over time with inflation. However, monetary measures assign joint process costs to joint products proportionately to relative sales value. Physical measures treat each physical unit of output as equally desirable by assigning a uniform amount of joint process cost to every unit of output produced.

6. Approximated net realizable values are

necessary when some or all of the joint products are not salable at the split-off point. An approximated net realizable value is calculated by subtracting the incremental separate costs incurred between split-off and point of sale from the expected final sales price of the product. Thus the additional approximations are the final sale price and the incremental separate costs.

7. One approach is to ignore by-product

inventory completely until it is sold. Only then does the revenue it generates acknowledge the existence of the

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by-product. This revenue is carried to the income statement as an increase to net income of the period. The second approach is to record, at the split-off point, the final net realizable value of the by-products recovered. The net realizable value is credited as a reduction of the joint process costs that gave rise to the by-product. The second approach is theoretically preferable because it causes the benefit to be matched with the source of the benefit – namely, the joint process costs being incurred during the period.

8. If a company using job order costing

produces a by-product or a scrap item continuously from normal production, the net realizable value of that by-product or scrap should be considered in setting the predetermined overhead rate. The estimated net realizable value of the by-product or scrap should be deducted from total estimated overhead costs in setting the rate. When the by-product or scrap is actually sold, its net realizable value should be credited to Manufacturing Overhead.

If a company using job order costing only produces a by-product or a scrap item during a particular job, then the net realizable value of the by-product/scrap should not be considered in setting the predetermined overhead rate. The net realizable value should be credited to the particular job that gave rise to the by-product/scrap.

9. For a not-for-profit to appropriately evaluate

the uses of its resources, the AICPA require that multipurpose costs be allocated between program and support categories. Program expenses are those that are directly aimed at the accomplishment of the organization's charitable objectives and are considered a more valid use of resources. Comparison of support expenses to total expenses may suggest a measure of organizational efficiency. The AICPA is concerned with donors having knowledge of the relative and absolute magnitude of funds spent on fundraising.

Exercises 10. Student solutions will vary. No solution provided. 11. a. In a poultry butcher shop, the major joint input is chicken and turkey meat.

The major questions to be asked follow: (1) Is a poultry butcher shop really the business I want to be in? Presumably, this question has been answered in the affirmative. (2) What specific meats do I want to work with and what customers do I want to serve? The answer to this question will determine what inputs will be purchased and, to some extent, what production processes will be performed. (3) What specific cuts of poultry should be selected from the meat carcasses? The answer to this question will determine how the carcasses are cut into salable parts. (4) How much processing should I do to the individual cuts. The answer to this question will determine what specific processes will be necessary beyond the split-off point. The answer to this question will also determine what types of equipment the poultry butcher shop must have to execute the required conversion operations. The decision to classify output as joint product, by-product, scrap, or waste is not as important in this environment because inventory levels will be minimal due to the perishable nature of the product. Rather, the focus will be on maximizing the value added to the raw carcasses that are purchased from poultry wholesalers.

b. For a poultry butcher shop, the manner in which joint cost is allocated can

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affect some decisions. For example, in pricing products, a poultry butcher shop wants to cover all costs. To do so requires that an appropriate price be established for each cut of meat. This price will be determined partly by the costs of each cut, and part of the cost is joint cost. The allocation of joint costs can also be important in meeting reporting requirements, e.g., income determination and inventory valuation for purposes of reporting to the Internal Revenue Service. Joint products are also relevant in determining whether one is going to engage in production. However, once the split-off point is reached in the production operation, the joint costs are irrelevant in determining whether additional conversion operations should be performed.

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c. Four potential categories of output are obtained from joint production.

Joint products are the main products obtained and are distinguished from the other outputs by their relatively greater sales value. At the opposite end of the continuum, waste is an incidental output of a joint production process and has no value. By-products and scrap are distinguished by the fact that they both have some value but the value is substantially below that of joint products. By-product differs from scrap in that it has a somewhat larger market value.

12. a. Direct instructional costs $38,000 Overhead 4,000 Total costs $42,000 Application rate = $42,000 ÷ 3,000 = $14.00 per hour Cost assignment: High School League (2,000 x $14.00) $28,000 Amateur Adult (1,000 x $14.00) 14,000 Total cost assigned $42,000

b. Application rate = $42,000 ÷ [($10 x 2,000) + ($30 x 1,000)]

= $0.84 per dollar of sales value Cost Assignment: High School League ($20,000 x 0.84) $16,800 Amateur Adult ($30,000 x 0.84) 25,200 Total cost assigned $42,000 c. The monetary method of allocation best captures the relative incentives of

providing the joint services. It is appropriate to assign Amateur Adults more cost because it generates more revenues. Alternatively, more class hours are required for High School League. If class hours are considered to be a cost driver, it is appropriate to assign more costs to the High School League.

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13. a. Allocation rate = $24,000,000 ÷ 48,000,000 = $0.50 per foot

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Grade A: $0.50 x 36,000,000 = $18,000,000 Grade B: $0.50 x 12,000,000 = $6,000,000 b. Incremental revenue (36,000,000 x $1.10) $39,600,000 Incremental costs (36,000,000 x $0.75) 27,000,000 Increase in income $12,600,000 Based on the incremental change in net income, the company should

process Grade A Wood further. 14. a. Joint Unit Total lbs. Product Allocated*

Products Weight Produced Total Percent* Joint Cost Fish 0.5 100,000 50,000 57.14 $108,795 Oil 0.25 100,000 25,000 28.57 54,397 Meal 0.125 100,000 12,500 14.29 27,208 87,500 100.00 $190,400 b. Unit Joint Pounds Selling Allocated*

Products Produced Price Total Proportion Joint Cost Fish 50,000 $6.00 $300,000 30/55 $103,855 Oil 25,000 8.00 200,000 20/55 69,236 Meal 12,500 4.00 50,000 5/55 17,309 $550,000 100.00 $190,400 *rounded c. The physical measure (pounds) is an unchanging yardstick, but it treats all

pounds as equally valuable. The monetary basis assigns joint costs using sales value but, because of inflation and market price variability, is a changing yardstick. However, the monetary basis probably provides a better way of matching the joint costs to the benefits achieved from the joint production process. This is due to the substantial differences in per pound prices across the three products.

15. a. Sales value of milk $100,000 (31.25%) Sales value of sour cream 220,000 (68.75%) Total sales value $320,000

Since the milk represents 31.25% of the total sales value at split-off, $43,200 represents 31.25% of the total joint costs. Total joint costs are $138,240 ($43,200 ÷ 0.3125).

b. 320,000 pints = 160,000 quarts of sour cream Quarts of milk 240,000 (60%) Quarts of sour cream 160,000 (40%) Total quarts 400,000

Since the milk represents 60% of the total physical quantity produced, $43,200 represents 60% of the total joint costs. Total joint costs are $72,000

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($43,200 ÷ 0.60). 16. a. Games News Documentary Revenues $18,000,000 $15,000,000 $95,000,000 Separate Costs (17,000,000) (8,000,000) (55,000,000) NRV $ 1,000,000 $ 7,000,000 $40,000,000 Joint cost allocation: Games [$12,000,000 x (1 ÷ 48)] $ 250,000 News [$12,000,000 x (7 ÷ 48)] 1,750,000 Documentary [$12,000,000 x (40 ÷ 48)] 10,000,000 Total $12,000,000 Revenues $18,000,000 $15,000,000 $95,000,000 Separate Costs (17,000,000) (8,000,000) (55,000,000) Allocated costs (250,000) (1,750,000) (10,000,000) Net Profit $ 750,000 $ 5,250,000 $30,000,000 b. Joint cost allocation: Games [$12,000,000 x (18 ÷ 128)] $ 1,687,500 News [$12,000,000 x (15 ÷ 128)] 1,406,250 Documentary [$12,000,000 x (95 ÷ 128)] 8,906,250 Total $12,000,000 Revenues $18,000,000 $15,000,000 $95,000,000 Separate Costs (17,000,000) (8,000,000) (55,000,000) Allocated costs (1,687,500) (1,406,250) ( 8,906,250) Net Profit $ (687,500) $ 5,593,750 $31,093,750 c. Obviously, as head of the Games Group, a manager would be very

concerned about the effects of allocating joint costs under the scheme in part (b). The result of the allocation is to make the Games Group appear to be very unprofitable. Some of the points students might make in their presentations include (some of which could be rebutted):

1. The allocation of joint costs is totally arbitrary; there is no cause and effect relationship represented in the allocations in part (b).

2. The Games Group has a different degree of utilization than the other two groups, News and Documentaries, because most of its activities originate at a different location. Evidence of this relationship can be found in the separate costs incurred by the Games Group relative to the other two groups. The allocations in part (b) fail to consider this fact.

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17. a. Units of output allocation: Total bottles = 15,000 + 20,000 + 25,000 = 60,000 Perfume (15,000 ÷ 60,000) x $240,000 $ 60,000 Eau de Toilet (20,000 ÷ 60,000) x $240,000 80,000 Body Splash (25,000 ÷ 60,000) x $240,000 100,000 Total $240,000 Weight-based allocation: Total weight = (15,000 x 3) + (20,000 x 2) + (25,000 x 3) = 160,000 Perfume (45,000 ÷ 160,000) x $240,000 $ 67,500 Eau de Toilet (40,000 ÷ 160,000) x $240,000 60,000 Body Splash (75,000 ÷ 160,000) x $240,000 112,500 Total $240,000 Approximated Net realizable value computation: Perfume 15,000 x ($8.50 - $2) $ 97,500 Eau de Toilet 20,000 x ($6.00 - $1) 100,000 Body Splash 25,000 x ($6.00 - $1.50) 112,500 Total $310,000 Approximated net realizable value allocation: Perfume ( 97,500 ÷ 310,000) x $240,000 $ 75,484 Eau de Toilet (100,000 ÷ 310,000) x $240,000 77,419 Body Splash (112,500 ÷ 310,000) x $240,000 87,097 Total $240,000

b. Cost assigned to inventory = allocated joint cost + separate costs Perfume $ 60,000 + ($2 x 15,000) $ 90,000 Eau de Toilet $ 80,000 + ($1 x 20,000) 100,000 Body Splash $100,000 + ($1.50 x 25,000) 137,500 Total $327,500 Ending inventory valuation based on bottles of output: Perfume ($ 90,000) x (500 ÷ 15,000) $ 3,000 Eau de Toilet ($100,000) x (1,000 ÷ 20,000) 5,000 Body Splash ($137,500) x (1,500 ÷ 25,000) 8,250 Total $16,250 Inventory valuation based on weight: Perfume ($ 67,500 + $30,000) x (1,500 ÷ 45,000) $ 3,250 Eau de Toilet ($ 60,000 + $20,000) x (2,000 ÷ 40,000) 4,000 Body Splash ($112,500 + $37,500) x (4,500 ÷ 75,000) 9,000 Total $16,250

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Inventory valuation based on approximated net realizable value:

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Perfume ($75,484 + $30,000) x (500 ÷ 15,000) $ 3,516 Eau de Toilet ($77,419 + $20,000) x (1,000 ÷ 20,000) 4,871 Body Splash ($87,097 + $37,500) x (1,500 ÷ 25,000) 7,476 Total $15,863 18. a. (a) (b) (c)=(a)–(b) (d) (e)=(c)–(d) Final Sales Split-off Incremental Incremental Incremental Product Value Sales Value Sales Costs Profit Butter $15,000 $10,000 $ 5,000 $ 7,500 $ (2,500) Jam 60,000 10,000 50,000 20,000 30,000 Syrup 900 750 150 100 50

Only products Jam and Syrup should be processed beyond the split-off point. b. Joint costs $60,000 Less NRV of Syrup ($1.80 - $0.20) x 500 800 Joint costs to be allocated $59,200 Unit-based allocation: Butter (5,000 ÷ 15,000) x $59,200 $19,733*

Jam (10,000 ÷ 15,000) x $59,200 39,467*

Total $59,200 Weight-based allocation: Butter (50,000 ÷ 110,000) x $59,200 $26,909 Jam (60,000 ÷ 110,000) x $59,200 32,291 Total $59,200 NRV computation (assuming Jam is not processed further) Butter 5,000 x ($3.00 - $1.50) $ 7,500 Jam 10,000 x ($6.00 - $2) 40,000 NRV $47,500 NRV-based allocation: Butter (7,500 ÷ 47,500) x $59,200 $ 9,347*

Jam (40,000 ÷ 47,500) x $59,200 49,853*

Total $59,200 *Rounded 19. a. Fabric Yarn Final revenues $180,000 $140,000 Revenues at split-off 120,000 100,000 Incremental revenues $ 60,000 $ 40,000 Incremental costs 40,000 34,000 Net benefit (cost) of further processing $ 20,000 $ 6,000 Fabric and Yarn should be processed further. b. The irrelevant item is the $40,000 of joint processing cost.

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20. a. (a) (b) (c) = (a) - (b) (d) (e) = (c) - (d)

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Final Split-off Incremental Incremental Incremental Product Revenues Sales Value Revenue Costs Profit Candied apples $620,000 $642,000 ($22,000) $26,000 $(48,000) Apple jelly 740,000 706,000 34,000 38,000 (4,000) Apple jam 270,000 253,000 17,000 15,000 2,000

Management should not have further processed candied apples and apple jelly because the incremental costs from further processing was greater than the incremental revenues. Rather, management should only further process apple jam beyond the split-off point.

b. Candied apples $48,000 Apple jelly 4,000 Additional potential profit $52,000 21. a. Joint cost $64,000 Less NRV of by-product 1,000 x (0.75 - 0.15) (600) Joint cost to be allocated $63,400 NRV of Fillet 9,000 x ($6 - $1.50) $40,500 NRV of Smoked 10,000 x ($6.50 - $4.50) 20,000 Total NRV $60,500 Cost allocation: Fillet $63,400 x ($40,500 ÷ $60,500) $42,441 Smoked $63,400 x ($20,000 ÷ $60,500) 20,959 Total cost allocation $63,400

b. Separate costs for Fillet = 9,000 x $1.50 = $13,500 Separate costs for Smoked = 10,000 x $4.50 = $45,000

Fillet Smoked Joint costs $42,441 $20,959 Separate costs 13,500 45,000 Total costs $55,941 $65,959 Divide by units 9,000 10,000 Unit cost $6.22* $6.60*

*rounded

Inventory values: Fillet 600 x $6.00 $3,600.00 Smoked 600 x $6.50 3,900.00 Canned (54 ÷ 1,000) x $600 32.40

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Total inventory value $7,532.40

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22. Because the by-products have substantial value, they should be accounted for

on the basis of net realizable value rather than realized value. Use of realized value would result in distorted cost information. Whether the direct or indirect method is used would be dependent on the timing of the sale of by-products and joint products. If both product groups sell shortly after they are produced, then the choice of method is less important. However, if the by-product tends to sell in a different period than its related joint products, the use of the direct method would provide a stronger match between costs and benefits.

23. a. Joint Services Increase in Revenues Allocated Cost Renting $ 400,000 1/3 $ 8,333 Sales 800,000 2/3 16,667 Totals $1,200,000 1 $25,000 b. Joint Services Increase in Net Income Allocated Cost Renting $ 75,000 0.60 $15,000 Sales 50,000 0.40 10,000 Totals $ 125,000 1.00 $25,000 c. The allocation based on increase in net income may be better because it

matches the advertising cost to the net benefit of the advertising. 24. Joint process cost $240,000 Less net realizable value of by-product inventory 40,000 Amount to be allocated $200,000 Proration of amount to be allocated based on weight: Product Bushels Proportion* Allocation Premium 9,600 0.22 $ 44,000 Good 26,000 0.59 118,000 Fair 8,400 0.19 38,000 44,000 1.00 $200,000 *rounded 25. a. Sales value of blouses = Joint cost of blouses Total sales value Total allocated joint cost $ 40,000 = X $300,000 $180,000 $300,000 X = $40,000($180,000) $30X = $4($180,000) $30X = $720,000 X = $24,000 for blouses Total joint cost $180,000 Joint cost for dresses and blouses ($87,000 + $24,000) (111,000)

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Joint cost assigned to jackets $ 69,000 b. Joint costs = 60% of relative sales value amounts; therefore, $87,000 = 0.6X X = $145,000 sales value for dresses

$300,000 - $145,000 for dresses and $40,000 for blouses = sales value of $115,000 for jackets

c. Dresses Jackets Blouses Final sales value $150,000 $134,000 $105,000 Sales value at split off 145,000 115,000 40,000 Increase in value $ 5,000 $ 19,000 $ 65,000 Additional costs (13,000) (10,000) (39,000) Incremental benefit (loss) $ (8,000) $ 9,000 $ 26,000 Process jackets and blouses further. d. Joint costs allocated to jackets: $69,000 Additional costs 10,000 Total costs for 8,000 units $79,000 Sales $67,000 Cost for 4,000 units (39,500) Gross profit $27,500 26. a. Total joint cost $16,000,000 Revenue from tours $700,000 Expenses of tours (380,000) (320,000) Joint cost to be allocated $15,680,000 Rare D&C Sequel Gross Revenues $8,000,000 $54,000,000 Separate costs (4,800,000) (37,200,000) Net realizable value $3,200,000 $16,800,000 Joint cost allocation: NRV Joint Cost Allocated Rare D&C $ 3,200,000 16% $ 2,508,800 Sequel 16,800,000 84 13,171,200 $20,000,000 100% $ 15,680,000 b. Rare D&C Sequel Gross Revenues $8,000,000 $54,000,000 Separate costs (4,800,000) (37,200,000) Net realizable value $3,200,000 $16,800,000 Joint costs (2,508,800) (13,171,200) Net profit $ 691,200 $ 3,628,800

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27. Total sales value (24,000 x $21) $504,000

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Less costs (24,000 x $4) 96,000 Reduction of joint cost $408,000 The gross margin for the major products will decrease by $408,000, but net

income will remain the same. 28. Sales of by-product $11,825 Cost of by-product sales (90,000 x $0.10) 9,000 Net realizable value of by-product $ 2,825 a. Azzi Potato Inc

Income Statement For May 2006

Sales of hash browns & potato chips $80,000 Cost of goods sold: Hash browns & potato chips (80% x $30,000) $24,000 By-products 9,000 (33,000) Gross profit $47,000 Expenses (3,800) Income from operations $43,200 Other revenues (by-product sales) 11,825 Net income before taxes $55,025 b. Azzi Potato Inc

Income Statement For May 2006

Sales of hash browns & potato chips $80,000 Cost of goods sold (24,000) Gross profit $56,000 Expenses (3,800) Income from operations $52,200 Other income (by-product sales) 2,825 Net income before taxes $55,025 c. Azzi Potato Inc

Income Statement For May 2006

Sales of hash browns & potato chips $80,000 Cost of goods sold (21,740)* Gross profit $58,260 Expenses (3,800) Net income before taxes $54,460 *$30,000 - $2,825 = $27,175; $27,175 x 80% = $21,740.

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d. The approach in part (c) is better than either (a) or (b) because it

consistently matches the NRV of the by-product with the costs of the joint production operations that produced the by-product.

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29. a. Estimated OH $199,250 Estimated NRV of by-product ( 9,200) Estimated OH to be covered $190,050 Divided by estimated CPU time ÷ 70,000 Predetermined OH rate per CPU hr. $2.715 b. Cash 9,794 Manufacturing Overhead 9,794 To record sale of by-product c. Total actual OH $199,750 Total applied OH (68,400 x $2.715) $185,706 Total actual NRV of by-product 9,794 195,500 Underapplied overhead $ 4,250 30. a. $ 67,500 ÷ 30,000 = $42.25 b. DM $ 210.00 DL ($10 x126) 1,260.00 OH ($2.25 x126) 283.50 Total $1,753.50 c. Cash 9.00 Manufacturing Overhead 18.50 Work in Process - Job XX 27.50 To record disposal value of spoiled work incurred on Job XX (the stained glass window) 31. a. Cash 2,500 Work in Process - Stiles Bldg. 2,500 To record sale of Stiles model b. Cash 2,500 Manufacturing Overhead 2,500 To record sale of Stiles model 32. a. 2 b. 1 c. 1 d. 2 e. 2 f. 1 g. 1 h. 2 i. 1

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j. 2 33. a. Joint Product Percent Joint Cost Allocated Fundraising 0.10 $ 18,000 Program 0.90 162,000 Total 1.00 $180,000 Joint Product Percent Joint Cost Allocated b. Fundraising 0.02 $ 3,600 Program 0.98 176,400 Total 1.00 $180,000 34. Student solutions will vary. No solution provided. 35. a. Work in Process - Combining 39,810 Raw Material Inventory 28,000 Wages Payable 7,560 Manufacturing Overhead 4,250 Work in Process - Heating 39,810 Work in Process - Combining 39,810 Work in Process - Heating 11,490 Raw Material Inventory 6,100 Wages Payable 2,150 Manufacturing Overhead 3,240 Work in Process - Heating 2,120 Raw Material Inventory 2,120 Work in Process - Heating 9,210 Raw Material Inventory 1,960 Wages Payable 3,120 Manufacturing Overhead 4,130 Finished Goods - Forever 40,595 Finished Goods – Fantasy 22,035 Work in Process - Heating 62,630 b. Joint cost allocation: Forever ($158,910 ÷ $211,880) x $51,300 $38,475 Fantasy ($52,970 ÷ $211,880) x $51,300 12,825 Total $51,300

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c. Work in Process – Combining DM 28,000 39,810 To Heating DL 7,560 OH 4,250 Bal 0

Work in Process - Heating DM 6,100 40,595 To FG – Forever DL 2,150 22,035 To FG – Fantasy OH 3,240 From Combining 39,810 DM 2,120 DM 1,960 DL 3,120 OH 4,130 Bal 0

Finished Goods – Forever Finished Goods – Fantasy Beg XXX Beg XXX CGM 40,595 CGM 22,035 36. a. Joint cost allocation: Cream (80,000 ÷ 920,000) x $320,000 $ 27,826*

Skim (840,000 ÷ 920,000) x $320,000 292,174*

Total $320,000 *rounded b. Beg Finished Goods $ 0 CGM 320,000 Goods available for sale 320,000 End Finished Goods (81,740)*

Cost of Goods Sold $238,260 * Cream ($27,826 ÷ 80,000) x (80,000 – 60,000) = $ 6,957 rounded Skim ($292,174 ÷ 840,000) x (840,000 – 625,000) = 74,783 rounded Total $81,740 Sales $679,000 Cost of Goods Sold 238,260 Gross Margin $440,740 c. Lakeside could test the fat content of the milk before purchase and only

purchase milk that, when processed, would result in minimal loss.

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37. a. Cream $54,000 ÷ 60,000 lbs = $0.90 per pound

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Skim $181,000 ÷ 625,000 lbs = $0.2896 per pound

b. Joint cost allocation: Cream ($72,000* ÷ $315,264) x $320,000 $ 73,082 rounded Skim ($243,264* ÷ $315,264) x $320,000 246,918 rounded Total $320,000 * Cream ($0.90 x 80,000) = $ 72,000

Skim ($0.2896 x 840,000) = 243,264 Total $315,264 c. Beg Finished Goods $ 0 CGM 320,000 Goods available for sale 320,000 End Finished Goods (81,740)*

Cost of Goods Sold $238,260 * Cream ($73,082 ÷ 80,000) x (80,000 – 60,000) = $18,271 rounded Skim ($246,918 ÷ 840,000) x (840,000 – 625,000) = 63,199 rounded Total $81,740 Sales $679,000 Cost of Goods Sold 238,260 Gross Margin $440,740 38. a. Joint cost allocation (in millions): Oil (55 ÷ 275) x $49.8 = $ 9.96 Meal (220 ÷ 275) x $49.8 = 39.84 Total $49.80

b. Cost of goods sold (in millions): Oil ($9.96 ÷ 55) x (55 x 0.60) = $ 5.976 Meal ($39.84 ÷ 220) x (220 x 0.80) = 31.872 Total $37.848 c. Ending finished goods (in millions): Oil ($9.96 ÷ 55) x (55 x 0.40) = $ 3.984 Meal ($39.84 ÷ 220) x (220 x 0.20) = 7.968 Total $11.952

39. a. Joint cost allocation (in millions): Oil ($0.339 x 55) = $18.645 Meal ($0.169 x 220) = 37.180 Total $55.825 Oil ($18.645 ÷ $55.825) x $49.8 = $16.633*

Meal ($37.180 ÷ $55.825) x $49.8 = 33.167*

Total $49.800 *rounded

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266

b. Cost of goods sold (in millions): Oil ($16.633 ÷ 55) x (55 x 0.60) = $ 9.980*

Meal ($33.167 ÷ 220) x (220 x 0.80) = 26.534*

Total $36.514 *rounded c. Ending finished goods (in millions): Oil ($16.633 ÷ 55) x (55 x 0.40) = $ 6.653*

Meal ($33.167 ÷ 220) x (220 x 0.20) = 6.633*

Total $13.286 *rounded d. Each method allocates a different amount of joint costs to the joint

products and results in a different per-unit cost for each product. In problem 38 the physical measure was used to assign joint costs and more joint costs were assigned to the meal. This allocation resulted in a lower cost of goods sold number and a higher value in ending inventory.

40. a. Joint cost allocation: Checking $400,000 x ($948,750 ÷ $1,650,000) = $230,000 Credit Cards $400,000 x ($701,250 ÷ $1,650,000) = 170,000 Total $400,000 b. Checking Credit Card Total Revenues $948,750 $701,250 $1,650,000 Joint costs (230,000) (170,000) (400,000) Separate costs (125,000) (90,000) (215,000) Gross margin unadjusted $593,750 $441,250 $1,035,000 Insurance revenue 32,500 Overall gross margin $1,067,500 41. a. Total joint costs: Direct material $37,500 Direct labor 12,000 Overhead 11,000 $60,500 Sales value of scrap: $0.65 per lb. x 3,600 lbs. (2,340) Joint cost to be allocated $58,160 b. Robes Bath Towels Revenues $40.00 $22.00 Separate costs (16.80) (4.60) NRV per unit $23.20 $17.40 Multiply by # of units produced x 6,000 x 12,000 Total NRV $139,200 $208,800 NRV % 40% 60%

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Joint cost assignable to robes (40% x $58,160) $23,264 Joint cost assignable to towels (60% x $58,160) 34,896 $58,160 WIP-Robes 23,264 WIP-Towels 34,896 Work in Process - Cutting 58,160 Allocation of joint costs to robes and towels Finished Goods – Scrap 2,340 Work in Process - Cutting 2,340 To record production of scrap c. Robes Bath Towels Joint costs $ 23,264 $34,896 Separate costs: $16.80 X 6,000 100,800 $ 4.60 X 12,000 55,200 Total to finished goods $124,064 $90,096 42. a.

Clean & Sort $15,450 $2,000

Cutting Dept. Package & Delivery Dept.

Split-off

Premium 1,500 pecks $1,500 $30,000 Good $2,200 2,000 pecks $15,000 Fair 500 pecks $500 $4,500 b. Materials $15,000 Labor 300 Overhead 150 Joint cost $15,450

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c. Joint Sales Add'l NRV at Joint

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*

Product Price Cost Split-Off Percent* Cost Premium $30,000 $1,500 $28,500 73 $11,278 Good 15,000 4,200 10,800 27 4,172 $39,300 100 $15,450 *rounded d. Raw materials 15,000 Cash (A/P) 15,000 Purchase of peaches Work in Process – Clean & Sort 15,450 Raw Materials 15,000 Wages Payable 300 Manufacturing Overhead 150 To record joint processing costs Work in Process – Packaging (Premium) 11,278 Work in Process – Cutting (Good) 4,172 Work in Process – Clean & Sort 15,450 To move joint production costs to Packaging and Cutting Departments Work in Process - Cutting (Good) 2,000 Various accounts 2,000 To record cutting and bottling costs for Good Peaches Work in Process - Packaging (Good) 6,172 Work in Process – Cutting (Good) 6,172 To move Good Peaches from the Cutting to the Packaging department Work in Process - Packaging (Premium) 1,500 Work in Process - Packaging (Good) 2,200 Various accounts 3,700 To record packaging and delivery costs Finished Goods (Premium) 12,778 Work in Process - Packaging (Premium) 12,778 To record completed production of premium peaches Finished Goods (Good) 8,372 Work in Process - Packaging (Good) 8,372 To record completed production of Good Peaches Cash 4,500 Various Accounts 500 Other Income 4,000 To record sale of Fair Peaches

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e. Total cost $15,450

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Estimated NRV of scrap (4,000) Joint cost to allocate $11,450 Joint Sales Add'l NRV at Joint*

Product Price Cost Split-Off Percent* Cost Premium $30,000 $1,500 $28,500 73 $ 8,358 Good 15,000 4,200 10,800 27 3,092 $39,300 100 $11,450 *rounded f. Raw materials 15,000 Cash (A/P) 15,000 Purchase of peaches Work in Process – Clean & Sort 15,450 Raw Materials 15,000 Wages Payable 300 Manufacturing Overhead 150 To record joint processing costs Work in Process - Packaging (Fair) 4,000 Work in Process – Clean & Sort 4,000

To recognize by-product

Work in Process - Packaging (Premium) 8,358 Work in Process - Cutting (Good) 3,092 Work in Process – Clean & Sort 11,450 To allocate joint processing costs Work in Process - Cutting (Good) 2,000 Various accounts 2,000 To record cutting cost for Good Peaches Work in Process - Packaging (Good) 5,092 Work in Process – Cutting (Good) 5,092 To move Good Peaches from the

Cutting to the Packaging department

Work in Process - Packaging (Premium) 1,500 Work in Process - Packaging (Good) 2,200 Work in Process - Packaging (Fair) 500 Various accounts 4,200

To record Packaging Cost

Finished Goods (Premium) 9,852 Finished Goods (Good) 7,292 Finished Goods (Fair) 4,500 Work in Process - Packaging (Premium) 9,852 Work in Process - Packaging (Good) 7,292 Work in Process - Packaging (Fair) 4,500 To move completed production to finished goods

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43. a. Personal $707,000 $753,000 Training Joint Costs $62,800 Apparel $29,600 $289,000 Towels 2,510 lbs Pack & Sell $377* $1,506 *rounded b. 2,510 x ($0.60 - $0.10 - $0.05) = $1,130 (rounded) c. $36,000 + $23,800 + $3,000 - $1,130 = $61,670 d. Personal Training Apparel Gross revenues $753,000 $289,000 Separate costs: Cost of Goods Sold (194,850)* Labor (431,000) (24,000) Supplies (98,000) (700) Equipment depreciation (65,000) (1,200) Administration (113,000) (3,700) Net realizable value $ 46,000 $ 64,550 * BI + Purchases - EI = $35,000 + $181,350 - $21,500 e. Personal Training: $61,670 x ($46,000 ÷ $110,550) = $25,661 (rounded) Apparel: $61,670 x ($64,550 ÷ $110,550) = $36,009 (rounded)

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f. Personal Training Apparel Gross revenues $753,000 $289,000 Separate costs: Cost of Goods Sold (194,850) Labor (431,000) (24,000) Supplies (98,000) (700) Equipment depreciation (65,000) (1,200) Administration (113,000) (3,700) Joint costs (25,661) (36,009) Operating income $ 20,339 $ 28,541

44. a.

Oranges 140,000 lbs $77,900

Dept 1

Dept 3 $6,450 39,200 gal

Split-off Dept 2 Juice Juice $9,620 16,800 gal $5.25 gal 16,800 gal Jelly Jelly 31,360 gal $3.45 gal Distribution Pulp Pulp $110 $0.08 gal 7,840 gal b. 56,000 gallons of output in Dept. 1: Transferred to Dept. 2 (30%) 16,800 gallons Transferred to Dept. 3 (70%) 39,200 gallons c. 39,200 gallons of input to Dept. 3: Pulp (20%) 7,840 gallons Marmalade (80%) 31,360 gallons d. Sales value (7,840 x $.08) $627*

Distribution expense (110 NRV $517 *rounded

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e. Joint Sales Total Separate Product Gallons Price Sales Costs NRV Juice 16,800 $5.25 $ 88,200 $9,620 $ 78,580 Jelly 31,360 3.45 108,192 5,933* 102,259 * $6,450 - $517 f. Joint Joint Product NRV Percent Cost* Juice $ 78,580.00 43 $33,497 Jelly 102,259.20 57 44,403 $180,839.20 100 $77,900 * Total joint cost: $44,200 + $33,700 = $77,900 g. Joint Joint Separate Total Inv. Value of Product Cost Costs Cost % End. Inv. Juice $33,497 $9,620.00 $43,117.00 x 15 $6,468 Jelly 44,403 $5,932.80 $50,335.80 x 15 $7,550 45. a.

Harvest $875,000

Split-off Wheat 350,000 bushels $3.50/bushel Straw Baling Straw 5,000 tons $50,000 $45/ton b. 1. By-Product Inventory – Straw 150,000 Work in Process - Wheat 150,000 (5,000 tons x $30 per ton) To record completed production of by-product 2. By-product Inventory – Straw 225,000 Various Production Expenses 50,000 Work in Process - Wheat 175,000 (5,000 tons at $45 per ton - $50,000) To record completed production of by-product (Alternative) Work in Process - Straw 50,000 Various Production Expenses 50,000 To record production of by-product

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Work in Process – Straw 175,000 Work in Process - Wheat 175,000 To record reduction of main product for NRV of by-product By-Product Inventory - Straw 225,000 Work in Process - Straw 225,000 To record completed production of by-product 3. Work in Process - Straw 96,250* Work in Process - Wheat 96,250 To allocate joint processing costs to straw *Sales value of Wheat at split-off (70 × 5,000 × $3.50) $1,225,000 (89%) Sales value of Straw at split-off (5,000 × $30) 150,000 (11%) $1,375,000 Total joint costs ($175 x 5,000) $875,000 Proportion of straw sales value at split-off x .11 Joint costs assignable to straw $ 96,250 Work in Process – Straw 50,000 Various Production Expenses 50,000 Incurrence of separable processing costs of straw Finished Goods Inventory – Straw 146,250 Work in Process - Straw 146,250 To record completed production of straw (CPA adapted) 46. a. Joint process cost: Direct materials $40,000 Direct labor 23,400 Overhead 10,000 Total $73,400 Less by-product NRV 4,600 Amount to be allocated $68,800 Allocation on the basis of sales value at split-off: Product Sales Value Proportion Allocation*

Tenderloin $132,000 0.5491 $37,778 Roast 86,000 0.3577 24,610 Ham 22,400 0.0932 6,412 $240,400 1.0000 $68,800 Allocation on the basis of pounds produced: Product Pounds Proportion Allocation* Tenderloin 8,600 0.2622 $18,039 Roast 13,400 0.4085 28,105 Ham 10,800 0.3293 22,656 32,800 1.0000 $68,800 *rounded

Chapter 11

Computation of EI values under each allocation base:

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274

Sales Value Approach: Product Allocation Units Unit Cost Units in EI EI Value Tenderloin $37,778 6,440 $5.87 1,000 $5,870.00 Roast 24,610 16,740 1.47 2,600 3,822.00 Ham 6,412 8,640 0.74 1,040 769.60 Physical Pounds Approach: Product Allocation Units Unit Cost Units in EI EI Value Tenderloin $18,039 6,440 $2.80 1,000 $2,800.00 Roast 28,105 16,740 1.68 2,600 4,368.00 Ham 22,656 8,640 2.62 1,040 2,724.80

b. 1. For financial statement purposes, the sales value approach apportions costs according to the relative market values of the products while the physical (pounds) approach allocation treats every pound of output as equally worthy. This is done by assigning the same cost per pound to all outputs ignoring that some pounds of product sell for a higher amount than others. Pounds are, however, an unchanging measure of output while dollars (sales value in the present case) change as the purchasing power of the monetary unit changes.

2. Because joint process costs are sunk, once the joint process has been

conducted, these costs and the bases used to allocate them are irrelevant to decisions about processing beyond the split-off point.

47. a. With many scrap and waste materials it is often an issue of who is to bear

the cost. Undoubtedly, the resulting costs in this case to the firms and society far exceeded the cost the individual or firm would have incurred to properly dispose of the hazardous waste materials.

b. If caught, those involved with this type of illegal disposal of materials could

be subject to damage claims, very large fines, and prison time. Furthermore, it is likely that the costs of the cleanup would be imposed on them.

c. Firms have an obligation to ensure proper waste disposal and to educate

their employees in proper methods of waste disposal. Employees should be made aware of the risks associated with improper disposal including the legal repercussions. Thus, the least expensive and most effective way to control waste is for each firm to assume responsibility for its own waste. Beyond internal measures, the larger society can assume a greater oversight role through increased regulation and monitoring of waste control efforts. Much of this activity is currently monitored by the EPA, but the role of this agency could be expanded. Further, we could tighten laws and improve the penalty structure for improper disposal of waste materials. Lastly, we could improve waste recycling opportunities for manufacturing

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firms and pursue other alternatives to reduce the costs of waste disposal.

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d. The vendor/manufacturer must bear some of the responsibility for proper use and disposal of its products. Manufacturers should have superior knowledge about chemical properties and the risks associated with the components of their products. Furthermore, while giving due consideration to relative cost, manufacturers have an obligation to produce products with materials and components that are the least toxic and the most convenient to recycle. If extraordinarily toxic to the environment, manufacturers should be directly responsible for proper waste disposal.