Cost Accounting 15E. Chapter 16 Solutions

8/18/2019 Cost Accounting 15E. Chapter 16 Solutions

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CHAPTER 16

COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS

16-1 Exhibit 16-1 presents many examples of joint products from four different generalindustries. These include:

Industry Separable Products at the Splitoff Point Food Processing: !amb !amb cuts" tripe" hides" bones" fat Tur#ey $reasts" %ings" thighs" poultry meal

Extracti&e: Petroleum 'rude oil" natural gas

16-2 ( joint cost is a cost of a production process that yields multiple products simultaneously.( separable cost is a cost incurred beyond the splitoff point that is assignable to each of thespecific products identified at the splitoff point.

16-3 The distinction bet%een a joint product and a byproduct is based on relati&e sales &alue.( joint product is a product from a joint production process )a process that yields t%o or more products* that has a relati&ely high total sales &alue. ( byproduct is a product that has a relati&elylo% total sales &alue compared to the total sales &alue of the joint )or main* products.

16-4 ( product is any output that has a positi&e sales &alue )or an output that enables acompany to a&oid incurring costs*. +n some joint-cost settings" outputs can occur that do not ha&ea positi&e sales &alue. The offshore processing of hydrocarbons yields %ater that is recycled bac# into the ocean as %ell as yielding oil and gas. The processing of mineral ore to yield gold andsil&er also yields dirt as an output" %hich is recycled bac# into the ground.

16-5 The chapter lists the follo%ing six reasons for allocating joint costs:1. 'omputation of in&entoriable costs and cost of goods sold for financial accounting

purposes and reports for income tax authorities.,. 'omputation of in&entoriable costs and cost of goods sold for internal reporting purposes.. 'ost reimbursement under contracts %hen only a portion of a businesss products or

ser&ices is sold or deli&ered under cost-plus contracts./. +nsurance settlement computations for damage claims made on the basis of cost

information of joint products or byproducts.0. ate regulation %hen one or more of the jointly produced products or ser&ices are subject

to price regulation.

6. !itigation in %hich costs of joint products are #ey inputs.

16-6 The joint production process yields indi&idual products that are either sold this period or held as in&entory to be sold in subse2uent periods. 3ence" the joint costs need to be allocated bet%een total production rather than just those sold this period.

16-7 This situation can occur %hen a production process yields separable outputs at the splitoff point that do not ha&e selling prices a&ailable until further processing. The result is that selling

16-1


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prices are not a&ailable at the splitoff point to use the sales &alue at splitoff method. Examplesinclude processing in integrated pulp and paper companies and in petro-chemical operations.

16-8 $oth methods use mar#et selling-price data in allocating joint costs" but they differ in%hich sales-price data they use. The sales value at splitoff method allocates joint costs to joint

products on the basis of the relati&e total sales &alue at the splitoff point of the total production of these products during the accounting period. The net realizable value method allocates joint coststo joint products on the basis of the relati&e net reali4able &alue )the final sales &alue minus theseparable costs of production and mar#eting* of the total production of the joint products duringthe accounting period.

16-9 !imitations of the physical measure method of joint-cost allocation include:a. The physical %eights used for allocating joint costs may ha&e no relationship to the

re&enue-producing po%er of the indi&idual products. b. The joint products may not ha&e a common physical denominator55for example" one

may be a li2uid %hile another a solid %ith no readily a&ailable con&ersion factor.

16-10 The 7 method can be simplified by assuming )a* a standard set of post-splitoff point processing steps and )b* a standard set of selling prices. The use of )a* and )b* achie&es the same benefits that the use of standard costs does in costing systems.

16-11 The constant gross-margin percentage 7 method ta#es account of the post-splitoff point 8profit9 contribution earned on indi&idual products" as %ell as joint costs" %hen ma#ingcost assignments to joint products. +n contrast" the sales &alue at splitoff point and the 7methods allocate only the joint costs to the indi&idual products.

16-12 o. (ny method used to allocate joint costs to indi&idual products that is applicable to the problem of joint product-cost allocation should not be used for management decisions regarding%hether a product should be sold or processed further. hen a product is an inherent result of a joint process" the decision to process further should not be influenced by either the si4e of thetotal joint costs or by the portion of the joint costs assigned to particular products. ;oint costs areirrele&ant for these decisions. The only rele&ant items for these decisions are the incrementalre&enue and the incremental costs beyond the splitoff point.

16-13 o. The only rele&ant items are incremental re&enues and incremental costs %hen ma#ingdecisions about selling products at the splitoff point or processing them further.


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16-15 The sales byproduct method enables a manager to time the sale of byproducts to affectreported operating income. ( manager %ho %as belo% the targeted operating income could adopta 8fire-sale9 approach to selling byproducts so that the reported operating income exceeds thetarget. This illustrates one dysfunctional aspect of the sales method for byproducts.

16-16 ),>-> min.* Jo!"-#o$" %&&o#%"o!' !$()%!#* $*""&*+*!",

1. )a* >,>/>?>

1>,0>

>./>>>.>?>>.16>>.,>>.>/>1.>>>

@,>.>>/.>>?.>>

16.>> , .>>@ 0> .>>

@>.,>> >.,>> >.,>> >.,>> >.,>>

Costs of Destroyed Product

$reast: @>.,> per pound × /> pounds C @ ?

ings: @>.,> per pound × 10 pounds C

@1 1

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Note: (lthough not re2uired" it is useful to highlight the indi&idual product profitability figures:

S%&*$ %&(* %"

S&"o.. *"o

P$#%&

*%$()*$ *"o

P)o(#"

S%&*$

%&(*

Jo!" Co$"$

A&&o#%"*

)o$$

I!#o+*

Jo!" Co$"$

A&&o#%"*

)o$$

I!#o+*$reastsingsThighs$onesFeathers

@00.>>/.>>

1/.>>?.>>>.0>

@.A0,./0?.6>/.B>>.>

@,1.,01.000./>.1>>.,>

@,>.>>/.>>?.>>

16.>>,.>>

@0.>>>.>>6.>>

)?.>>*)1.0>*

,. The sales &alue at splitoff method captures the benefits-recei&ed criterion of costallocation and is the preferred method. The costs of processing a chic#en are allocated to products in proportion to the ability to contribute re&enue. Duality 'hic#ens decision to processchic#en is hea&ily influenced by the re&enues from breasts and thighs. The bones pro&ide

relati&ely fe% benefits to Duality 'hic#en despite their high physical &olume.The physical measures method sho%s profits on breasts and thighs and losses on bonesand feathers. i&en that Duality 'hic#en has to jointly process all the chic#en products" it is non-intuiti&e to single out indi&idual products that are being processed simultaneously as ma#inglosses %hile the o&erall operations ma#e a profit. Duality 'hic#en is processing chic#en mainlyfor breasts and thighs and not for %ings" bones" and feathers" %hile the physical measure methodallocates a disproportionate amount of costs to %ings" bones" and feathers.

16-17 )1> min.* Jo!" )o(#"$ %! )o(#"$ #o!"!(%"o! o. 16-16,

1. Ending in&entory:

$reasts 10 × @>.A0 C @0.>6 ings / × >.1,,0 C >./B

Thighs 6 × >.,10> C 1.,B

$ones 0 × >.>61 C >.1

Feathers , × >.>>> C >. >6

@ A.,1,.

Jo!" )o(#"$ B)o(#"$ et eali4able 7alues of byproducts:

$reasts ings ings @ /.>> Thighs $ones $ones ?.>>

Feathers Feathers > .0>@ 1, .0>

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;oint costs to be allocated:

;oint 'osts– et eali4able 7alues of $yproducts C @0>–@1,.0> C @A.0>Po(!$

o.

P)o(#"

/o&*$%&*

S*&&! P)#*

*) Po(!

S%&*$

%&(*

%" S&"o..

/*"!:

S%&*$ %&(*

%" S&"o..

Jo!"

Co$"$

A&&o#%"*

A&&o#%"*

Co$"$ P*)

Po(!

$reast 1>> @>.00 @00 00 6B @,B.?B @>.,B?BThighs /> >.0 1/ 1/ 6B A.61 >.1B> @ 6B @ A.0 >

Ending in&entory:

$reasts 10 × @>.,B?B @/./?

Thighs 6 × >.1B> 1.1/

@ 0.6,

. Treating all products as joint products does not re2uire judgments as to %hether a productis a joint product or a byproduct. ;oint costs are allocated in a consistent manner to all products

for the purpose of costing and in&entory &aluation. +n contrast" the approach in re2uirement ,lo%ers the joint cost by the amount of byproduct net reali4able &alues and results in in&entory&alues being sho%n for only t%o of the fi&e products" the ones )perhaps arbitrarily* designated as being joint products.

16-18 )1> min.* N*" )*%&%&* ;%&(* +*"o,

( diagram of the situation is in >> × @01G 0"B>> × @,6 @66">>> @10"/>> @?16"/>>Heduct separable costs />6 "/> BA">6 > 0>"/> > et reali4able &alue at splitoff point @, 0 6"66> @ 06"/ > @ 1"> >>eighting" @,06"66>G @06"/> ÷ @1">>> >.?, >.1? 1.>>

;oint costs allocated" >.?,G >.1? × @,B">>> @ ,6B"A?> @ 0B",, > @ ,B ">>>

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SOLUTION E

Processing

@BA">6>

min.* A&"*)!%";* =o!"-#o$"-%&&o#%"o! +*"o$' .()"*)-)o#*$$ *#$o!,

( diagram of the situation is in > A"0>> 1>">>> eighting" ,"0>>G A"0>> ÷ 1>">>> >.,0 >.A0

;oint costs allocated" >.,0G >.A0 × @1,>">>> @ >">>> @ B>">>> @1,>">>>

,. *"%!o& T()*!"!* To"%&

Final sales &alue of total production"

,"0>> × @,1.>>G A"0>> × @1/.>> @ 0,"0>> @1>0">>> @10A"0>>

Heduct separable costs"

,"0>> × @.>>G A"0>> × @,.>> A"0>> 10">>> ,,"0>>

et reali4able &alue at splitoff point @ /0">>> @ B>">>> @10">>>

eighting" @/0">>>G @B>">>>÷

@10">>> 1I ,I

;oint costs allocated" 1IG ,I × @1,>">>> @ />">>> @ ?>">>> @1,>">>>

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. a. Physical-measure )gallons* method:*"%!o& T()*!"!* To"%&

e&enues @0,"0>> @1>0">>> @10A"0>>'ost of goods sold: ;oint costs >">>> B>">>> 1,>">>>

>> ,,"0>> Total cost of goods sold A"0>> 1>0">>> 1/,"0>>ross margin @10">>> @ > @ 10">>>

b. Estimated net reali4able &alue method:*"%!o& T()*!"!* To"%&

e&enues @0,"0>> @1>0">>> @10A"0>>'ost of goods sold: ;oint costs />">>> ?>">>> 1,>">>> >> ,,"0>> Total cost of goods sold /A"0>> B0">>> 1/,"0>>

ross margin @ 0">>> @ 1>">>> @ 10">>>

/.

Aoo& B*;, T()*!"!* To"%&


,"0>> × @6>.>>G A"0>> × @1/.>> @10>">>> @1>0">>> @,00">>>

Heduct separable costs"

),"0>> × @1,.>>* J )>.,> × @10>">>>*G

A"0>> × @,.>> 6>">>> 10">>> A0">>>

et reali4able &alue at splitoff point @ B>">>> @ B>">>> @1?>">>>

eighting" @B>">>>G @B>">>>÷

@1?>">>> >.0> >.0>;oint costs allocated" >.0G >.0 × @1,>">>> @ 6>">>> @ 6>">>> @1,>">>>

(n incremental approach demonstrates that the company should use the ne% process:+ncremental re&enue"

)@6>.>> 5 @,1.>>* × ,"0>> @ BA"0>>

+ncremental costs:

(dded processing" @B.>> × ,"0>> @,,"0>>

Taxes" )>.,> × @6>.>>* × ,"0>> >">>> )0,"0>> *

+ncremental operating income fromfurther processing @ /0">>>

Proof: Total sales of both products @,00">>>;oint costs 1,>">>>>> e% gross margin 6>">>>Kld gross margin 10">>>Hifference in gross margin @ /0">>>

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SOLUTION E,>>>for 1>,>>>

gallons

Processing@, per gallon

Processing@ per gallon

A,0>>gallons

,,0>>gallons

Lethanol:,,0>> gallonsat @,1 per gallon

Turpentine:A,0>> gallons

at @1/ per gallon


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16-20 )/> min.* A&"*)!%";* +*"o$ o. =o!"-#o$" %&&o#%"o!' *!! !;*!"o)*$,

Total production for the year %as:

E!! To"%&

So& I!;*!"o)*$ P)o(#"o!M 6? 1, ,>>N /?> 1,> 6>>O 6A, ,? A>>

( diagram of the situation is in .

1. a. et reali4able &alue )7* method:

< Y > To"%&


,>> × @1",>>G 6>> × @B>>G A>> × @6>> @,/>">>> @0/>">>> @/,>">>> @1",>>">>>

Heduct separable costs –– –– ,>>">>> ,>>">>>

et reali4able &alue at splitoff point @,/>">>> @0/>">>> @,,>">>> @1">>>">>>

eighting" @,/>G @0/>G @,,> ÷ @1">>> >.,/ >.0/ >.,,

;oint costs allocated"

>.,/" >.0/" >.,, × @0?>">>> @1B",>> @1",>> @ 1,A"6>> @ 0?>">>>

Ending +n&entory Percentages: < Y >

Ending in&entory 1, 1,> ,?Total production ,>> 6>> A>>

Ending in&entory percentage 66 ,> /

Income Statement

< Y > To"%&

e&enues"

6? × @1",>>G /?> × @B>>G 6A, × @6>> @?1"6>> @/,">>> @/>",>> @B16"?>>

'ost of goods sold: ;oint costs allocated 1B",>> 1",>> 1,A"6>> 0?>">>> >">>> ,>>">>> Production costs 1B",>> 1",>> ,A"6>> A?>">>>

Heduct ending in&entory" 66G ,>G / of production costs B1"?A, 6,"6/> 1"1>/ 16A"616 'ost of goods sold /A",? ,0>"06> 1/"/B6 61,"?/ross margin @ /",A, @1?1"//> @ ??"A>/ @>/"/16

ross-margin percentage /, /, ,,

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b. 'onstant gross-margin percentage 7 method:

Step 1:

Final sales &alue of prodn." ),>> × @1",>>* J )6>> × @B>>* J )A>> × @6>>* @1",>>">>>

Heduct joint and separable costs" @0?>">>> J @,>>">>> A?>">>>ross margin @ /,>">>>

ross-margin percentage" @/,>">>> @1",>>">>> 0

Step 2:

< Y > To"%&


,0> × @1"?>>G >> × @1">>G 0> × @?>> @,/>">>> @0/>">>> @/,>">>> @1",>>">>>

Heduct gross margin" using o&erall ross-margin percentage of sales" 0 ?/">>> 1?B">>> 1/A">>> /,>">>>Total production costs 106">>> 01">>> ,A">>> A?>">>>

Step : Heduct separable costs — —

,>>">>> ,>>">>>;oint costs allocated @106">>> @01">>> @ A">>> @ 0?>">>>

Income Statement

< Y > To"%&

e&enues" 6? × @1",>>G

/?> × @B>>G 6A, × @6>> @?1"6>> @/,">>> @/>",>> @B16"?>>

'ost of goods sold: ;oint costs allocated 106">>> 01">>> A">>> 0?>">>> >">>> ,>>">>>

Production costs 106">>> 01">>> ,A">>> A?>">>> Heduct ending in&entory" 66G ,>G / of production costs 1>,"B6> A>",>> 1>"B,> 1?/">?> 'ost of goods sold 0">/> ,?>"?>> ,6,">?> 0B0"B,>ross margin @ ,?"06> @101",>> @1/1",>> @,>"??>ross-margin percentage 0 0 0 0

Summary

< Y > To"%&

a. 7 method:+n&entories on balance sheet @B1"?A, @ 6,"6/> @ 1"1>/ @16A"616

'ost of goods sold on income statement /A",? ,0>"06> 1/"/B6 61,"?/@A?>">>>

b. 'onstant gross-margin percentage 7 method

+n&entories on balance sheet @1>,"B6> @ A>",>> @ 1>"B,> @1?/">?>'ost of goods sold on income statement 0">/> ,?>"?>> ,6,">?> 0B0"B,>

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12/40

16-21 )> min.* Jo!"-#o$" %&&o#%"o!' )o#*$$ .()"*),

;oint 'osts C

@1,?>>

+'?

)on-


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,. The operating-income amounts for each product using each method is:

)a* Physical Leasure Lethod

C)(* O& NL %$ To"%&

e&enues'ost of goods sold;oint costs

B> 1>0 1B0@000

@1">/>

1"//> ,1> 1"60>@ )61>*

@/"/B>

1"?>> /B> ,",B>@,",>>

)b* 7 Lethod

C)(* O& NL %$ To"%&

e&enues

'ost of goods sold;oint costs> 1"11 .,0@1"?? .A0

@A0>.>>

,B>.,0 1>0 .>>

B0 .,0@0/ .A0

@1">/>.>>

A.0> ,1> .>> 0? .0>@ /06 .0>

@/"/B>.>>

1"?>>.>> /B> .>> ,",B> .>>@,",>> .>>

. either method should be used for product emphasis decisions. +t is inappropriate to use joint-cost-allocated data to ma#e decisions regarding dropping indi&idual products" or pushingindi&idual products" as they are joint by definition. Product-emphasis decisions should be made based on rele&ant re&enues and rele&ant costs. Each method can lead to product emphasis

decisions that do not lead to maximi4ation of operating income.

/. $ecause crude oil is the only product subject to taxation" it is clearly in >> × @,> per ton* @1>>">>> @06>">>> @66>">>>

eighting )@1>>">>>G @06>">>> @66>">>>* >.10 >.?0;oint costs allocated )>.10G >.?0 × @/>>">>>* @6>">>> @/>">>> @/>>">>>

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PANEL B: P)o(#"-L!* I!#o+* S"%"*+*!" .o) J(!* 2014 S*#%& B S*#%& S To"%&

e&enues),0">>> tons ×@1A per tonG /">>> × @ per ton* @/,0">>> @1"1,,">>> @1"0/A">>>

Heduct joint costs allocated )from Panel (* 6>">>> />">>> />>">>>

Heduct separable costs

R 1>> ">>> ,? ">>> ? ">>>ross margin @ ,60 ">>> @ 0// ">>> @?>B ">>>

ross margin percentage 6, /? 0,

1b.

PANEL A: A&&o#%"o! o. Jo!" Co$"$ ($! P$#%&-*%$()*

*"o

S*#%& B?

B**.

R%+*!

S*#%& S?

S)+

R%+*! To"%&

Physical measure of total production )tons* ,>">>> ,?">>> /?">>>eighting ),>">>> tonsG ,?">>> tons /?">>> tons* /, 0?;oint costs allocated )>./,G >.0? × @/>>">>>* @16?">>> @,,">>> @/>>">>>


e&enues

),0">>> tons ×@1A per tonG /">>> × @ per ton* @/,0">>>@1"1,,">>

> @1"0/A">>>

Heduct joint costs allocated )from Panel (* 16?">>> ,,">>> />>">>>

Heduct separable costs 1>> ">>> ,? ">>> ? ">>>ross margin @ 10A ">>> @ 60, ">>> @?>B ">>>

ross margin percentage A 0? 0,

1c.PANEL A: A&&o#%"o! o. Jo!" Co$"$ ($! N*" R*%&%&*

%&(* *"o S*#%& B S*#%& S To"%&Final sales &alue of total production during accounting period ),0">>> tons ×@1A per tonG /">>> ×@ per ton* @/,0">>> @1"1,,">>> @1"0/A">>>Heduct separable costs 1>> ">>> ,? ">>> ? ">>>

et reali4able &alue at splitoff point @ ,0 ">>> @ ??/ ">>> @ 1",>B ">>>eighting )@,0">>>G @??/">>> @1",>B">>>* ,A A;oint costs allocated )>.,AG >.A × @,/>">>>* @1>?">>> @,B,">>> @/>>">>>


e&enues ),0">>> tons ×@1A per tonG /">>> ×@ per ton* @/,0">>> @1"1,,">>> @1"0/A">>>Heduct joint costs allocated )from Panel (* 1>?">>> ,B,">>> />>">>>Heduct separable costs 1>> ">>> ,? ">>> ? ">>>

ross margin @ ,1A"> >> @ 0B,"> >> @ ?>B ">>>ross margin percentage 01 0 0,

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,. >> × @,> per

tonG 6">>> × @/ per ton* @1>>">>> @06>">>> @,/">>> @6?/">>>eighting

)@1>>">>>G @06>">>>G @,/">>> @6?/">>>* 1/.61BB ?1.?A1 .0>?? 1>>;oint costs allocated

)>.1/61BBG >.?1?A1G >.>0>?? × @/>>">>>* @0?"/?> @,A"/?0 @1/">0 @/>>">>>

PANEL B: P)o(#"-L!* I!#o+* S"%"*+*!"

.o) J(!* 2014 S*#%& B S*#%& S S"o#@ To"%&

e&enues),0">>> tons × @1A per tonG /">>> × @ per

tonG 6">>> × @/ per ton* @/,0">>>@1"1,,">>

> @,/">>> @1"0A1">>>>">>> ,?">>> > ?">>>;oint costs allocated )from Panel (* 0?"/?> ,A"/?0 1/">0 /> >">>>ross margin @,66"0,> @006"010 @ B"B60 @?">>>Heduct mar#eting costs 1,"/>> 1,"/ >>Kperating income @ ) ,"/0* @ ?,>"6 >>

+n this )misleading* analysis" the @/>>">>> of joint costs are reallocated bet%een >> 5 @1,"/>>*.

16-23 ),> min.* Jo!" #o$" %&&o#%"o!: $*&& ++*%"*& o) )o#*$$ .()"*),

1.a. gallons Q @/.,0 @A1 @6?> @1"Beighting" @A1G @6?> ÷ @1"B >.01, >./??;oint costs allocated" >.01,G >./?? × @0> @,A1 @,0B @0>

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b. et reali4able &alue method:Coo@*$ Soo&% To"%&

Final sales &alue of total production" A,0 lbs Q @,.,/G 6/> 2ts Q @1.0 @1"6,/ @?6/ @,"/??

Heduct separable costs ?> ,/> 6,>

et reali4able &alue @ 1",// @6,/ @1"?6?eighting" @1",//G @6,/ ÷ @1"?6? >.666 >./;oint costs allocated"

>.666G >./ × @0> @ 0 @1AA @ 0>

,.Coo@*$?So *%& Soo&%?So O&

e&enue if sold at splitoff @A1a @ 6?> b

Process further 7 1",// c 6,/ d

Profit )!oss* from processing further @01 @)06*

a

0A0 lbs Q @1.,/ C @A1 b 16> gal Q @/.,0 C @6?>c A,0 lbs Q @,.,/ 5 @?> C @1",//d 6/> 2ts Q @1.0 5 @,/> C @6,/

+

a @6?,",/> $yproduct – – 60" > >>d

Total re&enues 6?, ",/> A/A ",/>

'ost of goods sold Total manufacturing costs 0>>">>> 0>>">>>

Heduct &alue of byproduct production ?0">>> b > et manufacturing costs /10">>> 0>>">>>

Heduct main product in&entory A/"A>>c B>">>>e

'ost of goods sold />">> /1>">>>ross margin @/1 "B/> @A ",/>

a /,"6/> × @16.>> b ?"0>> × @1>.>>c +n&entory C 0,">>> 5 /,"6/> C B"6> lbsG )B"6>I0,">>>* Q @/10">>> C @A/"A>>

d 6"0>> × @1>.>>e )B"6>I0,">>>* Q @0>>">>> C @B>">>>

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P)o(#"o!

*"o

S%&*$

*"o

,. Lain Product @A/"A>> @B>">>>$yproduct ,>">>>a >

a Ending in&entory sho%n at unreali4ed selling price.

$+ J Production– J ?"0>>–6"0>> C ,">>> pounds

Ending in&entory C ,">>> pounds × @1> per pound C @,>">>>

16-25 ),> min.* Jo!" #o$"$ %! *#$o! +%@!,

1. For analy4ing the incremental &alue generated by rattles as a product line" the allocation

of the cost of the sna#e )%hich is a joint cost* is irrele&ant because it is sun#. The allocatedo&erhead charge is also irrele&ant because it represents ;ac#s li&ing expenses" %hich %ould beincurred regardless of the decision to sell )or not sell* rattles. > and the traced processingexpenses of @66>. The incremental profit from selling rattles is gi&en by:

> 5 Processing Expenses" @66> C @1"0/>.

;ac# should therefore continue to sell rattles as dropping that product line %ould reduce hiso&erall income by @1"0/>.

,. ;ac# purchases sna#es at a unit cost of @11. i&en the total sna#e cost of @,6"/>>" thisimplies that ;ac# purchased a total of @,6"/>>I@11 C ,"/>> sna#es this season. ;ac#sincremental profit per rattle )gi&en one rattle per sna#e and the incremental profit calculated inre2uirement 1 abo&e* is therefore:

@1"0/>I,"/>> C @>.6/ per rattle

$ecause the miner is offering just @>.6> per rattle" ;ac# is better off processing and selling therattles on his o%n.

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16-26 )0-/0 min.* Jo!" #o$"$ %! )o(#"$,

1. 'omputing byproduct deduction to joint costs:

e&enues from '" 16">>> × @6 @ B6">>>

Heduct:ross margin" 1> of re&enues B"6>>Lar#eting costs" ,> of re&enues 1B",>>Peanut $utter Hepartment separable costs 1, ">>>

et reali4able &alue )less gross margin* of ' @ 00",>>

;oint costs @1?>">>>Heduct byproduct contribution 00",>> et joint costs to be allocated @ 1,/ "?>>

D*(#" N*"

U!" !%& S*%)%&* R*%&%&* A&&o#%"o! o. S%&*$ S%&*$ P)o#*$$! %&(* %" 124'800

(%!"" P)#* %&(* Co$" S&"o.. /*"! Jo!" Co$"$

( 1,">>> @1, @1//">>> @,A">>> @11A">>> A.0 @ /6"?>>$ 60">>> 1B0 ">>> –– 1B0 ">>> 6,.0 A?"> >>Totals @B">>> @ ,A ">>> @1,">>> @1, / "?>>

A S*%)%&*

Jo!" Co$"$ P)o#*$$!

A&&o#%"o! Co$"$ To"%& Co$"$ U!"$ U!" Co$"

( @ /6"?>> @,A">>> @ A"?>> 1,">>> @6.10$ A?"> >> –– A?"> >> 60 ">>> 1.,>Totals @ 1,/ "?>> @ ,A ">>> @ 101 "?>> AA ">>>

Snit cost for ': @./0 )@00",>> 16">>>* J @>.A0 )@1,">>> 16">>>* C @/.,>"

or @6.>> 5 @>.6> )1> × @6* 5 @1.,> ),> × @6* C @/.,>.

,. +f all three products are treated as joint products:

(%!""

U!"S%&*$

P)#*

!%&S%&*$

%&(*

D*(#"

S*%)%&*P)o#*$$!

Co$"

N*"

R*%&%&*%&(* %"

S&"o.. /*"!

A&&o#%"o!

o.

180'000Jo!"

Co$"$

( 1,">>> @1, @1//">>> @,A">>> @11A">>> 11A A6.? @ 00"?B,$ 60">>> 1B0">>> 1B0">>> 1B0 A6.? B"10' 16">>> 6 B6 ">>> 1",>> 6/"?>> 6/.? A6.? >"B00Totals @/0">>> @ 0?", >> @A6"?>> @ 1? >">>>

16-1?


19/40

A S*%)%&*

Jo!" Co$"$ P)o#*$$!

A&&o#%"o! Co$"$ To"%& Co$"$ U!"$ U!" Co$"

( @ 00"?B, @,A">>> @ ?,"?B, 1,">>> @6.B1$ B"10 –– B"10 60">>> 1./

' > "B00 1, ">>> /, "B00 16">>> ,.6?Totals @ 1?>" >>> @B">>> @,1B">>> B ">>>

'all the attention of students to the different unit 8costs9 resulting from the t%o assumptionsabout the relati&e importance of Product '. The point is that costs of indi&idual products dependhea&ily on %hich assumptions are made and %hich accounting methods and techni2ues are used.

16-27 ),0 min.* *"o$ o. =o!"-#o$" %&&o#%"o!' *!! !;*!"o),

1. et reali4able &alue of human product:),">>> gallons Q @0?0* 5 @1,>">>> C @1">0>">>>

et reali4able &alue of &eterinarian product:0>> gallons Q )@/1> 5 @1>* C @,>>">>>

;oint costs: @6>">>> J @B>">>> C @10>">>>

;oint costs charged to human product:

1">0>">>>@10>">>>

1",0>">>>×

C @1,6">>>

;oint costs charged to &eterinarian product:

,>>">>>@10>">>>

1",0>">>>×

C @,/">>>

,.H(+%!

P)o(#"

*"

P)o(#" To"%&

>>G 0>> Q @1> @1,>">>> @ 0">>> @1,0">>>;oint costs )from abo&e* 1,6">>> ,/">>> 10>">>>Total costs @,/6 ">> > @,B">>> @,A0">>>

Snits produced )gallons* ,">>>

0>> ,"0>>

'ost per gallon

@,/6">>> ,">>>G @,B">>> 0>> @1, @0? @11>

Snits in ending in&entory )gallons*

'ost of ending in&entory @1, Q >>G @0? Q ,>>

>>

@6"B>>

,>>

@11"6>>

0>>

@/?"0>>

16-1B


20/40

. Final gross margin: 7 )3uman* J 7 )7et* 5 ;oint costs

C @1">0>">>> J @,>>">>> 5 @10>">>> C @1"1>>">>>

Final sales re&enues: ),">>> Q @0?0* J )0>> Q @/1>* C @1"A0">>>

Final gross margin percentage:

@1"1>>">>>

@1"A0">>> C ?>

$y applying this constant gross margin percentage of ?> to both products" %e canidentify the amount of joint costs allocated to each product" as sho%n belo%.

Co!$"%!" )o$$-+%)! *)#*!"%* NR

+*"o

H(+%!

P)o(#"

*"

P)o(#" To"%&

Final sales &alue of production

@,">>> Q 0?0G @/1> Q 0>> @1"1A>">>> @,>0">>> @1"A0">>>ross Largin )?>* B6">>> 16/">>> 1"1>>">>>Total costs @ ,/">>> @ /1">>> @ ,A0">>>">>> 0">>> 1,0">>>;oint costs @ 11/">>> @ 6">>> @ 10>">>>

/. +n Larch" Ti&oli sold 1"A>> gallons for human use for a sales re&enue of:

1"A>> Q @0?0 C @BB/"0>>

Snder the constant gross-margin percentage 7 method" each product is pro&ided a grossmargin of ?>. Therefore" the gross margin for the sale of human product in Larch is:

@BB/"0>> Q ?> C @AB0"6>>

0. e&enue from accepting the offer: @6">>>'ost of modification )>> pints Q @>*: B">>>

et +nflo%: )@">>>*(dd: 'ost sa&ing from not ha&ing to dispose of

toxic byproduct 0">>>Total benefit from offer: @,">>>

Ti&oli should therefore accept the offer because its net income %ill increase by @,">>> as a result.

16-,>


21/40

16-28 )/> min.* A&"*)!%";* +*"o$ o. =o!"-#o$" %&&o#%"o!' )o(#"-+ *#$o!$,

( diagram of the situation is in >> A0.> ,0> C >.> @ 1"0>>$ 6,"0>> 6,.0 ,0> C >.,0 ,6",0>' /0">>> /0.> ,0> C >.1? 1?"B>>H 6A"0>> 6A.0 ,0> C >.,A ,?"0>

@,0>">>> 1.>> @1>0">>>

b.

P$#%& *%$()* A&&o#%"o! o. 105'000o. To"%& P)o(#"o! /*"! Jo!" Co$"$

( ,A0">>> gallons ,A0 0>> C >.00 @ 0A"A0>$ 1>>">>> gallons 1>> 0>> C >.,> ,1">>>' A0">>> gallons A0 0>> C >.10 10"A0>H 0>">>> gallons 0> 0>> C >.1> 1>"0>>

0>>">>> gallons 1.>> @1>0">>>

c.!%& S%&*$

%&(* o.

To"%&P)o(#"o!

S*%)%&*Co$"$

N*"

R*%&%&*

%&(* %"S&"o.. /*"!

A&&o#%"o!

o.

105'000Jo!" Co$"$

>> @10">>> 10 >> C >./0 @ /A",0>">>> 6>">>> B>">>> B> >> C >.> 1"0>>

' /0">>> 5 /0">>> /0 >> C >.10 10"A0>>> >">>> > >> C >.1> 1>"0>>

@>>">>> 1.>> @1>0">>>

'omputation of gross-margin percentages:

a. >> @10>">>> @/0">>> @A0">>> @6/0">>>;oint costs 1"0>> ,6",0> 1?"B>> ,?"0> 1>0">>>">>> 6>">>> > /0">>> /0">>>Total cost of goods sold ,A1"0>> ?6",0> 1?"B>> A"0> /0>">>>ross margin @ 1>"0>> @ 6"A0> @,6"1>> @ 1"60> @1B0">>>ross-margin percentage ,A.6 /,.0 0?.> ,., >.,

16-,1


22/40

b. Physical-measure method:S(*) A S(*) B C S(*) D To"%&

e&enues @A0">>> @10>">>> @/0">>> @A0">>> @6/0">>>;oint costs 0A"A0> ,1">>> 10"A0> 1>"0>> 1>0">>>

">>> 6>">>> > /0">>> /0">>>Total cost of goods sold ,BA"A0> ?1">>> 10"A0> 00"0>> /0>">>>ross margin @ AA",0> @ 6B">>> @,B",0> @1B"0>> @1B0">>>ross-margin percentage ,> .6 /6.> 60 ,6 >.,

c. et reali4able &alue method:S(*) A S(*) B C S(*) D To"%&

e&enues @A0">>> @10>">>> @/0">>> @A0">>> @6/0">>>;oint costs /A",0> 1"0>> 10"A0> 1>"0>> 1>0">>>">>> 6>">>> > /0">>> /0">>>

Total cost of goods sold ,?A",0> B1"0>> 10"A0> 00"0>> /0>">>>ross margin @ ?A"A0> @ 0?"0>> @ ,B",0> @1B"0>> @1B0">>>

ross-margin percentage ,./ B.> 60.> ,6.>

>.,

.6 /6.> 60.> ,6.> et reali4able &alue ,./ B.> 60.> ,6.>

,. Further Processing of ( into >> 5 @A0">>> @>>">>>+ncremental costs ,/>">>>+ncremental operating income from further processing @ 6>">>>

Further processing of $ into >> 5 @6,"0>> @ ?A"0>>+ncremental costs 6>">>>+ncremental operating income from further processing @ ,A"0>>

Further Processing of H into >> 5 @6A"0>> @ A"0>>+ncremental costs /0">>>+ncremental operating loss from further processing @ )A"0>>*

16-,,


23/40

Kperating income can be increased by @A"0>> if Product H is sold at its splitoff point rather than processing it further into min.* Co+%)$o! o. %&"*)!%";* =o!"-#o$" %&&o#%"o! +*"o$' .()"*)-)o#*$$! *#$o!' #o#o&%"* )o(#"$,

16-,


24/40

'hocolate-Po%der !i2uor

$ase

Lil#-'hocolate!i2uor $ase

Processing

Processing@6>"110

;oint 'osts@6,">>>

> × @,>G A>> × @6> @1/">>> @/,">>> @06">>>

eighting" @1/">>>G @/,">>> ÷ @06">>> >.,0 >.A0;oint costs allocated" >.,0G >.A0 × @6,">>> @10"0>> @/6"0>> @6,">>>

Production cost per pound U@10"0>> J @0>"1>>V B"1>>G

U@/6"0>> J @6>"110V 1/"B?>@A.,1

@A.1,

1b.Physical-measure method:Physical measure of total production

),?">>>÷,">>>* × 0>G 0> A>> gallons A>> gallons 1"/>> gallons

eighting" A>>G A>>÷1"/>> >.0> >.0>;oint costs allocated"

>.0>G >.0>×

@6,">>> @1">>> @1">>> @6,">>>Production cost per pound U@1">>> J @0>"1>>V B"1>>G

U@1">>> J @6>"110V 1/"B?>@?.B1

@6.>?1c. et reali4able &alue method:

Co#o&%"*-

Po*)

&@-

Co#o&%"* To"%&


16-,/


25/40

B"1>> Q @BG 1/"B?> Q @1> @?1"B>> @1/B"?>> @,1"A>>Heduct separable costs 0>"1>> 6>"110 11> ",10 et reali4able &alue at splitoff point @ 1"?> > @ ?B"6?0 @1 ,1 "/?0eighting" @1"?>>G @?B"6?0 ÷ @1,1"/?0 >.,61? >.A?,;oint costs allocated"

>.,61?G >.A?, × @6,">>> @16",, @/0"A6? @6,">>>Production cost per pound U@16",, J @0>"1>>V B"1>>G

U@/0"A6? J @6>"110V 1/"B?> @A.,B

@A.>A

1d. 'onstant gross-margin percentage 7 method:

Step 1:

Final sales &alue of total production" )B"1>> Q @BG 1/"B?> Q @1>* @,1"A>>Heduct joint and separable costs" )@6,">>> J @0>"1>> J @6>"110* 1A, ",10ross margin @ 0B "/?0ross-margin percentage )@0B"/?0 @,1"A>>* ,0.6A

Step 2:

Co#o&%"*- &@-

Po*) Co#o&%"* To"%&

Final sales &alue of total production" B"1>> Q @BG 1/"B?> Q @1> @?1"B>> @1/B"?>> @,1"A>>Heduct gross margin" using o&erall gross- margin percentage of sales ),0.6A* ,1">,6 ?"/0B 0B "/?0Total production costs 6>"?A/ 111"/1 1A,",10

Step :

Heduct separable costs 0>"1> > 6>"110 11> ",10;oint costs allocated @ 1>"AA/ @ 01",,6 @ 6, ">>>

Production cost per pound U@1>"AA/ J @0>"1>>V B"1>>G

U@01",,6 J @6>"110V 1/"B?>@6.6B

@A./

,. Co#o&%"*- &@-Po*) Co#o&%"* To"%&

a. e&enues )6"0>> Q @BG 1"0>> Q @1>* @ 0? "0>> @ 10 ">>> @ 1B "0>>'ost of goods sold ;oint costs 10"0>> /6"0>> 6,">>> "1>> 6>"110 11>",10 Production costs 60"6>> 1>6"610 1A,",10

16-,0


26/40

Heduct ending in&entory),"6>> Q @A.,1G 1"/?> Q @A.1,* 1?"A/6 1>"0? ,B",?/

'ost of goods sold /6"?0/ B6">AA A,"B1ross margin @11"6/6 @?"B, @0>"06B

ross-margin percentage 1B.B ,?.?

b. e&enues @ 0? "0>> @ 10 ">>> @ 1B "0>>'ost of goods sold ;oint costs 1">>> 1">>> 6,">>> "1>> 6>"110 11>",10 Production costs ?1"1>> B1"110 1A,",10 Heduct ending in&entory

),"6>> Q @?.B1G 1"/?> Q @6.>?* ,"166 ?"BB? ,"16/ 'ost of goods sold 0A"B/ ?,"11A 1/>">01ross margin @066 @0,"?? @0"//B

ross-margin percentage >.BA B.,

c. e&enues @ 0? "0>> @ 10 ">>> @ 1B "0>>'ost of goods sold ;oint costs 16",, /0"A6? 6,">>> "1>> 6>"110 11>",10 Production costs 66", 1>0"?? 1A,",10 Heduct ending in&entory

),"6>> Q @A.,BG 1"/?> Q @A.>A* 1?"B0/ 1>"/6/ ,B"/1? 'ost of goods sold /A"A? B0"/1B 1/,"ABAross margin @11"1,, @B"0?1 @0"//B

ross-margin percentage 1B .> ,B .

d. e&enues @ 0? "0>> @ 10 ">>> @ 1B "0>>'ost of goods sold ;oint costs 1>"AA/ 01",,6 6,">>> "1>> 6>"110 11>",10 Production costs 6>"?A/ 111"/1 1A,",10 Heduct ending in&entory

),"6>> Q @6.6BG 1"/?> Q @A./* 1A"B/ 1>"BB6 ,?"B> 'ost of goods sold /"/?> 1>>"/0 1/"?,0ross margin @10">,> @/"600 @/B"6A0

ross-margin percentage ,0 .A ,0 .A

. Further processing of chocolate-po%der li2uor base into chocolate po%der:+ncremental re&enue" @?1"B>> 5 @1/">>> )@,> Q A>>* @6A"B>>+ncremental costs 0>"1> >

16-,6


27/40

+ncremental operating income from further processing @1A "?> >

Further processing of mil#-chocolate li2uor base into mil# chocolate:+ncremental re&enue" @1/B"?>> 5 @/,">>> )@6> Q A>>* @1>A"?>>+ncremental costs 6>"110

+ncremental operating income from further processing @ /A"6?0

'hocolate Factory should continue to process mil#-chocolate li2uor base into mil# chocolate andchocolate-po%der li2uor base into chocolate po%der.

16-30 )> min.* Jo!"-#o$" %&&o#%"o!' )o#*$$ .()"*) o) $*&&,

( diagram of the situation is in .1.

a. >> 0./? @0/0"/B6Hecorati&e Pieces ,">>> A> 1/>">>> 10.,, @100",//Posts 1?">>> 16 ,??">>> 1.> @1B",6>Totals @B,>">>> 1>>.>> @1">,>">>>

b. Physical measure method.

P$#%&*%$()* o.

To"%& P)o!, /*"!

Jo!"Co$"$

A&&o#%"*

>Totals 1>,">>> 1>> .>> @1">,>">>>

c. et reali4able &alue method.

o!"&U!"$ o.

To"%& P)o!,

(&&

P)o#*$$*S*&&! P)#*

*) U!"

N*"

R*%&%&*%&(* %"

S&"o.. /*"!

Jo!"Co$"$

A&&o#%"*

>> 06.6? @ 0A?"16

Hecorati&e Pieces 1"?>>

a 11> ??">>> b 1>.1/ 1>"/,?Posts 1?">>> 16 ,??">>> .1? ?"/6Totals @?6?">>> 1>> .>> @1">,>">>>

16-,A


28/40

a ,">>> monthly units of output–1> normal spoilage C 1"?>> good units. b 1"?>> good units × @11> C @1B?">>>–Further processing costs of @11>">>> C @??">>>

,. Presented belo% is an analysis for Houghty >>!ess: ormal further processing shrin#age ,>>Snits a&ailable for sale 1"?>>

Final sales &alue )1"?>> units × @11> per unit* @1B?">>>

!ess: ">>>*+ncremental re&enue 0?">>>!ess: Further processing costs )11>">>>*(dditional contribution from further processing @ )0,">>>*

. (ssuming Houghty


29/40

Hecorati&ePieces

@11> per unit

SOLUTION E min.* Jo!"-#o$" %&&o#%"o!,

1.

16-,B

Processing

,>>>

per unit

Posts@16 per unit

;oint 'osts

@1">,>">>>


30/40

a.Physical-measure method:

B(""*) B(""*)+&@ To"%&

Physical measure of total production

)1,">>> gal Q G 1,">>> gal Q B* 6">>> cups 1>?">>> cups 1//">>> cupseighting" 6">>>G 1>?">>> ÷ 1//">>> >.,0 >.A0;oint costs allocated" >.,0G >.A0 Q @6"6> @10"?/> @/A"0,> @6"6>

b. >> 2uarts Q @,./> @AB",>> @6/"?>> @1//">>>eighting" @AB",>>G @6/"?>> ÷ @1//">>> >.00 >./0;oint costs allocated"

>.00G >./0 × @6"6> @/"?/? @,?"01, @6"6>

c. et reali4able &alue method: B(""*) B(""*)+&@ To"%&

Final sales &alue of total production" 6">>> tubs × @/.6>G ,A">>>

2uarts × @,./>

@160"6>> @6/"?>> @,>"/>>

Heduct separable costs 0A"6>> > 0A"6>> et reali4able &alue @1>?">>> @6/"?>> @1A,"?>>eighting" @1>?">>>G @6/"?>>÷

@1A,"?>>

>.6,0 >.A0

;oint costs allocated" >.6,0G >.A0 × @6"6> @B"6>> @,"A6> @6"6>

d. 'onstant gross-margin percentage 7 method:

Step 1:

Final sales &alue of total production )see 1c.* @,>"/>>Heduct joint and separable costs )@6"6> J @0A"6>>* 1,>"B6>ross margin @1>B"//>ross-margin percentage )@1>B"//> @,>"/>>* /A.0>

Step 2:

B(""*) B(""*)+&@ To"%&

Final sales &alue of total production @160"6>> @6/"?>> @,>"/>>Heduct gross margin" using o&erall gross-margin percentage of sales )/A.0>* A?"66> >"A?> 1>B"//>

16->


31/40

Total production costs ?6"B/> /">,> 1,>"B6>

Step :Heduct separable costs 0A"6>> > 0A"6>>;oint costs allocated @,B"/> @/">,> @6"6>

,. (d&antages and disad&antages:

- Physical-Leasure(d&antage: !o% information needs. Knly #no%ledge of joint cost and physicaldistribution is needed.Hisad&antage: (llocation is unrelated to the re&enue-generating ability of products.

-


32/40

16-32 )1> min.* ()"*) )o#*$$! *#$o! #o!"!(%"o! o. 16-31,

1.and ,. The decision about %hich combination of products to produce is not affected by themethod of joint cost allocation. For both the sales &alue at splitoff and physical measuremethods" the rele&ant comparisons are as sho%n belo%:

B(""*) B(""*)+&@

e&enue if sold at splitoff @ AB",>> a @6/"?>> b

Process further 7 1>?">>> c /",>> d

Profit )!oss* from processing further @ ,?"?>> @),1"6>>*

a 1?">>> lbs Q @/./> C @AB",>> b ,A">>> 2uarts Q @,./> C @6/"?>>c 6">>> tubs Q @/.6> 5 1?">>> lbs Q @.,> C @1>?">>>d 0/">>> pints Q @1.0> 5 0/">>> pints Q @>.A> C @/",>>

To maximi4e profits" 'lo&er should process butter further into spreadable butter. 3o%e&er"'lo&er should sell the buttermil# at the splitoff point in 2uart containers. The extra cost tocon&ert to pint containers )@>.A> per pint Q , pints per 2uart C @1./> per 2uart* exceeds theincrease in selling price )@1.0> per pint Q , pints per 2uart C @.>> per 2uart 5 @,./> original price C @>.6> per 2uart* and leads to a loss of @,1"6>>.

. The decision to sell a product at split off or to process it further should ha&e nothing to do%ith the allocation method chosen. For each product" you need to compare the re&enue fromselling the product at split off to the 7 from processing the product further. Kther things being e2ual" management should choose the higher alternati&e. The total joint cost is the sameregardless of the alternati&e chosen and is therefore irrele&ant to the decision.

16-33 ),> min.* Jo!"-#o$" %&&o#%"o! " % )o(#",

1. b 0>">>>c

Products sold ,0">>> ?0">>> /">>>Ending in&entory 6",0> ?"A0> A">>>

a ,0 floor matsI1>> tires C >.,0 floor mats per tire Q 1,0">>> tires C 1",0> floor mats b A0 car matsI1>> tires C >.A0 car mats per tire Q 1,0">>> tires C B"A0> car matsc )1,0">>> tiresI1>>* Q /> lbs C 0>">>> lbs rubber shreds

;oint cost to be charged to joint products C ;oint 'ost 5 7 of $yproduct C @6>>">>> 5 )0>">>> lbs Q >.A> per lb*

C @6>>">>> 5 @0">>> C @060">>>

16-,


33/40

&oo) %"$ C%) %"$ To"%&

Q @1,G B"A0> Q @6 @ A0">>> @ 06,"0>> @BA"0>>eighting" @A0">>>G @06,"0>> ÷ @BA"0>> >./> >.6>;oint costs allocated" >./>G >.6> Q @060">>> @,,6">>> @B">>> @060">>>

&oo) %"$ C%) %"$ To"%&

e&enues" ,0">>> Q @1,G ?0">>> Q @6 @ >>">>> @ 01>">>> @ ?1>">>>'ost of goods sold:;oint costs allocated" >./>G >.6> Q @060">>> @,,6">>> @B">>> @060">>>!ess: Ending in&entory ) /0",>>* b ) 1"6/>*c ) A6"?/>*

'ost of goods sold @ 1?>"?>> @ >A"6> @ /??"16>

ross margin @ 11B",>> @ ,>,"6/> @ ,1"?/>

b 6",0> Q @,,6">>>I1",0> C @/0",>>c

?"A0> Q @B">>>IB"A0> C @1"6/>

The ending in&entory of rubber shreds is reported at its estimated mar#et &alue of @/"B>>)A">>> lbs Q @>.A>*.

,. >>

@,/>">>> @6>">>> @6>>">>>

!ess: Ending in&entory ) /?">>>*e ) "6>>*f ) ?1"6>>*

'ost of goods sold @1B,">>> @,6"/>> @01?"/>>

ross margin @1>?">>> @1?"6>> @>"1>> @,1"A>>

d /">>> lbs Q @>.A> per lb. C @>"1>>e 6",0> Q @,/>">>>I1",0> C @/?">>>f ?"A0> Q @6>">>>IB"A0> C @"6>>

16-


34/40

. The production method of accounting for the byproduct is only appropriate if The LatPlace is positi&e they can sell the byproduct at the expected selling price. Loreo&er" TheLat Place should &ie% the byproducts contribution to the firm as material enough to findit %orth%hile to record and trac# any in&entory that may arise. The sales method is

appropriate if either the disposition of the byproduct is unsure or the selling price isun#no%n" or if the amounts in&ol&ed are so negligible as to ma#e it economicallyinfeasible for The Lat Place to #eep trac# of byproduct in&entories.

16-34 )10 min.* B)o(#"-#o$"! =o()!%& *!")*$ #o!"!(%"o! o. 16-33,

1. $yproduct=production method journal entries

i* (t time of production:or#-in-process +n&entory 6>>">>>

(ccounts Payable" etc. 6>>">>>

For $yproduct:Finished oods +n& 5 >>

For ;oint ProductsFinished oods +n& 5 Floor ,,6">>>Finished oods +n& 5 'ar B">>>

or#-in-process +n&entory 060">>>

ii* (t time of sale:For $yproduct'ash or (I >"1>>

Finished oods +n& 5 "1>>

For ;oint Products'ash or (I ?1>">>>

>">>>"?>>'ost of goods sold 5 'ar >A"6>

Finished oods +n& 5 Floor 1?>"?>>Finished oods +n& 5 'ar >A"6>

16-/


35/40

,. $yproduct=sales method journal entries

i* (t time of production:or#-in-process +n&entory 6>>">>>

(ccounts Payable" etc. 6>>">>>

For byproduct: o entry

For ;oint ProductsFinished oods +n& 5 Floor ,/>">>>Finished oods +n& 5 'ar 6>">>>

or#-in-process +n&entory 6>>">>>

ii* (t time of saleFor byproduct

'ash or (I >"1>>>>

>">>>>

Finished oods +n& 5 Floor 1B,">>>Finished oods +n& 5 'ar ,6"/>>

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16-35 )/> min.* P)o#*$$ .()"*) o) $*&&' )o(#",

1. The analysis sho%n belo% indicates that it %ould be more profitable for e%castle Lining'ompany to continue to sell bul# ra% coal %ithout further processing. This analysis ignores any&alue related to coal fines. +t also assumes that the costs of loading and shipping the bul# ra%

coal on ri&er barges %ill be the same %hether e%castle sells the bul# ra% coal directly or processes it further.

+ncremental sales re&enues:

>>a tons × @/* @,?A"6/>">>>

>> tons × @>* ,A>">>>">>>+ncremental sales re&enue 1A"6/>">>>

+ncremental costs:Hirect labor AB>">>>">>>

3ea&y e2uipment costs )@0">>> × 1, months* /,>">>>>> tons × @.>* ,B"A>>">>>

Kutbound rail freight )?"/6>">>> tons ÷ 6>> tons* × @,0> per car "0,0">>>+ncremental costs /"6,0">>>+ncremental gain )loss* @ )16"B?0">>>*

a B">>>">>> tons × )15 >.>6*

,. The cost of producing the ra% coal is irrele&ant to the decision to process further or not. (s %esee from re2uirement 1" the cost of producing ra% coal does not enter any of the calculationsrelated to either the incremental re&enues or the incremental costs of further processing. Theans%er %ould the same as in re2uirement 1: Ho not process further.

. The potential re&enue from the coal fines byproduct %ould result in additional re&enue ranging bet%een @0"6A>">>> )at a mar#et price of @1/* and @1>"1,0">>> )at a mar#et price of @,0*.

'oal fines C A0 of 6 of ra% bul# tonnageC >.A0 × )B">>>">>> × >.>6*

C />0">>> tons

Potential incremental income from preparing and selling the coal fines:

Linimum Laximum+ncremental income per ton

)Lar#et price 5 +ncremental costs*@B )@1/ 5 @0* @,, )@,0 5 @*

+ncremental income )@BG @,, × />0">>>* @"6/0">>> @?"B1>">>>

The incremental loss from si4ing and cleaning the ra% coal is @16"B?0">>> as calculatedin re2uirement 1. (nalysis indicates that relati&e to selling bul# ra% coal" the effect of further processing and selling coal fines is not beneficial at either minimum or maximum incrementalincome le&els. 3ence" further processing is still not in e%castles interest. +n fact" di&iding the

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loss of @/?"A1>">>> by the coal fines output of />0">>> tons re&eals that the selling price of coalfines %ould ha&e to increase to create an incremental income of at least @/1.B/ per ton for further processing to become e%castles preferred option.

ote that other than the financial implications" some factors that should be considered in

e&aluating a sell-or-process-further decision include the follo%ing:• ">>> @10">>>">>> @,,"0>">>>

Heduct separable costs = RRRRR = ?"/>>">>> ?"/>>">>> et reali4able &alue at splitoff point @"0A>">>> @"B6>">>> @ 6"6>>">>> @1/"1>">>>

eighting b >.,0 >.,?> >./6A 1.>>>;oint costs allocatedc @,"A,"/>> @">,/">>> @0">/"6>> @1>"?>>">>>

a @A Q 01>">>>G @/ Q BB>">>>G @1> Q 1"0>>">>> b @"0A>">>>G @"B6>">>>G @6"6>>">>> @1/"1>">>>c @1>"?>>">>> Q >.,0G @1>"?>>">>> Q >.,?>G @1>"?>>">>> Q >./6A

16-A

;oint costs@1>"?>>">>>

(pple

Further Processing@?"/>>">>>

'eleronProcessing

$roadcom


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,.Further processing (pple

+ncremental re&enue)@11.>> Q /00">>>* 5 )@A.>> Q 01>">>>* @ 1"/0">>>

+ncremental processing cost 1"0>>">>>

+ncremental operating incomeI)loss* @ )60">>>*

Further processing $roadcom+ncremental re&enue

)@0.>> Q )BB>">>> Q 1.,0** 5 )@/ Q BB>">>>* @,",,A"0>>+ncremental processing cost ,">>>">>>+ncremental operating income @ ,,A"0>>

Further processing 'eleron+ncremental re&enue

)@1>.>> Q 1"0>>">>>* 5 )@/.A0 Q 1"0>>">>>* @A"?A0">>>

+ncremental processing cost ?"/>>">>>+ncremental operating incomeI)loss* @ )0,0">>>*

Current Policy

7 )from re2uirement 1*:>>>>Process 'eleron further 6"6>>">>>

1/"1>">>>;oint costs 1>"?>>">>>Kperating income @ ">">>>

Preferred !ptions

>>Process $roadcom further

)@"B6>">>> J @,,A"0>> incremental optg. inc.* /"1?A"0>>


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16-37 )6> min.* *"o$ o. =o!"-#o$" %&&o#%"o!' #o+)**!$;*,

1. ;oint costs for Wardash include @//>">>> in direct materials" @,,>">>> in direct labor" and@11>">>> in o&erhead costs" for a total of @AA>">>>.

,. (t splitoff" the relati&e %eights of the t%o perfumes are A">>> ounces of >>

?

× ÷ C @B6",0>

omance:

A@AA>">>>

?

× ÷ C @6A"A0>.

. The relati&e sales &alues of production at splitoff are as follo%s:

>>omance: /B">>> Q @,/ per ounce C @1"1A6">>>

The ratio of the sales &alues is B,:11A6" or 1:. (ccordingly" the joint costs are allocated as:

">>>

/

× ÷ C @1B,"0>>

omance:

@AA>">>>

/

× ÷ C @0AA"0>>.

/. Estimated net reali4able &alue per ounce of )5* Snit pac#aging cost: @1A"0>>I0">>> C ,A.0>

Estimated 7 per ounce: @ ?,.>>

Estimated net reali4able &alue per ounce of omance perfume:

)5* Snit pac#aging cost: @1B6">>>I,?">>> C A.>>)5* Snit processing cost in $: @11,">>>I,?">>> C / .>>

Estimated 7 per ounce: @,> .0>

0. The estimated net reali4able &alues of the t%o perfumes are as follo%s:

>>omance: /B">>> Q @,>.0> per ounce C @1">>/"0>>

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The ratio of the E7s is 0A/">>>:1">>/"0>>" or /:A. (ccordingly" the joint costs are allocatedas:

">>>

11

× ÷ C @,?>">>>

omance:

A@AA>">>>11

× ÷ C @/B>">>>.

6. The gross margin for Wardash 'osmetics as a %hole is the sum of the expected net reali4able&alues from >/"0>>* 5 ;oint 'osts )@AA>">>>*C @?>?"0>>.

The final sales &alue of the total production is:

>> Q @1.0>* C @,"1>">>>.

The gross margin percentage for the firm as a %hole is therefore:@?>?"0>>

@,"1>">>> C 0.

A. The joint cost allocations to >> Q @1.0> @A66"0>> @1"0/"0>> @,"1>">>>ross Largin )0* ,6?",A0 0/>",,0 ?>?"0>>Total costs @/B?",,0 @1">>",A0 @1"0>1"0>>>> Q @11

1B,"0>>

0B">>>

A1"0>>;oint costs @>0"A,0 @/6/",A0 @ AA>">>>

?. o. per ounce" %hich is lo%er. The manager of Wardash 'osmetics could earn an extra @.0> per ounce by selling residue rather than omance.

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Cost Accounting 15E. Chapter 16 Solutions