Solution manual cost and managerial accounting 3rd by barficost allocation for joint products and by products

Chapter Cost Allocation for Joint Products and By-Products Questions A joint production process is one that yields more than one principal product simultaneously By definition, a given joint process yields more than one output, so managers get several outputs In some cases, management may decide to “tune” the process to produce more of the most desirable product But management must always decide the best use of the remaining outputs For example, in the natural resources industries, it is common for both oil and natural gas to be extracted from an oil field, multiple types of ores to be extracted simultaneously from mines and for multiple meat products to be obtained from processing hogs and cattle Joint products are those items resulting from a joint process that have the greatest relative sales value of all outputs By-products are of insufficient sales value to justify undertaking the joint process Scrap has little, if any, 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 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 Joint products gain separate identity at the split-off point They may or may not be processed further outside the joint process after the split-off point It is also possible that there may be several subsequent split-off points after the original one within a joint process In other words, a joint process may continue to refine outputs after the original split-off point 215 216 Chapter Cost Allocation for Joint Products and By-Products Separate costs can be distinctly traced to one joint product or another; joint costs cannot be This difference is due to the fact that joint costs are incurred prior to the split-off point and separate costs are incurred after the split-off point Joint processing costs are allocated only to the joint products, not to by-products or scrap Joint process cost is not allocated to scrap or to by-products because the purpose of engaging in the joint process is to produce the joint products, not the scrap or by-products Thus, the costs resulting from the joint process are best matched with the primary revenues from the products obtained from that process (Additionally, the revenues from scrap or by-product may not be great enough to cover any costs which might potentially be assigned to them.) Under some accounting treatments using the net realizable approach to accounting for by-products and scrap, joint process costs are reduced by the value of the byproducts or scrap Thus, in those cases, all of the joint process costs initially incurred are not allocated to the joint products 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 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 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 and deflation 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 10 Approximated net realizable values are necessary when some or 238 Chapter 217 Cost Allocation for Joint Products and By-Products 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 11 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 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 Each student will have a different answer to preferability 12 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 byproduct 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 13 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 14 Student solutions will vary No answer provided Chapter Cost Allocation for Joint Products and By-Products Exercises 218 15 a b c d e f g h i j k l m n o p No match 12 10 4&9 13 16 15 14 11 16 a In a butcher shop, the major joint input is meat The major questions to be asked follow: (1) Do I really want to be in the butcher shop business? Presumably, this question has been answered in the affirmative (2) What specific meats I want to work with and what customers 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 meat 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 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 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 meat wholesalers 238 b 17 Chapter 219 Cost Allocation for Joint Products and By-Products For a butcher shop, the manner in which joint costs is allocated can affect some decisions For example, in pricing products, a butcher shop wants to cover all costs To 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 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 a by-product has a somewhat larger market value a Direct instructional costs Overhead Total costs $38,000 4,000 $42,000 Application rate = $42,000 ÷ (4,000 + 2,000) = $7.00 per hour Cost assignment: Small Business Management Intro to Internet Total cost assigned (4,000 × $7.00) (2,000 × $7.00) $28,000 14,000 $42,000 Application rate = $42,000 ữ [(4,000 ì $5) + (2,000 $15)] = $42,000 ÷ $50,000 = $0.84 per dollar of sales value Cost Assignment: Small Business Management ($20,000 × 0.84) $16,800 Intro to Internet ($30,000 × 0.84) 25,200 Total cost assigned $42,000 b × 220 c 18 Chapter Cost Allocation for Joint Products and By-Products The monetary method of allocation best captures the relative incentives of providing the joint services It is appropriate to assign Introduction to Internet more cost because it generates more revenues Alternatively, more class hours are required for Small Business Management If class hours is considered to be a cost driver, it is appropriate to assign more costs to Small Business Management a Allocation rate = $12,000,000 ÷ 20,000 = $600 per ton Chemical A: $600 × 12,000 = $7,200,000 Chemical B: $600 × 8,000 = $4,800,000 b Incremental revenue = (12,000 tons × 2,000 lbs × $1.00 per lb.) = Incremental costs (12,000 tons × $1,500 per ton) Increase in income $24,000,000 18,000,000 $ 6,000,000 Based on the incremental change in net income, the company should process Chemical A further 19 a Fish = oz ÷ 16 oz = 50% Oil = oz ÷ 16 oz = 25% Meal = oz ÷ 16 oz = 12.5% The remaining 25% is waste Joint Products Fish Oil Meal Unit Weight 0.5 0.25 0.125 b Joint Products Fish Oil Meal Units 50,000 25,000 12,500 c Total lbs Produced 100,000 100,000 100,000 Product Total 50,000 25,000 12,500 87,500 Unit Selling Price Total $3.00 $150,000 4.00 100,000 2.00 25,000 $275,000 Percent 57.1 28.6 14.3 100.0 Allocated Joint Cost $54,359 27,227 13,614 $95,200 Percent 54.5 36.4 9.1 100.0 Allocated Joint Cost $51,884 34,653 8,663 $95,200 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 because of the substantial differences in per pound prices among the three products 238 20 a Cost Allocation Sales value of Sales value of Total sales Chapter for Joint Products and By-Products milk $ 50,000 (31.25%) sour cream 110,000 (68.75%) value $160,000 221 Since the milk represents 31.25% of the total sales value at split-off, then $21,600 represents 31.25% of the total joint costs Total joint costs are $69,120 ($21,600 ÷ 0.3125) b 21 pints = quart 160,000 pints = 80,000 quarts of sour cream Quarts of milk 120,000 (60%) Quarts of sour cream (160,000 ÷ 2) 80,000 (40%) Total quarts 200,000 Since the milk represents 60% of the total physical quantity produced, then $21,600 represents 60% of the total joint costs Total joint costs are $36,000 ($21,600 ÷ 0.60) a Revenues Separate Costs NRV Communications News Entertainment $18,000,000 $15,000,000 $95,000,000 (17,000,000) (8,000,000) (55,000,000) $ 1,000,000 $ 7,000,000 $40,000,000 Joint cost allocation: Communications $12,000,000 × ($1 ÷ $48) News $12,000,000 × ($7 ÷ $48) Entertainment $12,000,000 × ($40 ÷ $48) Total Revenues Separate Costs Allocated costs Net Profit b $18,000,000 (17,000,000) (250,000) $ 750,000 Total revenues = $18 m + $15 Joint cost allocation: Communications $12,000,000 × News $12,000,000 × Entertainment $12,000,000 × Total Revenues Separate Costs Allocated costs Net Profit $15,000,000 (8,000,000) (1,750,000) $ 5,250,000 $ 250,000 1,750,000 10,000,000 $12,000,000 $95,000,000 (55,000,000) (10,000,000) $30,000,000 m + $95 m = $128 m ($18 ÷ $128) ($15 ÷ $128) ($95 ÷ $128) $18,000,000 (17,000,000) (1,687,500) $ (687,500) $15,000,000 (8,000,000) (1,406,250) $ 5,593,750 $ 1,687,500 1,406,250 8,906,250 $12,000,000 $95,000,000 (55,000,000) ( 8,906,250) $31,093,750 222 c 22 a Chapter Cost Allocation for Joint Products and By-Products Obviously, as head of the Communications 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 Communications Group appear to be very unprofitable Some of the points students might make in their presentations include (some of which may be rebuttable): The allocation of joint costs is totally arbitrary; there is no cause and effect relationship represented in the allocations in part (b) The Communications Group has a different degree of utilization than the other two groups of facilities, administration, etc because most of its activities originate at a different location Evidence of this relationship is found in the separate costs incurred by the Communications Group relative to the other two groups The allocations in part (b) fail to consider this fact Units of output allocation: Total units = 7,500 + 10,000 Product (7,500 ÷ 30,000) Product (10,000 ÷ 30,000) Product (12,500 ữ 30,000) Total + ì ì ì 12,500 = 30,000 $120,000 $30,000 $120,000 40,000 $120,000 50,000 $120,000 Total weight = [(7,500 × 3) + (12,500 × 3)] = 22,500 + 20,000 + 37,500 = 80,000 ounces Weight-based allocation: Product (22,500 ữ 80,000) ì $120,000 $33,750 Product (20,000 ữ 80,000) ì $120,000 30,000 Product (37,500 ÷ 80,000) × $120,000 56,250 Total $120,000 Approximated Net realizable Product [7,500 × ($4.25 Product [10,000 × ($3.00 Product [12,500 × ($3.00 Total value computation: - $1)] $24,375 - $0.50)] 25,000 - $0.75)] 28,125 $77,500 Approximated net realizable value allocation: Product (24,375 ữ 77,500) ì $120,000 $37,742 Product (25,000 ữ 77,500) ì $120,000 38,710 Product (28,125 ữ 77,500) ì $120,000 43,548 Total $120,000 238 b Chapter Cost Allocation for Joint Products and By-Products Cost assigned to inventory = allocated joint cost + separate costs Product = $30,000 + ($1 × 7,500) = $37,500 Product = $40,000 + ($0.50 × 10,000) = $45,000 Product = $50,000 + ($0.75 × 12,500) = $59,375 223 Inventory valuation based on units of production: Product ($37,500) ì (500 ữ 7,500) $ 2,500 Product ($45,000) ì (1,000 ữ 10,000) 4,500 Product ($59,375) ì (1,500 ÷ 12,500) 7,125 Total $14,125 Inventory valuation based on weight: Product ($33,750 + $7,500) ì (1,500 ữ 22,500) Product ($30,000 + $5,000) ì (2,000 ữ 20,000) Product ($56,250 + $9,375) ì (4,500 ữ 37,500) Total $2,750 3,500 7,875 $14,125 Inventory valuation based on approximated net realizable value: Product ($37,742 + $7,500) ì (500 ữ 7,500) $3,016 Product ($38,710 + $5,000) ì (1,000 ữ 10,000) 4,371 Product ($43,548 + $9,375) ì (1,500 ữ 12,500) 6,351 Total $13,738 23 a Final sales value = Final sales price × Units Split-off sales value = Sales price at split-off × units Incremental costs = Incremental processing cost × units (a) (b) (c)=(a)–(b) (d) (e)=(c)–(d) Final Sales Split-off Incremental Incremental Incremental Product Value Sales Value Sales Costs Profit Sun $15,000 $10,000 $ 5,000 $ 7,500 $(2,500) Moon 60,000 10,000 50,000 20,000 30,000 Mars 450 375 75 50 25 Only products Moon and Mars should be processed beyond the split-off point 224 b Chapter Cost Allocation for Joint Products and By-Products Joint costs $30,000 Less NRV of Mars ($1.80 - $0.20) × 250 (400) Joint costs to be allocated $29,600 Unit-based allocation: Sun (5,000 ữ 15,000) ì $29,600 Moon (10,000 ữ 15,000) ì $29,600 Total $ 9,867 19,733 $29,600 Weight-based allocation: Sun (50,000 ữ 110,000) ì $29,600 Moon (60,000 ữ 110,000) ì $29,600 Total $13,455 16,145 $29,600 NRV computation (assuming Sun is not processed further) Sun (5,000 × $2) $10,000 Moon (10,000 × $4) 40,000 NRV $50,000 NRV-based allocation: Sun (10,000 ữ 50,000) ì $29,600 Moon (40,000 ữ 50,000) × $29,600 Total 24 a $ 5,920 23,680 $29,600 Product A $180,000 (120,000) $ 60,000 (40,000) Final revenues Revenues at split-off Incremental revenues Incremental costs Net benefit (cost) of further processing $ 20,000 Product B $140,000 (100,000) $ 40,000 (34,000) $ 6,000 Both products should be processed further b 25 a Product Candied peaches Peach jelly Peach jam b The irrelevant item is the $40,000 of joint processing cost (a) Final Revenues (b) (c)= (a)-(b) (d) (e)=(c)-(d) Split-off Incremental Incremental Incremental Sales Value Revenues Costs Profit $62,000 $40,000 $22,000 $26,000 $(4,000) 74,000 40,000 34,000 38,000 (4,000) 27,000 10,000 17,000 15,000 2,000 Candied peaches Peach jelly Additional potential profit $ 4,000 4,000 $8,000 238 26 a b Chapter 225 Cost Allocation for Joint Products and By-Products Joint cost $32,000 Less NRV of Z [1,000 × (0.50 - 0.10)] (400) Joint cost to be allocated $31,600 NRV of X [9,000 × ($4 - $0.75)] NRV of Y [10,000 × ($4.25 - $1)] Total NRV $29,250 32,500 $61,750 Cost allocation: X [$31,600 ì ($29,250 ữ $61,750)] Y [$31,600 ì ($32,500 ữ $61,750)] Total cost allocation $14,968 16,632 $31,600 Separate costs for X = 9,000 × $0.75 = $6,750 Separate costs for Y = 10,000 × $1.00 = $10,000 X Y Joint costs $14,968 $16,632 Separate costs 6,750 10,000 Total costs $21,718 $26,632 Divide by units 9,000 10,000 Unit cost $2.41 $2.66 Inventory values X: 600 × $2.41 Y: 900 × $2.66 Z: (54 ữ 1,000) ì $400 Total inventory value $1,446 2,394 22 $3,862 27 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 28 a b Allocate joint cost of $50,000: Joint Services Increase in Revenues Leasing $ 800,000 1/3 Sales 1,600,000 2/3 Totals $2,400,000 Allocated Cost $16,667 33,333 $50,000 Allocate joint cost of $50,000: Joint Services Increase in Net Income Leasing $ 150,000 0.60 Sales 100,000 0.40 Totals $ 250,000 1.00 Allocated Cost $30,000 20,000 $50,000 226 c 29 Cost Allocation The allocation better because benefit of the Chapter for Joint Products and By-Products based on increase in net income may be it matches the advertising cost to the net advertising Joint process cost Less net realizable value of by-product inventory Amount to be allocated $120,000 20,000 $100,000 Proration of amount to be allocated based on weight: Product M N O 30 a Pounds 4,800 13,000 4,200 22,000 Proportion 0.22 0.59 0.19 1.00 Sales value of pants Total sales value Allocation $ 22,000 59,000 19,000 $100,000 = Joint cost of pants Total joint cost $ 40,000 = X $300,000 $180,000 $300,000X = $40,000($180,000) $30X = $4($180,000) $30X = $720,000 X = $24,000 for pants Total joint cost Joint cost for hats and pants ($87,000 + $24,000) Joint cost assigned to shirts b $180,000 (111,000) $ 69,000 Joint costs = 60% of relative sales value amounts; therefore, $87,000 = 0.6X X = $145,000 sales value for hats $300,000 – ($145,000 for hats and $40,000 for pants) = sales value of $115,000 for shirts c Hats Final sales value $150,000 Sales value at split off 145,000 Increase in value $ 5,000 Additional costs (13,000) Incremental benefit (loss) $ (8,000) Shirts Pants $134,000 $105,000 115,000 40,000 $ 19,000 $ 65,000 (10,000) (39,000) $ 9,000 $ 26,000 Process shirts and pants further d Joint costs allocated to shirts: Additional costs $69,000 10,000 Chapter Cost Allocation for Joint Products and By-Products Total costs for 8,000 units $79,000 238 Sales Cost for 4,000 units Gross profit 31 a Total joint cost Revenue from tours Expenses of tours Joint cost to be allocated Total Receipts Separate costs Net realizable value $67,000 (39,500) $27,500 $8,000,000 $350,000 (190,000) Total Receipts Separate costs Net realizable value Joint costs Net profit 32 (160,000) $7,840,000 Movie $4,000,000 (2,400,000) $1,600,000 Allocate joint cost of $7,840,000: NRV Movie $ 1,600,000 16% Movie 8,400,000 84 $10,000,000 100% b Joint cost allocated $1,254,400 6,585,600 $7,840,000 Movie $4,000,000 (2,400,000) $1,600,000 (1,254,400) $ 345,600 Total sales value (12,000 × $42) Less costs (12,000 × $8) Reduction of joint cost Movie $27,000,000 (18,600,000) $ 8,400,000 Movie $27,000,000 (18,600,000) $ 8,400,000 (6,585,600) $ 1,814,400 $504,000 (96,000) $408,000 The gross margin for the major products will decrease by $408,000, but net income will remain the same 33 Sales of by-product Cost of by-product sales (45,000 × $0.30) Net realizable value of by-product a b Sales of potato patties Cost of goods sold: Potato patties (80% × $60,000) By-products Gross profit Expenses Income from operations Other revenues (by-product sales) Net income before taxes Sales of potato patties Cost of goods sold Gross profit 227 $23,850 (13,500) $10,350 $79,000 $48,000 13,500 (61,500) $17,500 (7,600) $ 9,900 23,850 $33,750 $79,000 (48,000) $31,000 Chapter Cost Allocation for Joint Products and By-Products Expenses (7,600) Income from operations $23,400 Other income (by-product sales) 10,350 Net income before taxes $33,750 228 c Sales of potato patties Cost of goods sold Gross profit Expenses Net income before taxes *$60,000 - $10,350 = $49,650; 34 $79,000 (39,720)* $39,280 (7,600) $31,680 $49,650 × 80% = $39,720 d The approach in part (c) is the best because it consistently matches the NRV of the by-product with the costs of the joint production operations that produced the by-product a Estimated OH Estimated NRV of by-product Estimated OH to be covered Divided by estimated CPU time Predetermined OH rate per CPU hr b Cash $398,500 (18,400) $380,100 35,000 $ 10.86 19,588 Manufacturing Overhead c 35 19,588 Total actual OH Total applied OH (34,200 × $10.86) $371,412 Total actual NRV of by-product 19,588 Underapplied overhead a $135,000 ÷ 15,000 = $9.00 per DLH b DM DL ($20 × 63) OH ($9.00 × 63) Total c Disposal Value of Spoiled Work Manufacturing Overhead Work in Process - Job XX To record disposal value of spoiled work incurred on Job XX (the stained glass window) $ 420.00 1,260.00 567.00 $2,247.00 18 37 55 $399,500 391,000 8,500 $ 238 36 a Chapter Cost Allocation for Joint Products and By-Products Cash 5,000 Work in Process - Monroe Bldg 5,000 b Cash 5,000 Manufacturing Overhead 37 a b c d e f g h i j 38 a b 39 a b 229 5,000 1 2 1 2 Joint Product Fundraising Program Total Percent 0.10 0.90 1.00 Joint Cost $ 18,000 162,000 $180,000 Joint Product Fundraising Program Total Percent 0.0200 0.9800 1.0000 Joint Cost $ 3,600 176,400 $180,000 Work in Process - Mixing Raw Material Inventory Wages Payable Manufacturing Overhead 39,810 Work in Process - Cooking Work in Process - Mixing 39,810 Work in Process - Cooking Raw Material Inventory Wages Payable Manufacturing Overhead 11,490 Work in Process - Cooking Raw Material Inventory 2,120 Work in Process - Cooking Raw Material Inventory Wages Payable Manufacturing Overhead 9,210 28,000 7,560 4,250 39,810 6,100 2,150 3,240 2,120 1,960 3,120 4,130 Finished Goods - Elegance 40,595 Finished Goods - Sooosoft 22,035 Work in Process - Cooking 62,630 Joint cost allocation: Elegance [($158,910 ữ $211,880) ì $51,300] $38,475 Chapter Cost Allocation for Joint Products and By-Products 230 Sooosoft Total c [($52,970 ÷ $211,880) × $51,300] 12,825 $51,300 Work in Process - Mixing DM 28,000 | To Cooking 39,810 DL 7,560 | OH 4,250 | Bal Work in Process - Cooking From Mixing 39,810 | To FG - Elegance 40,595 DM 6,100 | To FG - Sooosoft 22,035 DL 2,150 | OH 3,240 | DM 2,120 | DM 1,960 | DL 3,120 | OH 4,130 | Bal Finished Goods - Elegance Beg XXX | CGM 40,595 | 40 41 Finished Goods - Sooosoft Beg XXX | CGM 22,035 | a Joint cost allocation Checking $800,000 ì ($1,897,500ữ$3,300,000) = $460,000 Credit Cards$800,000 ì ($1,402,500ữ$3,300,000) = 340,000 Total $800,000 b Checking Cred Cards Total Revenues $1,897,500 $1402,500 $3,300,000 Joint costs (460,000) (340,000) (800,000) Separate costs (250,000) (180,000) (430,000) Gross margin unadjusted $1,187,500 $ 882,500 $2,070,000 Insurance revenue 65,000 Overall gross margin $2,135,000 a Total joint costs: Direct material Direct labor Overhead Sales value of scrap ($1.25 per lb × 1,800 lbs.) Joint cost to be allocated $23,875 6,000 5,900 $35,775 2,250 $33,525 238 b Chapter 231 Cost Allocation for Joint Products and By-Products Robes Bath Towels Revenues $ 20.00 $ 11.00 Separate costs (8.40) (2.30) NRV per unit $ 11.60 $ 8.70 Multiply by # of units produced × 3,000 × 6,000 Total NRV $34,800 $52,200 NRV % 40% 60% Joint cost assignable to robes (40% × $33,525 Joint cost assignable to towels (60% × $33,525) WIP-Robes WIP-Towels Work in Process - Cutting 13,410 20,115 Finished Goods - Scrap Work in Process - Cutting 2,250 c 42 a Materials Labor Overhead Joint cost 33,525 2,250 Robes $13,410 Joint costs Separate costs ($8.40 X 3,000) ($2.30 X 6,000) Total Bath Towels $20,115 25,200 $38,610 13,800 $33,915 $1,500 300 150 $1,950 b Joint Product Group Group $13,410 20,115 $33,525 Sales Price $3,000 1,500 Add'l Cost $150 440 NRV at Split-Off $2,850 1,060 $3,910 Allocated Joint Percent Cost 73 $1,424 27 526 100 $1,950 232 c Chapter Cost Allocation for Joint Products and By-Products Raw Materials 1,500 Cash (A/P) 1,500 Work in Process - Rec & Sep Raw Materials Wages Payable Manufacturing Overhead 1,950 Work in Process - Boxing (Group 1) Work in Process - Slicing (Group 2) Work in Process - Rec & Sep 1,424 526 Work in Process - Boxing (Group 1) Work in Process - Slicing (Group 2) Various accounts 150 220 1,500 300 150 1,950 370 Finished Goods (Group 1) 1,574 Work in Process - Boxing (Group 2) 746 Work in Process - Boxing (Group 1) 1,574 Work in Process - Slicing (Group 2) 746 Work in Process - Boxing (Group 2) Various accounts 220 Finished Goods (Group 2) Work in Process - Boxing (Group 2) 966 Cash 450 Various accounts Other Income d Total cost Estimated NRV of scrap Joint cost to allocate Joint Product Group Group Sales Price $3,000 1,500 Add'l Cost $150 440 220 966 50 400 $1,950 (400) $1,550 NRV at Split-Off $2,850 1,060 $3,910 Allocated Joint Percent Cost 73 $1,132 27 418 100 $1,550 238 e Chapter 233 Cost Allocation for Joint Products and By-Products Work in Process - Rec & Sep 1,950 Raw Materials 1,500 Wages Payable 300 Manufacturing Overhead 150 Work in Process - Boxing (Group 3) Work in Process - Rec & Sep 400 Work in Process - Boxing (Group 1) Work in Process - Slicing (Group 2) Work in Process - Rec & Sep 1,132 418 Work in Process - Slicing (Group 2) Various accounts 220 Work in Process - Boxing (Group 2) Work in Process - Slicing (Group 2) 638 Work in Process - Boxing (Group 1) Work in Process - Boxing (Group 2) Work in Process - Boxing (Group 3) Various accounts 150 220 50 Finished Goods (Group 1) Finished Goods (Group 2) Finished Goods (Group 3) Work in Process - Boxing (Group 1) Work in Process - Boxing (Group 2) Work in Process - Boxing (Group 3) 43 400 1,550 220 638 420 1,282 858 450 1,282 858 450 a [2,510 × ($6.00 - $0.50 - $0.30)] = $13,052 b $36,000 + $23,800 + $3,000 - $13,052 = $49,748 c Gross revenues Separate costs: Cost of Goods Sold Labor Supplies Equipment depreciation Administration Net realizable value * d Styling Services $753,000 n/a (431,000) (98,000) (65,000) (113,000) $ 46,000 Cosmetics $289,000 (194,850)* (24,000) (700) (1,200) (3,700) $ 64,550 BI + Purchases - EI = $35,000 + $181,350 - $21,500 Styling Services: Cosmetics: $49,748 × ($46,000 ÷ $110,550) = $20,700 $49,748 × ($64,550 ÷ $110,550) = $29,048 234 e 44 Chapter Cost Allocation for Joint Products and By-Products Styling Services Cosmetics 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 (20,700) (29,048) Net income $ 25,300 $ 35,502 a 56,000 gallons of output in Dept 1: Transferred to Dept (56,000 × 30%) 16,800 gallons Transferred to Dept (56,000 × 70%) 39,200 gallons b 39,200 gallons of input to Dept 3: P&S (39,200 × 20%) 7,840 gallons Tomato sauce (39,200 × 80%) 31,360 gallons c Sales value (7,840 × $.08) Distribution expense NRV d Joint Product Paste Sauce Gallons 16,800 31,360 $627.20 (110.00) $517.20 Sales Total Separate Price Sales Costs NRV $5.25 $ 88,200 $9,620.00 $ 78,580.00 3.45 108,192 5,932.80* 102,259.20 *$6,450 - $517.20 e * Total joint cost: Joint Product NRV Paste $ 78,580.00 Sauce 102,259.20 $180,839.20 45 $44,200 + $33,700 = $77,900 Percent 43 57 100 f Joint Product Paste Sauce a By-Product Inventory - Straw Work in Process - Wheat (5,000 tons × $30 per ton) Joint Cost* $33,497 44,403 $77,900 Joint Separate Total Cost + Costs = Cost × $33,497 $9,620.00 $43,117.00 44,403 $5,932.80 $50,335.80 Inv Value of % = EI 15 $6,468 15 $7,550 150,000 150,000 238 b Chapter 235 Cost Allocation for Joint Products and By-Products 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) (Alternative) Work in Process - Straw Various production expenses c 50,000 50,000 Work in Process - Straw Work in Process - Wheat 175,000 By-Product Inventory - Straw Work in Process - Straw 225,000 Work in Process - Straw Work in Process - Wheat 175,000 *Sales value of wheat at split-off (70 × 5,000 × $3.50) Sales value of straw at split-off (5,000 × $30) 225,000 96,250* 96,250 $1,225,000 (89%) 150,000 $1,375,000 (11%) Total joint costs ($175 × 5,000) $875,000 Proportion of straw sales value at split-off × 11 Joint costs assignable to straw $ 96,250 Work in Process - Straw Various production expenses 50,000 Finished Goods Inventory - Straw Work in Process - Straw 146,250 50,000 146,250 (CPA adapted) Chapter Cost Allocation for Joint Products and By-Products 236 Case 46 a Joint process cost: Direct material Direct labor Overhead Total Less by-product NRV Amount to be allocated $20,000 11,700 5,000 $36,700 2,300 $34,400 Allocation on the basis of sales value at split-off: Product Sales Value Decimal Amount Allocation X $ 66,000 0.55 $34,400 $18,920 Y 43,000 0.36 $34,400 12,384 Z 11,200 0.09 $34,400 3,096 $120,200 1.00 $34,400 Allocation on the basis of pounds produced: Product Pounds Decimal Amount Allocation X 4,300 0.26 $34,400 $ 8,944 Y 6,700 0.41 $34,400 14,104 Z 5,400 0.33 $34,400 11,352 16,400 1.00 $34,400 Computation of EI values under each allocation base: Sales Value Approach: Product Allocation Units Unit Cost Units in EI EI Value X $18,920 3,220 $5.88 500 $2,940.00 Y 12,384 8,370 1.48 1,300 1,924.00 Z 3,096 4,320 0.72 520 374.40 Physical Pounds Approach: Product Allocation Units X $ 8,944 3,220 Y 14,104 8,370 Z 11,352 4,320 b Unit Cost $2.78 1.69 2.63 Units in EI 500 1,300 520 EI Value $1,390.00 2,197.00 1,367.60 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 238 Chapter 237 Cost Allocation for Joint Products and By-Products 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 Reality Check 47 The following is provided to illustrate an answer Student responses will vary a Business Joint products By-products Scrap Waste Lumber Mfg lumber products saw dust tree bark paper, furniture wood chips Beef Prod meat bone meal offal leather products blood meal University teaching service research Corn Prod corn cobs shucks corn stalks Oil refined products water Extraction chemical products plastics natural gas b For lumber manufacturing, use of approximated NRV or NRV would be the best base Lumber products have tremendous potential for processing beyond the split-off point and the value that can be added in such additional processing should be recognized in the allocation scheme The same logic applies to beef production and oil extraction A university produces two major unique services Some measure of activity would be the logical choice for allocating joint costs to teaching and research A logical activity measure would be faculty time Corn production costs could be allocated based on sales value at the split-off point The producer of the corn can easily establish market values for both corn stalks and the grain at the split-off point 238 48 a Chapter Cost Allocation for Joint Products and By-Products 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 firms and pursue other alternatives to reduce the costs of waste disposal 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 49 Student solutions will vary No solution provided 50 Student solutions will vary No solution provided  ... further d Joint costs allocated to shirts: Additional costs $69,000 10,000 Chapter Cost Allocation for Joint Products and By- Products Total costs for 8,000 units $79,000 238 Sales Cost for 4,000 units... Chapter 219 Cost Allocation for Joint Products and By- Products For a butcher shop, the manner in which joint costs is allocated can affect some decisions For example, in pricing products, a butcher... Chapter Cost Allocation for Joint Products and By- Products Separate costs can be distinctly traced to one joint product or another; joint costs cannot be This difference is due to the fact that joint