15 CHAPTER COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS 15-1
Exhibit 15-2 presents thirteen examples from four different general industries. These include: Industry Agriculture: Lamb Turkey Extractive: Petroleum Separable Products at the Splitoff Point Lamb cuts, tripe, hides, bones, fat Breasts, wings, thighs, poultry meal, etc. Crude oil, natural gas, raw LPG
15-2
A joint cost is a cost of a production process that yields multiple products simultaneously. A separable cost is a cost incurred beyond the splitoff point that is assignable to each of the specific products identified at the splitoff point.
15-3
The distinction between a joint product and a byproduct is based on relative sales value. A joint product is a product that has a relatively high sales value. A byproduct is a product that has low sales value compared to the sales value of the joint (or main) products.
15-4
A product is any output that has a positive sales value (or an output that enables an organization to avoid incurring costs). In some joint-cost settings, outputs can occur that do not have a positive sales value. The offshore processing of hydrocarbons yields water that is recycled back into the ocean while yielding oil and gas. The processing of mineral ore to yield gold and silver also yields dirt as an output, which is recycled back into the ground.
15-5
1. 2. 3. 4.
5. 6. 7.
The chapter lists the following seven reasons for allocating joint costs: Inventory cost and cost-of-goods-sold computations for external financial statements and reports for income tax authorities. Inventory cost and cost-of-goods-sold computations for internal financial reporting. Cost reimbursement under contracts when only a portion of a businesss products or services is sold or delivered to a single customer. Customer profitability analysis where individual customers purchase varying combinations of joint products or byproducts as well as other products of the company. Insurance settlement computations. Rate regulation when one or more of the jointly produced products or services are subject to price regulation. Contract litigation in which costs of joint products are key inputs.
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The joint production process yields individual products that are either sold this period or held as inventory to be sold in subsequent periods. Hence the joint costs need to be allocated between total production rather than just those sold this period.
15-6
15-7
This situation can occur when a production process yields separable outputs at the splitoff point that do not have selling prices available until further processing. The result is that selling prices are not available at the splitoff point to use the sales value at splitoff method. Examples include processing in integrated pulp and paper companies and in petro-chemical operations. Both methods use market selling-price data in allocating joint costs, but they differ in which sales-price data they use. The sales value at splitoff method allocates joint costs on the basis of each products relative sales value at the splitoff point. The estimated net realizable value method allocates joint costs on the basis of the relative estimated net realizable value (expected final sales value in the ordinary course of business minus the expected separable costs of production and marketing).
15-8
15-9
a. b.
Limitations of the physical measure method of joint-cost allocation include: The physical weights used for allocating joint costs may have no relationship to the revenue-producing power of the individual products. The joint products may not have a common physical denominatorfor example, one may be a liquid while another a solid with no readily available conversion factor.
15-10 The estimated NRV 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) achieves the same benefits that the use of standard costs does in costing systems.
splitoff point profit contribution earned on individual products, in addition to the joint costs, when making cost assignments to joint products.
15-11 The constant gross-margin percentage NRV method takes account of the post-
15-12 No. Any method used to allocate joint costs to individual products that is
applicable to the problem of joint product-cost allocation should not be used for management decisions regarding whether a product should be sold or processed further. When a product is an inherent result of a joint process, the decision to process further should not be influenced by either the size of the total joint costs or the portion of the joint costs assigned to particular products. Joint costs are irrelevant for these decisions. The only relevant items for these decisions are the incremental revenue and the incremental costs beyond the splitoff point.
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15-13 No. The only relevant items are incremental revenues and incremental costs
when making decisions about selling products at the splitoff point or processing them further. Separable costs are not always identical to incremental costs. Separable costs are costs incurred beyond the splitoff point that are assignable to individual products. Some separable costs may not be incremental costs in a specific setting (e.g., allocated manufacturing overhead that includes amortization).
a.
15-14 Two methods to account for byproducts are:
b.
Production methodrecognizes byproducts in the financial statements at the time production is completed. Sales methoddelays recognition of byproducts until the time of sale.
15-15 The sales byproduct method enables a manager to time the sale of byproducts to
affect reported operating income. A manager who is below the targeted operating income could adopt a fire-sale approach to selling byproducts so that the reported operating income exceeds the target. This illustrates one dysfunctional aspect of the sale byproduct method.
15-16 (20-30 min.) Joint-cost allocation, insurance settlement.
1. a. Sales value at splitoff method: Kg of Product 100 20 40 80 10 250 Wholesale Selling Price per kg $0.55 0.20 0.35 0.10 0.05 Sales Value at Splitoff $55.00 4.00 14.00 8.00 0.50 $81.50 Weighting: Sales Value at Splitoff 0.675 0.049 0.172 0.098 0.006 1.000 Joint Costs Allocated $33.75 2.45 8.60 4.90 0.30 $50.00 Allocated Costs per kg 0.3375 0.1225 0.2150 0.0613 0.0300
Breasts Wings Thighs Bones Feathers
Costs of Destroyed Product Breasts: $0.3375 per kilogram 40 kilograms = $13.50 Wings: $0.1225 per kilogram 15 kilograms = 1.84 $15.34
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15-16 (contd)
b. Physical measure method: Kg of Product 100 20 40 80 10 250 Weighting: Physical Measures 0.400 0.080 0.160 0.320 0.040 1.000 Joint Costs Allocated $20.00 4.00 8.00 16.00 2.00 $50.00 $8 3 $11 Allocated Costs per kg $0.200 0.200 0.200 0.200 0.200
Breasts Wings Thighs Bones Feathers
Costs of Destroyed Product Breast: $0.20 per kilogram 40 kilograms = Wings: $0.20 per kilogram 15 kilograms =
Note: Although not required, it is useful to highlight the individual product profitability figures: Sales Value at Physical Splitoff Method Measures Method Sales Joint Costs Gross Joint Costs Gross Product Value Allocated Income Allocated Income Breasts $55.00 $33.75 $21.25 $20.00 $35.00 Wings 4.00 2.45 1.55 4.00 0.00 Thighs 14.00 8.60 5.40 8.00 6.00 Bones 8.00 4.90 3.10 16.00 (8.00) Feathers 0.50 0.30 0.20 2.00 (1.50) 2. The sales-value at splitoff method captures the benefits-received criterion of cost allocation and is the preferred method. The costs of processing a chicken are allocated to products in proportion to the ability to contribute revenue. Quality Chickens decision to process chicken is heavily influenced by the revenues from breasts and thighs. The bones provide relatively few benefits to Quality Chicken despite their high physical volume. The physical measures method shows profits on breasts and thighs and losses on bones and feathers. Given that Quality Chicken has to jointly process all the chicken products, it is non-intuitive to single out individual products that are being processed simultaneously as making losses while the overall operations make a profit. Quality Chicken is processing chicken mainly for breasts and thighs and not for wings, bones, and feathers, while the physical measure method allocates a disproportionate amount of costs to wings, bones, and feathers. 662
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Chapter 15
15-17 (10 min.) Joint products and byproducts (continuation of 15-16).
1. Ending inventory: Breasts Wings Thighs Bones Feathers 15 4 6 5 2 $0.3375 0.1225 0.2150 0.0613 0.0300 = = = = = $5.0625 0.4900 1.2900 0.3065 0.0600 $7.2090 Net Realizable Values of Byproducts: Wings $ 4.00 Bones 8.00 Feathers 0.50 $12.50
2. Joint products Breasts Thighs Byproducts Wings Bones Feathers
Joint costs to be allocated: Joint costs Net realizable values of byproducts = $50 $12.50 = $37.50
Kg of Product Wholesale Selling Price per kg Sales Value at Splitoff Weighting: Sales Value at Splitoff Joint Costs Allocated Allocated Costs Per kg
Breast Thighs
100 40
$0.55 0.35
$55 14 $69
55 69 14 69
$29.89 7.61 $37.50
$0.2989 0.1903
Ending inventory: Breasts 15 $0.2989 Thighs 6 0.1903
$4.4835 1.1418 $5.6253
3.
Treating all products as joint products does not require judgments as to whether a product is a joint product or a byproduct. Joint costs are allocated in a consistent manner to all products for the purpose of costing and inventory valuation. In contrast, the approach in requirement 2 lowers the joint cost by the amount of byproduct net realizable values and results in inventory values being shown for only two of the five products, the ones (perhaps arbitrarily) designated as being joint products.
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15-18 (20-30 min.) Net realizable value cost-allocation method, further process decision.
A diagram of the situation is in Solution Exhibit 15-18. 1. Quantity in Kilograms 20,000 60,000 100,000 Sales Final Price per Sales Kilogram Value $24.00 $ 480,000 7.20 432,000 1.20 120,000 $1,032,000 Separable Processing Costs $120,000 240,000 0 $360,000 Estimated Net Realizable Value at Splitoff $360,000 192,000 120,000 $672,000
Alco Devo Holo Totals
Weighting 360/672 192/672 120/672
Allocation of $504,000 joint costs: Alco Devo Holo 360/672 $504,000 192/672 $504,000 120/672 $504,000 = $270,000 = 144,000 = 90,000 $504,000 Unit Cost $19.50 6.40 0.90
Alco Devo Holo Totals
Joint Separable Costs Processing Total Allocated Costs Costs $270,000 $120,000 $390,000 144,000 240,000 384,000 90,000 0 90,000 $504,000 $360,000 $864,000
Units 20,000 60,000 100,000 180,000
The ending inventory is: Alco Devo Holo 1,000 $19.50 1,000 $6.40 1,000 $0.90 = $19,500 = 6,400 = 900 $26,800
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15-18 (contd)
2. Unit Sales Price $24.00 7.20 1.20 Gross Margin $4.50 0.80 0.30 GrossMargin Percentage 18.75% 11.11% 25.00%
Alco Devo Holo 3.
Unit Cost $19.50 6.40 0.90
Further processing of Devo yields incremental income of $48,000: Incremental revenue of further processing Devo, ($7.20 $2.40) 60,000 Incremental processing costs Incremental operating income from further processing
$288,000 240,000 $ 48,000
Montore should process Devo further. Note that joint costs are irrelevant to this decision; they remain the same, whichever alternative (sell at splitoff or process further) is selected. SOLUTION EXHIBIT 15-18
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15-19 (30 min.) Process further or sell, joint-cost allocation.
A diagram of the situation is in Solution Exhibit 15-19. 1. Product A (5,000 units disposed at splitoff point) Incremental revenues, 5,000 $0 Incremental costs, 5,000 $0.24 Incremental operating income Product A (5,000 units processed further) Incremental revenues, 5,000 $1.80 Incremental processing costs Fixed Variable, 5,000 $1.08 Incremental operating income Product B (15,000 units sold at splitoff point) Incremental revenues, 15,000 $0.60 Incremental processing costs, 15,000 $0 Incremental operating income Product B (15,000 units processed further) Incremental revenues, 15,000 $1.80 Incremental processing costs Fixed Variable, 15,000 $1.20 Incremental operating income Product C (10,000 units disposed of at splitoff) Incremental revenues, 10,000 $0 Incremental costs, 10,000 $1.08 Incremental operating income Product C (10,000 units processed further) Incremental revenues, 10,000 $6.48 Incremental processing costs Fixed Variable, 10,000 $1.32 Incremental operating income
0 1,200 $ (1,200)
$
$9,000 $7,200 5,400
12,600 $ (3,600)
$9,000 0 $9,000
$27,000 $ 1,200 18,000
19,200 $ 7,800
$ 0 10,800 $(10,800)
$64,800 $12,000 13,200
25,200 $39,600
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15-19 (contd)
Summary of the alternatives is: Dispose at Splitoff $(1,200) 9,000 (10,800) $(3,000) Process Further $ (3,600) 7,800 39,600 $43,800 Preferred Alternative $ (1,200) Dispose at splitoff 9,000 Sell at splitoff 39,600 Process further $47,400
Product A B C
2.
Revenues Product B, 15,000 $0.60 Product C, 10,000 $6.48 Costs Joint costs, $6,000 + (5,000 $2.40) Disposal costs, A: 5,000 $0.24 Processing costs C: $12,000 + $13,200 Selling and administrative costs Gross margin
$ 9,000 64,800 $18,000 1,200 25,200 16,800
$73,800
no 61,200 $12,600
SOLUTION EXHIBIT 15-19
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15-20 (10 min.) Estimated net realizable value method.
A diagram of the situation is in Solution Exhibit 15-20 (all numbers are in thousands, other than per-unit costs). Cooking Oil Expected final sales value of production, CO, 1,000 $60; SO, 500 $30 Deduct expected separable costs to complete and sell Estimated net realizable value at splitoff point Weighting Joint costs allocated, CO, 0.8 $28,800; SO, 0.2 $28,800 SOLUTION EXHIBIT 15-20 Soap Oil Total
$60,000 36,000 $24,000
$24, 000 0.8 $30, 000
$15,000 9,000 $ 6,000
$6, 000 0.2 $30, 000
$75,000 45,000 $30,000
$23,040
$ 5,760
$28,800
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15-21 (10 min.) Net realizable value method.
A diagram of the situation is in Solution Exhibit 15-21. Corn Syrup Final sales value of total production, 12,500 $50; 6,250 $25 Deduct separable costs Net realizable value at splitoff point Weighting, $250,000; $62,500 $312,500 Joint costs allocated, 0.8; 0.2 $325,000 $625,000 375,000 $250,000 0.8 $260,000 Corn Starch $156,250 93,750 $ 62,500 0.2 $ 65,000 Total $781,250 468,750 $312,500 $325,000
SOLUTION EXHIBIT 15-21 (all numbers are in thousands)
Joint Costs Separable Costs Processing $375,000 Corn Syrup: 12,500 cases at $50 per case
Processing $325000
Processing $93,750
Corn Starch: 6,250 cases at $25 per case
Splitoff Point
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15-22 (30 min.) Joint-cost allocation, sales value, physical measure, NRV methods.
1 a.
Special B/ Beef Ramen $100,000 0.25 $60,000 Special B $216,000 60,000 48,000 $108,000 50% Special S/ Shrimp Ramen $300,000 0.75 $180,000 Special S $600,000 180,000 168,000 $252,000 42%
PANEL A: Allocation of Joint Costs Using Sales Value at Splitoff Method Sales value of total production at splitoff point (10,000 tonnes $10 per tonne; 20,000 $15 per tonne) Weighting ($100,000; $300,000 $400,000) Joint costs allocated (25; 0.75 $240,000) PANEL B: Product-Line Income Statement for June 2009 Revenues (12,000 tonnes $18 per tonne; 24,000 $25 per tonne) Deduct joint costs allocated (from Panel A) Deduct separable costs Gross margin Gross margin percentage
Total $400,000 $240,000 Total $816,000 240,000 216,000 $360,000 44%
1 b.
Special B/ Beef Ramen 10,000 33% $79,200 Special B $216,000 79,200 48,000 $ 88,800 41% Special S/ Shrimp Ramen 20,000 67% $160,800 Special S $600,000 160,800 168,000 $271,200 45%
PANEL A: Allocation of Joint Costs Using PhysicalMeasure Method Physical measure of total production (tonnes) Weighting (10,000 tonnes; 20,000 tonnes 30,000 tonnes) Joint costs allocated (0.33 $240,000; 0.67 $240,000) PANEL B: Product-Line Income Statement for June 2009 Revenues (12,000 tonnes $18 per tonne; 24,000 $25 per tonne) Deduct joint costs allocated (from Panel A) Deduct separable costs Gross margin Gross margin percentage
Total 30,000 $240,000 Total $816,000 240,000 216,000 $360,000 44%
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15-22 (contd)
1 c.
PANEL A: Allocation of Joint Costs Using Net Realizable Value Method Final sales value of total production during accounting period (12,000 tonnes $18 per tonne; 24,000 tonnes $25 per tonne) Deduct separable costs Net realizable value at splitoff point Weighting ($168,000; $432,000 $600,000) Joint costs allocated (0.28; 0.72 $240,000) PANEL B: Product-Line Income Statement for June 2009 Revenues (12,000 tonnes $18 per tonne; 24,000 tonnes $25 per tonne) Deduct joint costs allocated (from Panel A) Deduct separable costs Gross margin Gross margin percentage
Special B
Special S
Total
$216,000 48,000 $168,000 28% $67,200 Special B $216,000 67,200 48,000 $100,800 46.7%
$600,000 168,000 $432,000 72% $172,800 Special S $600,000 172,800 168,000 $259,200 43.2%
$816,000 216,000 $600,000 $240,000 Total $816,000 240,000 216,000 $360,000 44.1%
2.
Sherrie Dong probably performed the analysis shown below to arrive at the net loss of $2,228 from marketing the stock:
Special B/ Beef Ramen Special S/ Shrimp Ramen
PANEL A: Allocation of Joint Costs Using Sales Value at Splitoff Sales value of total production at splitoff point (10,000 tonnes $10 per tonne; 20,000 $15 per tonne; 4,000 $5 per tonne) Weighting ($100,000; $300,000; $20,000 $420,000) Joint costs allocated (0.238095; 0.714286; 0.047619 $240,000) PANEL B: Product-Line Income Statement for June 2009 Revenues (12,000 tonnes $18 per tonne; 24,000 $25 per tonne; 4,000 $5 per tonne) Separable processing costs Joint costs allocated (from Panel A) Gross margin Deduct marketing costs Operating income
Stock
Total
$100,000 23.8095% $57,143 Special B
$300,000 71.4286% $171,429 Special S
$20,000 4.7619% $11,428 Stock
$420,000 100% $240,000 Total
$216,000 48,000 57,143 $110,857
$600,000 168,000 171,429 $260,571
$20,000 0 11,428 8,572 10,800 $ (2,228)
$836,000 216,000 240,000 380,000 10,800 $369,200
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15-22 (contd)
In this (misleading) analysis, the $240,000 of joint costs are re-allocated between Special B, Special S, and the stock. Irrespective of the method of allocation, this analysis is wrong. Joint costs are always irrelevant in a process-further decision. Only incremental costs and revenues past the splitoff point are relevant. In this case, the correct analysis is much simpler: the incremental revenues from selling the stock are $20,000, and the incremental costs are the marketing costs of $10,800. So, Instant Foods should sell the stockthis will increase its operating income by $9,200 ($20,000 $10,800).
15-23 (30 min.)
Joint-cost allocation, process further.
ICR8 (Non-Saleable)
Processing $175
Crude Oil 150 bbls $18 / bbl = $2700
Joint Costs = $1800
ING4 (Non-Saleable)
Processing $105
NGL 50 bbls $15 / bbl = $750
XGE3 (Non-Saleable) Splitoff Point
Processing $210
Gas 800 eqvt bbls $1.30 / eqvt bbl = $1040
1a. Physical Measure Method
1. Physical measure of total prodn. 2. Weighting (150; 50; 800 1,000) 3. Joint costs allocated (weights $1,800) Crude Oil 150 0.15 $270 NGL 50 0.05 $90 Gas 800 0.80 $1,440 Total 1,000 1.00 $1,800
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15-23 (contd)
1b. NRV Method
1. 2. 3. 4. 5. Final sales value of total production Deduct separable costs NRV at splitoff Weighting (2,525; 645; 830 4,000) Joint costs allocated (weights $1,800) Crude Oil $2,700 175 $2,525 0.63125 $1,136.25 NGL $750 105 $645 0.16125 $290.25 Gas $1,040 210 $ 830 0.20750 $373.50 Total $4,490 490 $4,000 $1,800
2.
The operating income amounts for each product using each method is: a. Physical Measure Method
Revenues Cost of goods sold Joint costs Separable costs Total cost of goods sold Gross margin
Crude Oil $2,700 270 175 445 $2,255
NGL $750 90 105 195 $555
Gas $1,040 1,440 210 1,650 $ (610)
Total $4,490 1,800 490 2,290 $2,200
b. NRV Method
Revenues Cost of goods sold Joint costs Separable costs Total cost of goods sold Gross margin Crude Oil $2,700.00 1,136.25 175.00 1,311.25 $1,388.75 NGL $750.00 290.25 105.00 395.25 $354.75 Gas $1,040.00 373.50 210.00 583.50 $ 456.50 Total $4,490.00 1,800.00 490.00 2,290.00 $2,200.00
3.
Neither method should be used for product emphasis decisions. It is inappropriate to use joint-cost-allocated data to make decisions regarding dropping individual products, or pushing individual products, as they are joint by definition. Productemphasis decisions should be made based on relevant revenues and relevant costs. Each method can lead to product emphasis decisions that do not lead to maximization of operating income.
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15-23 (contd)
4. Since crude oil is the only product subject to taxation, it is clearly in Sinclairs best interest to use the NRV method since it leads to a lower profit for crude oil and, consequently, a smaller tax burden. A letter to the taxation authorities could stress the conceptual superiority of the NRV method. Chapter 15 argues that, using a benefits-received cost allocation criterion, market-based joint cost allocation methods are preferable to physical-measure methods. A meaningful common denominator (revenues) is available when the sales value at splitoff point method or NRV method is used. The physical-measures method requires nonhomogeneous products (liquids and gases) to be converted to a common denominator.
15-24 (40 min.) Alternative methods of joint-cost allocation, ending inventories.
Total production for the year was: Sold 120 340 475 Ending Inventories 180 60 25 Total Production 300 400 500
X Y Z
A diagram of the situation is in Solution Exhibit 15-24. 1. a. Net realizable value (NRV) method:
X Final sales value of total production, 300 $1,500; 400 $1,000; 500 $700 Deduct separable costs Net realizable value at splitoff point Weighting, $450; $400; $150 $1,000 Joint costs allocated, 0.45, 0.40, 0.15 $400,000 $450,000 $450,000 0.45 Y $400,000 $400,000 0.40 Z $350,000 200,000 $150,000 0.15 Total $1,200,000 200,000 $1,000,000
$180,000
$160,000
$ 60,000
$ 400,000
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15-24 (contd)
Ending Inventory Percentages: Ending inventory Total production Ending inventory percentage Income Statement X Revenues, 120 $1,500; 340 $1,000; 475 $700 Cost of goods sold: Joint costs allocated Separable costs Production costs Deduct ending inventory, 60%; 15%; 5% of production costs Cost of goods sold Gross margin Gross-margin percentage $180,000 180,000 180,000 108,000 72,000 $108,000 60% Y $340,000 160,000 160,000 24,000 136,000 $204,000 60% Z $332,500 60,000 200,000 260,000 13,000 247,000 $ 85,500 25.71% Total $852,500 400,000 200,000 600,000 145,000 455,000 $397,500 X 180 300 60% Y 60 400 15% Z 25 500 5%
b.
Constant gross-margin percentage NRV method:
$1,200,000 600,000 $ 600,000 50%
Final sales value of prodn., (300 $1,500) + (400 $1,000) + (500 $700) Deduct joint and separable costs, $400,000 + $200,000 Gross margin Gross-margin percentage, $600,000 $1,200,000
Step 1:
Step 2:
X Final sales value of total production, 300 $1,500; 400 $1,000; 500 $700 Deduct gross margin, using overall gross-margin percentage of sales, 50% Total production costs $450,000 225,000 225,000 Y $400,000 200,000 200,000 Z $350,000 175,000 175,000 Total $1,200,000 600,000 600,000
Step 3:
Deduct separable costs Joint costs allocated $225,000 $200,000 200,000 $(25,000) 200,000 $ 400,000
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15-24 (contd)
The negative joint-cost allocation to Product Z illustrates one unusual feature of the constant gross-margin percentage NRV method: some products may receive negative cost allocations so that all individual products have the same gross-margin percentage. Income Statement Revenues, 120 $1,500; 340 $1,000; 475 $700 Cost of goods sold: Joint costs allocated Separable costs Production costs Deduct ending inventory, 60%; 15%; 5% of production costs Cost of goods sold Gross margin Gross-margin percentage Summary X a. NRV method: Inventories on balance sheet Cost of goods sold on income statement $108,000 72,000 Y $ 24,000 136,000 Z $ 13,000 247,000 Total $145,000 455,000 $600,000 X $180,000 Y $340,000 Z $332,500 Total $852,500
225,000 225,000 135,000 90,000 $ 90,000 50%
200,000 200,000 30,000 170,000 $170,000 50%
(25,000) 200,000 175,000 8,750 166,250 $166,250 50%
400,000 200,000 600,000 173,750 426,250 $426,250 50%
b.
Constant gross-margin percentage NRV method $135,000 90,000 $ 30,000 170,000 $ 8,750 166,250 $173,750 426,250 $600,000
Inventories on balance sheet Cost of goods sold on income statement
2.
Gross-margin percentages:
NRV method Constant gross-margin percentage NRV
X 60% 50%
Y 60% 50%
Z 25.71% 50.00%
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15-24 (contd)
SOLUTION EXHIBIT 15-24
Joint Costs
Separable Costs Product X: 300 tons at $1,500 per tonne
Joint Processing Costs $400,000
Product Y: 400 tons at $1,000 per tonne Product Z: 500 tonnes at $700 per tonne
Processing $200 000 Splitoff Point
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15-25 (40 min.) Process further or sell, byproduct.
1. The analysis shown below indicates that it would be more profitable for Newcastle Mining Company to continue to sell bulk raw coal without further processing. This analysis ignores any value related to coal fines. It also assumes that the costs of loading and shipping the bulk raw coal on river barges will be the same whether Newcastle sells the bulk raw coal directly or processes it further. Incremental sales revenues: Sales revenue after further processing (9,400,000a tonnes $36) Sales revenue from bulk raw coal (10,000,000 tonnes $27) Incremental sales revenue Incremental costs: Direct labour Supervisory personnel Heavy equipment costs ($25,000 12 months) Sizing and cleaning (10,000,000 tonnes $3.50) Outbound rail freight (9,400,000 tonnes 60 tonnes) $240 per car Incremental costs Incremental gain (loss)
a10,000,000
$338,400,000 270,000,000 68,400,000
800,000 200,000 300,000 35,000,000 37,600,000 73,900,000 $ (5,500,000)
tonnes (1 0.06)
2.
The cost of producing the raw coal is irrelevant to the decision to process further or not. As we see from requirement 1, the cost of producing raw coal does not enter any of the calculations related to either the incremental revenues or the incremental costs of further processing. The answer would the same as in requirement 1: do not process further. The analysis shown below indicates that the potential revenue from the coal fines byproduct would result in additional revenue, ranging between $4,950,000 and $9,900,000, depending on the market price of the fines.
3.
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15-25 (contd)
Coal fines = = = 75% of 6% of raw bulk tonnage 0.75 (10,000,000 .06) 450,000 tonnes
Potential incremental income from preparing and selling the coal fines: Minimum $11 ($15 $4) $4,950,000 Maximum $22 ($24 $2) $9,900,000
Incremental income per tonne (Market price Incremental costs) Incremental income ($11; $22 450,000)
The incremental loss from sizing and cleaning the raw coal is $5,500,000, as calculated in requirement 1. Analysis indicates that relative to selling bulk raw coal, the effect of further processing and selling coal fines is only slightly negative at the minimum incremental gain ($4,950,000 $5,500,000 = $550,000) and very beneficial at the maximum incremental gain ($9,900,000 $5,500,000 = $4,400,000). NMC will benefit from further processing and selling the coal fines as long as its incremental income per tonne of coal fines is at least $12.22 ($5,500,000 450,000 tonnes). Hence, further processing is preferred. Note that other than the financial implications, some factors that should be considered in evaluating a sell-or-process-further decision include: Stability of the current customer market for raw coal and how it compares to the market for sized and cleaned coal. Storage space needed for the coal fines until they are sold and the handling costs of coal fines. Reliability of cost (e.g., rail freight rates) and revenue estimates, and the risk of depending on these estimates. Timing of the revenue stream from coal fines and impact on the need for liquidity. Possible environmental problems, i.e., dumping of waste and smoke from unprocessed coal.
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15-26 (30 min.) Accounting for a main product and a byproduct.
Production Method 1. Revenues Main product Byproduct Total revenues Cost of goods sold Total manufacturing costs Deduct value of byproduct production Net manufacturing costs Deduct main product inventory Cost of goods sold Gross margin $640,000a __ 640,000 Sales Method $640,000 28,000d 668,000
480,000 40,000b 440,000 88,000c 352,000 $288,000
480,000 0 480,000 96,000e 384,000 $284,000
$20.00 8,000 $5.00 c (8,000/40,000) $440,000 = $88,000
a 32,000 b
d e
5,600 $5.00 (8,000/40,000) $480,000 = $96,000
2.
a
Main Product Byproduct
Production Method $88,000 12,000a
Sales Method $96,000 0
Ending inventory shown at unrealized selling price. BI + Production Sales = EI 0 + 8,000 5,600 = 2,400 kilograms Ending inventory = 2,400 kilograms $5 per kilogram = $12,000
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Chapter 15
15-27 (35-45 min.) Joint costs and byproducts.
1. Computing byproduct deduction to joint costs: Revenues from C, 20,000 $3 Deduct: Gross margin, 10% of revenues Marketing costs, 25% of revenues Peanut Butter Department separable costs Net realizable value (less gross margin) of C Joint costs Deduct byproduct contribution Net joint costs to be allocated Unit Sales Quantity Price A 10,000 $10 B 60,000 2 Totals Final Sales Value $100,000 120,000 $220,000 Deduct Separable Processing Cost $20,000 $20,000 $ 60,000 6,000 15,000 10,000 $ 29,000 $160,000 29,000 $131,000 Net Realizable Allocation of Value at $131,000 Splitoff Weighting Joint Costs $ 80,000 40% $ 52,400 120,000 60% 78,600 $200,000 $131,000
A B Totals
Joint Costs Allocation $ 52,400 78,600 $131,000
Add Separable Processing Costs $20,000 $20,000
Total Costs $ 72,400 78,600 $151,000
Units 10,000 60,000 70,000
Unit Cost $7.24 1.31
Unit cost for C: $1.45 ($29,000 20,000) + $0.50 ($10,000 20,000) = $1.95, or $3.00 $0.30 (10% $3) $0.75 (25% $3) = $1.95.
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15-27 (contd)
2. If all three products are treated as joint products: Allocation Deduct Net of Separable Realizable $160,000 Processing Value at Joint Cost Splitoff Weighting Costs $20,000 $ 80,000 80 235 $ 54,468 120,000 120 235 81,702 25,000 35,000 35 235 23,830 $45,000 $235,000 $160,000
A B C Totals
Unit Sales Quantity Price 10,000 $10 60,000 2 20,000 3
Final Sales Value $100,000 120,000 60,000 $280,000
A B C Totals
Joint Costs Allocation $ 54,468 81,702 23,830 $160,000
Add Separable Processing Costs $20,000 25,000 $45,000
Total Costs $ 74,468 81,702 48,830 $205,000
Units 10,000 60,000 20,000 90,000
Unit Cost $7.45 1.36 2.44
Call the attention of students to the different unit costs resulting from the two assumptions about the relative importance of Product C. The point is that costs of individual products depend heavily on which assumptions are made and which accounting methods and techniques are used.
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Chapter 15
15-28 (4060 min.) Comparison of alternative joint-cost allocation methods, further-processing decision, chocolate products.
Joint Costs $30,000 Separable Costs ChocolatePowder Liquor Base Cocoa Beans
Processing $12,750
Chocolate Powder
P rocessing
Milk-Chocolate Liquor Base SPLITOFF POINT
Processing $26,250
Milk Chocolate
1
a. Sales value at splitoff method:
ChocolatePowder/ Liquor Base
MilkChocolate/ Liquor Base
Total
Sales value of total production at splitoff, 600 $21; 900 $26 Weighting, $12,600; $23,400 $36,000 Joint costs allocated, 0.35; 0.65 $30,000
$12,600 0.35 $10,500
$23,400 0.65 $19,500
$36,000
$30,000
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15-28 (contd)
b. Physical-measure method: Physical measure of total production (15,000 1,500) 60; 90 Weighting, 600; 900 1,500 Joint costs allocated, 0.40; 0.60 $30,000 c. Net realizable value method: 600 litres 0.40 $12,000 Chocolate Powder $24,000 12,750 $11,250 0.3125 $ 9,375 900 litres 0.60 $18,000 Milk Chocolate $51,000 26,250 $24,750 0.6875 $20,625 1,500 litres
$30,000
Total $75,000 39,000 $36,000
Final sales value of total production, 6,000 $4; 10,200 $5 Deduct separable costs Net realizable value at splitoff point Weighting, $11,250; $24,750 $36,000 Joint costs allocated, 0.3125; 0.6875 $30,000
$30,000
d. Step 1:
Constant gross-margin percentage NRV method:
Final sales value of total production, (6,000 $4) + (10,200 $5) Deduct joint and separable costs, ($30,000 + $12,750 + $26,250) Gross margin Gross-margin percentage ($6,000 $75,000) Step 2: Chocolate Powder Final sales value of total production, 6,000 $4; 10,200 $5 Deduct gross margin, using overall gross-margin percentage of sales (8%) Total production costs $24,000 1,920 22,080 Milk Chocolate $51,000 4,080 46,920
$75,000 69,000 $ 6,000 8%
Total $75,000 6,000 69,000
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Chapter 15
15-28 (contd)
Step 3: Deduct separable costs Joint costs allocated 2. a. Revenues Joint costs Separable costs Total cost of goods sold Gross margin Gross-margin percentage b. Revenues Joint costs Separable costs Total cost of goods sold Gross margin Gross-margin percentage c. Revenues Joint costs Separable costs Total cost of goods sold Gross margin Gross-margin percentage d. Revenues Joint costs Separable costs Total cost of goods sold Gross margin Gross-margin percentage 12,750 $ 9,330 Chocolate Powder $24,000 10,500 12,750 23,250 $ 750 3.125% $24,000 12,000 12,750 24,750 $ (750) (3.125)% $24,000 9,375 12,750 22,125 $ 1,875 7.813% $24,000 9,330 12,750 22,080 $ 1,920 8% 26,250 $20,670 39,000 $30,000
Milk Chocolate $51,000 19,500 26,250 45,750 $ 5,250 10.294% $51,000 18,000 26,250 44,250 $ 6,750 13.235% $51,000 20,625 26,250 46,875 $ 4,125 8.088% $51,000 20,670 26,250 46,920 $ 4,080 8%
Total $75,000 30,000 39,000 69,000 $ 6,000 8% $75,000 30,000 39,000 69,000 $ 6,000 8% $75,000 30,000 39,000 69,000 $ 6,000 8% $75,000 30,000 39,000 69,000 $ 6,000 8%
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15-28 (contd)
3. Further processing of chocolate-powder liquor base into chocolate powder: Incremental revenue, $24,000 $12,600 $11,400 Incremental costs 12,750 Incremental operating income from further processing $ (1,350) Further processing of milk-chocolate liquor base into milk chocolate: Incremental revenue, $51,000 $23,400 $27,600 Incremental costs 26,250 Incremental operating income from further processing $ 1,350 Chocolate Factory could increase operating income by $1,350 (to $7,350) if chocolate-powder liquor base is sold at the splitoff point and if milk-chocolate liquor base is further processed into milk chocolate.
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Chapter 15
15-29 (30 min.) Joint-cost allocation, process further or sell.
A diagram of the situation is in Solution Exhibit 15-29. 1. a. Sales value at splitoff method.
Monthly Unit Output 75,000 5,000 20,000 Selling Price Per Unit $8 60 20 Sales Value of Total Prodn. at Splitoff $ 600,000 300,000 400,000 $1,300,000 Physical Measure of Total Prodn. 75,000 5,000 20,000 100,000 Fully Processed Selling Price per Unit $8 100 20 Weighting 46.15% 23.0769 30.7692 100.0000% Joint Costs Allocated $ 461,539 230,769 307,692 $1,000,000
Studs (Building) Decorative Pieces Posts Totals
b. Physical measure method.
Weighting 75.00% 5.00 20.00 100.00% Joint Costs Allocated $ 750,000 50,000 200,000 $1,000,000
Studs (Building) Decorative Pieces Posts Totals
c. Net realizable value method.
Monthly Units of Total Prodn. 75,000 4,500a 20,000 Net Realizable Value at Splitoff $ 600,000 350,000b 400,000 $1,350,000
Studs (Building) Decorative Pieces Posts Totals
a b
Weighting 44.44% 25.9259 29.6296 100.0000%
Joint Costs Allocated $ 444,445 259,259 296,296 $1,000,000
5,000 monthly units of output 10% normal spoilage = 4,500 good units. 4,500 good units $100 = $450,000 Further processing costs of $100,000 = $350,000
2.
Presented below is an analysis for Sonimad Sawmill, Inc., comparing the processing of decorative pieces further versus selling the rough-cut product immediately at splitoff: Units Dollars Monthly unit output 5,000 Less: Normal further processing shrinkage 500 Units available for sale 4,500 $450,000 Final sales value (4,500 units $100 per unit) Less: Sales value at splitoff 300,000 Incremental revenue 150,000 Less: Further processing costs 100,000 Additional contribution from further processing $ 50,000 687
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Instructors Solutions Manual for Cost Accounting, 5Ce
15-29 (contd)
3. Sonimad Assuming Sawmill, Inc. announces that in six months it will sell the roughcut product at splitoff due to increasing competitive pressure, behaviour that may be demonstrated by the skilled labour in the planing and sizing process include the following: lower quality, reduced motivation and morale, and job insecurity, leading to nonproductive employee time looking for jobs elsewhere. Management actions that could improve this behaviour include the following: Improve communication by giving the workers a more comprehensive explanation as to the reason for the change so they can better understand the situation and bring out a plan for future operation of the rest of the plant. Offer incentive bonuses to maintain quality and production and align rewards with goals. Provide job relocation and internal job transfers. SOLUTION EXHIBIT 15-29 Joint Costs $1,000,000
Separable Costs
Studs $8 per unit
Processing
Raw Decorative Pieces $60 per unit
Processing $100000
Decorative Pieces $100 per unit
Posts $20 per unit Splitoff Point
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Chapter 15
15-30 (40 min.)
1. a. 1.
Alternative methods of joint-cost allocation, product-mix decision.
Joint costs = $360,000 Sales value at splitoff method Select Sales value at splitoff (30,000 $9.60, 50,000 $4.80, 20,000 $3.60) Weighting (288/600, 240/600, 72/600) Joint cost allocated (0.48, 0.40, 0.12 $360,000) Total cost computation Joint costs Separable processing Total costs Total units Unit cost Physical-measure method Select White 50,000 0.50 $180,000 $180,000 108,000 $288,000 40,000 $7.20 Knotty 20,000 0.20 $72,000 $72,000 18,000 $90,000 15,000 $6.00 Total 100,000 1.00 $360,000 $360,000 198,000 $558,000 Physical measure of production (board feet) 30,000 Weighting (30/100, 50/100, 20/100) 0.30 Joint costs allocated (0.30, 0.50, 0.20 $360,000) $108,000 Total cost computation Joint costs $108,000 Separable processing 72,000 Total costs $180,000 Total units 25,000 Unit cost $7.20 White Knotty Total
$288,000 0.48 $172,800 $172,800 72,000 $244,800 25,000 $9.792
$240,000 0.40 $144,000 $144,000 108,000 $252,000 40,000 $6.30
$72,000 0.12 $43,200 $43,200 18,000 $61,200 15,000 $4.08
$600,000 1.00 $360,000 $360,000 198,000 $558,000
2. 3. 4.
b. 1. 2. 3. 4.
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15-30 (contd)
c. 1. 2. 3. 4. 5. Estimated net realizable value method Select Expected final sales value of production (25,000 $19.20, 40,000 $10.80, 15,000 $8.40) $480,000 Deduct expected separable costs 72,000 Estimated NRV at splitoff $408,000 Weighting (408/840, 324/840, 108/840) 0.4857 Joint costs allocated (0.4857, 0.3857, 0.1286 $360,000) $174,852 Total cost computation Joint costs $174,852 Separable processing 72,000 Total costs $246,852 Total units 25,000 Unit cost $9.87 Select $9,792 7,200 9,870 White $432,000 108,000 $324,000 0.3857 $138,852 $138,852 108,000 $246,852 40,000 $6.17 White $12,600 14,400 12,340 Knotty $126,000 18,000 $108,000 0.1286 $46,296 $46,296 18,000 $64,296 15,000 $4.29 Knotty $2,040 3,000 2,145 Total $1,038,000 198,000 $ 840,000 1.0000 $360,000 $360,000 198,000 $558,000
2. a. Sales value at splitoff ($9.792 1,000, $6.30 2,000, $4.08 500) b. Physical measure ($7.20 1,000, $7.20 2,000, $6.00 500) (c) Estimated NRV ($9.87 1,000), $6.17 2,000, $4.29 500)
Total $24,432 24,600 24,355
3.
Raw to Select Oak Incremental revenues: $480,000 $288,000 Deduct incremental processing costs Increase in operating income Raw to White Oak Incremental revenues: $432,000 $240,000 Deduct incremental processing costs Increase in operating income Raw to Knotty Oak Incremental revenues: $126,000 $72,000 Deduct incremental processing costs Increase in operating income
$192,000 72,000 $120,000 $192,000 108,000 $ 84,000 $54,000 18,000 $36,000
Northwest Forestry is maximizing its total August 2010 operating income by fully processing each raw oak product into its finished product form.
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Chapter 15
15-31 (40 min.) Alternative methods of joint-cost allocation, productmix decisions.
A diagram of the situation is in Solution Exhibit 15-31. 1. Computation of joint-cost allocation proportions: a. Sales Value of Total Production at Splitoff A $ 50,000 B 30,000 C 50,000 D 70,000 $200,000 Allocation of $100,000 Joint Costs $ 25,000 15,000 25,000 35,000 $100,000
Weighting 50 200 = 0.25 30 200 = 0.15 50 200 = 0.25 70 200 = 0.35 1.00
b.
Physical Measure of Total Production A 300,000 litres B 100,000 litres C 50,000 litres D 50,000 litres 500,000 litres
Weighting 300 500 = 0.60 100 500 = 0.20 50 500 = 0.10 50 500 = 0.10 1.00
Allocation of $100,000 Joint Costs $ 60,000 20,000 10,000 10,000 $100,000
c.
Super A Super B C Super D
Final Sales Value of Total Separable Costs Production $300,000 $200,000 100,000 80,000 50,000 120,000 90,000
Net Realizable Value at Splitoff $100,000 20,000 50,000 30,000 $200,000
Weighting 100 200 = 0.50 20 200 = 0.10 50 200 = 0.25 30 200 = 0.15 1.00
Allocation of $100,000 Joint Costs $ 50,000 10,000 25,000 15,000 $100,000
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15-31 (contd)
Computation of gross-margin percentages: a. Sales value at splitoff method: Super A Super B $300,000 $100,000 25,000 15,000 200,000 80,000 225,000 95,000 $ 75,000 $ 5,000 5% 25% C $50,000 25,000 0 25,000 $25,000 50% Super D $120,000 35,000 90,000 125,000 $ (5,000) (4.17%) Total $570,000 100,000 370,000 470,000 $100,000 17.54%
Revenues Joint costs Separable costs Total cost of goods sold Gross margin Gross-margin percentage b.
Physical-measure method: Super A Super B $300,000 $100,000 60,000 20,000 200,000 80,000 260,000 100,000 0 $ 40,000 $ 13.33% 0% C $50,000 10,000 0 10,000 $40,000 80% Super D Total $120,000 $570,000 10,000 100,000 90,000 370,000 100,000 470,000 $ 20,000 $100,000 16.67% 17.54%
Revenues Joint costs Separable costs Total cost of goods sold Gross margin Gross-margin percentage c.
Net realizable value method: Super A $300,000 50,000 200,000 250,000 $ 50,000 16.67% Super B $100,000 10,000 80,000 90,000 $ 10,000 10% C $50,000 25,000 0 25,000 $25,000 50% Super D Total $120,000 $570,000 15,000 100,000 90,000 370,000 105,000 470,000 $ 15,000 $100,000 12.5% 17.54%
Revenues Joint costs Separable costs Total cost of goods sold Gross margin Gross-margin percentage
Summary of gross-margin percentages: Joint-Cost Allocation Method Sales value at splitoff Physical measure Net realizable value
Super A 25.00% 13.33% 16.67%
Super B 5% 0% 10%
C 50% 80% 50%
Super D (4.17)% 16.67% 12.50%
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Chapter 15
15-31 (contd)
2. Further Processing of A into Super A: Incremental revenue, $300,000 $50,000 Incremental costs Incremental operating income from further processing Further processing of B into Super B: Incremental revenue, $100,000 $30,000 Incremental costs Incremental operating loss from further processing Further Processing of D into Super D: Incremental revenue, $120,000 $70,000 Incremental costs Incremental operating loss from further processing $ 50,000 90,000 $ (40,000) $ 70,000 80,000 $ (10,000) $250,000 200,000 $ 50,000
Operating income can be increased by $50,000 if both B and D are sold at their splitoff point rather than processed further into Super B and Super D. SOLUTION EXHIBIT 15-31
Joint Costs
Revenues at Splitoff and Separable Costs gallons A, 300000 litres Revenue = $50000 B, 100000 litres s gallon Revenue = $30000 C, 50000 litres gallons Revenue = $50000 gallons D, 50000 litres Revenue = $70000 Splitoff Point
693
Processing $200000 Processing $80000
Super A $300000 Super B $100000
Processing $100000
Processing $90000
Super D $120000
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Instructors Solutions Manual for Cost Accounting, 5Ce
15-32 (25 min.) Joint-cost allocation, relevant costs (R. Capettini, adapted).
1. The four-day progressive product trimming ignores the fundamental point that the $360 cost to buy the pig is a joint cost. A pig is purchased as a whole. The butchers challenge is to maximize the total revenues minus incremental costs (assumed zero) from the sale of all products. At each stage, the decision made ignores the general rule that product emphasis decisions should consider relevant revenues and relevant costs. Allocated joint costs are not relevant. For example, the Day 2 decision to drop bacon ignores the fact that the $360 joint cost has been paid to acquire the whole pig. The $172.80 of revenues are relevant inflows. This same position also holds for the Day 3 and Day 4 decisions. The revenue amounts are the figures to use in the sales value at splitoff method: Joint Costs Revenue Weighting $144.00 0.2899 180.00 0.3623 172.80 0.3478 $496.80 1.0000
2.
Product Pork chops Ham Bacon
Allocated $104.36 130.43 125.21 $360.00
3.
No. The decision to sell or not sell individual products should consider relevant revenues and relevant costs. In the butchers context, the relevant costs would be the additional time and other incidentals to take each pig part and make it a salable product. The relevant revenues would be the difference between the selling price at the consumer level for the pig parts and what the butcher may receive for the whole pig.
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Chapter 15
15-33 (25 min.) Accounting for a byproduct.
1. Byproduct recognized at time of production:
Joint cost = Joint cost to be charged to main product = = $1,500 Joint Cost NRV of Byproduct $1,500 (50 kg $1.20) = $1,440
$1440 Inventoriable cost of main product = 400 containers = $3.60 per container Inventoriable cost of byproduct = NRV = $1.20 per kilogram Gross Margin Calculation under Production Method Revenues Main product: Water (600/2 containers $8) Byproduct: Sea Salt Cost of goods sold Main product: Water (300 containers $3.60) Gross margin Gross-margin percentage ($1,320 $2,400) Inventoriable costs (end of period): Main product: Water (100 containers $3.60) = $360 Byproduct: Sea Salt (10 kilograms $1.20) = $12 2. Byproduct recognized at time of sale: Joint cost to be charged to main product = Total joint cost = $1,500 $1500 Inventoriable cost of main product = 400 containers = $3.75 per container Inventoriable cost of byproduct = $0 Gross Margin Calculation under Sales Method Revenues Main product: Water (600/2 containers $8) $2,400 Byproduct: Sea Salt (40 kilograms $1.20) 48 2,448 Cost of goods sold Main product: Water (300 containers $3.75) 1,125 Gross margin $1,323 Gross-margin percentage ($1,323 $2,448) 54.04% Inventoriable costs (end of period): Main product: Water (100 containers $3.75) = $375 Byproduct: Sea Salt (10 kilograms $0) = $0 695
$2,400 0 2,400 1,080 $1,320 55.00%
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Instructors Solutions Manual for Cost Accounting, 5Ce
15-33 (contd)
3. The production method recognizes the byproduct cost as inventory in the period it is produced. This method sets the cost of the byproduct inventory equal to its net realizable value. When the byproduct is sold, inventory is reduced without being expensed through the income statement. The sales method associates all of the production cost with the main product. Under this method, the byproduct has no inventoriable cost and is recognized only when it is sold.
15-34 (40 min.) Joint-cost allocation.
1.
Joint Costs $20,000 Separable Costs Butter
Processing $0.50 per pound
Spreadable Butter
M ilk
Processing
Buttermilk
Processing $0.25 per pint
B uttermilk
SPLITOFF POINT
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Chapter 15
15-34 (contd)
a. Physical-measure method: Butter Physical measure of total production (10,000 lbs 2; 20,000 qts 4) Weighting, 20,000; 80,000 100,000 Joint costs allocated, 0.20; 0.80 $20,000 20,000 cups 0.20 $4,000 Buttermilk 80,000 cups 0.80 $16,000 Total 100,000 cups
$20,000
b.
Sales value at splitoff method: Sales value of total production at splitoff, 10,000 $2; 20,000 $1.5 Weighting, $20,000; $30,000 $50,000 Joint costs allocated, 0.40; 0.60 $20,000
Butter $20,000 0.40 $ 8,000
Buttermilk $30,000 0.60 $12,000
Total $50,000
$20,000
c.
Net realizable value method:
Butter $50,000 5,000 $45,000 0.60 $12,000
Buttermilk $30,000 0 $30,000 0.40 $ 8,000
Total $80,000 5,000 $75,000
Final sales value of total production, 20,000 $2.50; 20,000 $1.50 Deduct separable costs Net realizable value Weighting, $45,000; $30,000 $75,000 Joint costs allocated, 0.60; 0.40 $20,000 d. Step 1:
$20,000
Constant gross-margin percentage NRV method:
Final sales value of total production, Deduct joint and separable costs, ($20,000 + $5,000) Gross margin Gross-margin percentage ($55,000 $80,000)
$80,000 25,000 $55,000 68.75%
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15-34 (contd)
Step 2: Butter Final sales value of total production (see 1c.) Deduct gross margin, using overall gross-margin percentage of sales (68.75%) Total production costs Step 3: Deduct separable costs Joint costs allocated 2. Advantages and disadvantages: Physical-Measure Advantage: Low information needs. Only knowledge of joint cost and physical distribution is needed. Disadvantage: Allocation is unrelated to the revenue-generating ability of products. Sales Value at Splitoff Advantage: Considers market value of products as basis for allocating joint cost. Relative sales value serves as a proxy for relative benefit received by each product from the joint cost. Disadvantage: Uses selling price at the time of splitoff even if product is not sold by the firm in that form. Selling price may not exist for product at splitoff. Net Realizable Value Advantages: Allocates joint costs using ultimate net value of each product; applicable when the option to process further exists. Disadvantages: High information needs. Makes assumptions about expected outcomes of future processing decisions. 5,000 $10,625 0 $ 9,375 5,000 $20,000 $50,000 34,375 15,625 Buttermilk $30,000 20,625 9,375 Total $80,000 55,000 25,000
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Chapter 15
15-34 (contd)
Constant Gross-Margin percentage method Advantage: Since it is necessary to produce all joint products, they all look equally profitable. Disadvantages: High information needs. All products are not necessarily equally profitable; method may lead to negative cost allocations so that unprofitable products are subsidized by profitable ones. 3. When selling prices for all products exist at splitoff, the sales value at splitoff method is the preferred technique. It is a relatively simple technique that depends on a common basis for cost allocation: revenues. It is better than the physical measure method because it considers the relative market values of the products generated by the joint cost when seeking to allocate it (which is a surrogate for the benefits received by each product from the joint cost). Further, the sales value at splitoff method has advantages over the NRV method and the constant gross margin percentage method because it does not penalize managers by charging more for developing profitable products using the output at splitoff, and it requires no assumptions about future processing activities and selling prices.
15-35 (10 min.) Further processing decision (continuation of 15-34).
1 & 2. The decision about which combination of products to produce is not affected by the method of joint cost allocation. For both the sales value at splitoff and physical measure methods, the relevant comparisons are as shown below:
Revenue if sold at splitoff Process further NRV Profit (Loss) from processing further
10,000 lbs $2 = $20,000 20,000 qts $1.5 = $30,000 c 20,000 tubs $2.5 10,000lbs $.5 = $45,000 d 40,000 pints $.9 40,000 pints $.25 = $26,000
a b
Butter $20,000 a 45,000 c $25,000
Buttermilk $30,000 b 26,000 d $(4,000)
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15-35 (contd)
To maximize profits, Elsie should process butter further into spreadable butter. However, Elsie should sell the buttermilk at the splitoff point in quart containers. The extra cost to convert to pint containers ($0.25 per pint 2 pints per quart = $0.50 per quart) exceeds the increase in selling price ($0.90 per pint 2 pints per quart = $1.80 per quart $1.50 original price = $0.30 per quart) and leads to a loss of $4,000. 3. The decision to sell a product at splitoff or to process it further should have nothing to do with the allocation method chosen. For each product, you need to compare the revenue from selling the product at splitoff to the NRV from processing the product further. Other things being equal, management should choose the higher alternative. The total joint cost is the same regardless of the alternative chosen and is therefore irrelevant to the decision.
15-36 (20 min.) Joint-cost allocation with a byproduct.
1. Sales value at splitoff method: Byproduct recognized at time of production method
Joint cost to be charged to joint products = Joint cost NRV of Byproduct = $10,000 1000 tonnes 20% 0.25 vats $60 = $10,000 50 vats $60 = $ 7,000
Grade A Coal Sales value of coal at splitoff, 1,000 tonnes 0.4 $100; 1,000 tonnes 0.4 $60 Weighting, $40,000; $24,000 $64,000 Joint costs allocated, 0.625; 0.375 $7,000 Gross margin (Sales revenue Allocated cost)
Grade B Coal
Total
$40,000 0.625 $ 4,375 $35,625
$24,000 0.375 $ 2,625 $21,375
$64,000
$ 7,000 $57,000
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15-36 (contd)
2. Sales value at splitoff method: Byproduct recognized at time of sale method Joint cost to be charged to joint products = Total joint cost = $10,000 Grade A Coal
Sales value of coal splitoff, 1,000 tonnes .4 $100; 1,000 tonnes .4 $60 Weighting, $40,000; $24,000 $64,000 Joint costs allocated, 0.625; 0.375 $10,000 Gross margin (Sales revenue Allocated cost) $40,000 0.625 $ 6,250 $33,750
Grade B Coal
$24,000 0.375 $ 3,750 $20,250
Total
$64,000
$10,000 $54,000
Since the entire production is sold during the period, the overall gross margin is the same under the production and sales methods. In particular, under the sales method, the $3,000 received from the sale of the coal tar is added to the overall revenues, so that Cumberlands overall gross margin is $57,000, as in the production method. 3. The production method of accounting for the byproduct is only appropriate if Cumberland is positive they can sell the byproduct and positive of the selling price. Moreover, Cumberland should view the byproducts contribution to the firm as material enough to find it worthwhile to record and track any inventory that may arise. The sales method is appropriate if either the disposition of the byproduct is unsure or the selling price is unknown, or if the amounts involved are so negligible as to make it economically infeasible for Cumberland to keep track of byproduct inventories.
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15-37 (15 min.) Byproduct-costing journal entries (continuation of 15-36).
1. Byproductproduction method journal entries i) At time of production: Work-in-Process Inventory Accounts Payable, etc.
10,000 10,000
For byproduct: Finished Goods Inv Coal tar 3,000 Work-in-Process Inventory For joint products Finished Goods Inv Grade A 4,375 Finished Goods Inv Grade B 2,625 Work-in-Process Inventory ii) At time of sale: For byproduct Cash or A/R 3,000 Finished Goods Inv Coal Tar For joint products Cash or A/R 64,000 Sales Revenue Grade A Sales Revenue Grade B Cost of goods sold - Grade A Cost of goods sold - Grade B Finished Goods Inv Grade A Finished Goods Inv Grade B 4,375 2,625
3,000
7,000
3,000
40,000 24,000
4,375 2,625
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Chapter 15
15-37 (contd)
2. Byproductsales method journal entries i) At time of production: Work-in-Process Inventory Accounts Payable, etc. For byproduct: No entry For Joint Products Finished Goods Inv Grade A 6,250 Finished Goods Inv Grade B 3,750 Work-in-Process Inventory ii) At time of sale For byproduct Cash or A/R 3,000 Sales Revenue Coal Tar For joint products Cash or A/R 64,000 Sales Revenue Grade A Sales Revenue Grade B Cost of goods sold - Grade A Cost of goods sold - Grade B Finished Goods Inv Grade A Finished Goods Inv Grade B 6,250 3,750 6,250 3,750
10,000 10,000
10,000
3,000
40,000 24,000
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15-38 (30 min.) Accounting for a byproduct.
1. Byproduct recognized at time of production: Joint cost = ($300 50) + $10,000 = $25,000 Joint cost charged to main product = Joint cost NRV of byproduct = $25,000 (6 50 scarves $25) = $25,000 (300 scarves $25) = $17,500 Inventoriable cost of main product =
$17,500 = $11.67 per blouse 1,500 blouses
Inventoriable cost of byproduct = NRV = $25 per scarf Gross Margin Calculation under Production Method Revenues Main product: Blouses (1,200 blouses $90) Byproduct: Scarves Cost of goods sold Main product: Blouses (1,200 blouses $11.67) Gross margin Gross-margin percentage ($94,000 $108,000)
$108,000 0 108,000 14,000 $ 94,000 87.04%
Inventoriable costs (end of period): Main product: Blouses (300 blouses $11.67) = $3,500 Byproduct: Scarves (40 scarves $25) = $1,000
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15-38 (contd)
2. Byproduct recognized at time of sale: Joint cost to be charged to main product = Total joint cost = $25,000 $25,000 Inventoriable cost of main product = = $16.67 per blouse 1,500 blouses Inventoriable cost of byproduct = $0 Gross Margin Calculation under Sales Method Revenues Main product: Blouses (1,200 blouses $90) Byproduct: Scarves (260 scarves $25) Cost of goods sold Main product: Blouses (1,200 blouses $16.67) Gross margin Gross-margin percentage ($94,500 $114,500)
$108,000 6,500 114,500 20,000 $ 94,500 82.53%
Inventoriable costs (end of period): Main product: Blouses (300 blouses $16.67) = $5,000 Byproduct: Scarves (40 scarves $0) = $0 3. a. Byproductproduction method journal entries i) At time of production: Work-in-Process Inventory Accounts Payable, etc. For byproduct: Finished Goods Inv Scarves Work-in-Process Inventory For main product Finished Goods Inv Blouses 17,500 Work-in-Process Inventory
25,000 25,000
7,500 7,500
17,500
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15-38 (contd)
ii) At time of sale: For byproduct Cash or A/R 6,500 Finished Goods Inv Scarves For main product Cash or A/R Sales Revenue Blouses
6,500
108,000 108,000 14,000 14,000
Cost of goods sold Blouses Finished Goods Inv Blouses
b. Byproductsales method journal entries i) At time of production: Work-in-Process Inventory Accounts Payable, etc. For byproduct: No entry For main product Finished Goods Inv Blouses 25,000 Work-in-Process Inventory ii) At time of sale: For byproduct Cash or A/R Sales Revenue Scarves For joint product Cash or A/R Sales Revenue Blouses
25,000 25,000
25,000
6,500 6,500
108,000 108,000 20,000 20,000
Cost of goods sold - Blouses Finished Goods Inv Blouses
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Chapter 15
15-39 (30 min.) Estimated net realizable value method, byproducts.
1. A diagram of the situation is in Solution Exhibit 15-39. a. For the month of November 2010, Princess Corporations output was: apple slices 89,100 applesauce 81,000 apple juice 67,500* animal feed 27,000 These amounts were calculated as follows: Product Slices Sauce Juice Feed
*Net kilograms: 1.08 net kilograms Net kilograms
Input Proportion 270,000 kg 0.33 270,000 0.30 270,000 0.27 270,000 0.10 1.00
= = = 72,900 (0.08 net kilograms) 72,900 67,500
Total Kilograms 89,100 81,000 72,900 27,000 270,000
Kilograms Lost 5,400 5,400
Net Kilograms 89,100 81,000 67,500* 27,000 264,600
b.
The estimated net realizable value for each of the three main products is calculated below: Estimated Net Realizable Value $ 72,000 43,200 28,800 $144,000
Product Slices Sauce Juice
Net Kilograms 89,100 81,000 67,500
Price $0.96 0.66 0.48
Revenue $ 85,536 53,460 32,400 $171,396
Separable Costs $13,536 10,260 3,600 $27,396
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15-39 (contd)
c. and d. The estimated net realizable value of the byproduct is deducted from the production costs prior to allocation to the joint products, as presented below: Allocation of Cutting Department Costs to Joint Products and Byproducts Net realizable value (NRV) of byproduct = = = = Costs to be allocated
Byproduct revenue Separable costs $0.12 (270,000 10%) $840 $3,240 $840 $2,400
= Joint costs NRV of byproduct = $72,000 $2,400 = $69,600
Product Slices Sauce Juice
Revenue $ 85,536 53,460 32,400 $171,396
Separable Costs $13,536 10,260 3,600 $27,396
Joint Costs $34,8001 20,8802 13,9203 $69,600
Gross Margin $37,200 22,320 14,880 $74,400
1) Slices 72K/144K $69,600 = $34,800 2) Sauce 43.2K/144K $69,600 = $20,880 3) Juice 28.8K/144K $69,600 = $13,920
2.
The gross-margin dollar information by main product is determined by the arbitrary allocation of joint production costs. As a result, these cost figures and the resulting gross-margin information are of little significance for planning and control purposes. The allocation is made only for purposes of inventory costing and income determination.
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15-39 (contd)
SOLUTION EXHIBIT 15-39
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15-40 (20-30 min.) Joint-product/byproduct distinctions, ethics (continuation of 15-39).
1. The 2010 method gives Princess managers relatively little discretion vis--vis the pre2010 method. The 2010 method recognizes all four products in the accounting system at the time of production. The pre-2010 method recognizes only two products (apple slices and applesauce) at the time of production. Consider the data in the question. The $72,000 of joint costs would be allocated as follows (using the $72,000 and $43,200 estimated NRV amounts): Apple Slices: Applesauce:
$72, 000 $72, 000 $45, 000 $115, 200 $43, 200 $72, 000 $27, 000 $115, 200
The gross margin on each product is: Apple Slices: Applesauce:
($85, 536 $45, 000 $13, 536) 31.57% $85, 536
($53, 460 $27, 000 $10, 260) 30.30% $53, 460
The gross margins on the two byproducts are: Apple Juice: Animal Feed:
$32, 400 $3, 600 88.89% $32, 400 $3, 240 $840 74.07% $3, 240
With the pre-2010 method, managers have flexibility as to when to sell the apple juice and the animal feed. Both can be kept in cold storage until needed. If there is a need for a large dose of gross margin at year end to meet the target ratio, high gross margins from apple juice or animal feed can be drawn on to help achieve the target. 2. The controller could examine the sales patterns of apple juice and animal feed at year end. Do managers who have ratios from existing sales below the target sell apple juice and animal feed inventories to achieve the target ratio? Do managers who have ratios above the target put apple juice and animal feed production into inventory so as to provide a cushion for subsequent years?
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Chapter 15
15-40 (contd)
One piece of evidence here would be physical inventory holding patterns on a monthly basis. If there were a different pattern of inventory holding for the two byproducts than for the two joint products, there would be grounds for further investigating whether managers are abusing the bonus system. 3. Using the estimated net realizable value method with all products treated as a joint product would reduce gaming behaviour by managers with respect to bonus payments. The estimated net realizable value of all four products ($72,000 + $43,200 + $28,800 + $2,400 = $146,400) would be used to allocate the $72,000 joint cost: Slices: Sauce: Juice: Feed:
$72,000 $72,000 $146, 400 $43, 200 $72,000 $146, 400 $28,800 $72,000 $146, 400 $2, 400 $72,000 $146, 400
= $35,410 = $21,246 = $14,164 = $ 1,180 $72,000
A second method that could be used in conjunction with that discussed above is to have an inventory-holding charge. If managers build up inventory, they would be penalized. This would reduce incentives to use inventory to manipulate reported income to meet target ratios.
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15-41 (60 min.) Joint-cost allocation, process further or sell byproducts
1.
Alpha
Beta
Delta
Alpha Expected final sales value of productiona Deduct expected separable costs to complete and sell Estimated net realizable value at splitoff point Weightingb Joint costs allocatedc
a($4.20 b($714,000
Beta $3,000,000 1,680,000 $1,320,000 0.467 $1,008,720
Delta $792,000 $792,000 0.280 $604,800
Total $4,506,000 1,680,000 $2,826,000 1.000 $2,160,000
$714,000 $714,000 0.253 $546,480
170,000); ($6.00 500,000); ($2.40 330,000) $2,826,000); ($1,320,000 $2,826,000); ($792,000 $2,826,000) c$2,160,000 0.253; 0.467; 0.280
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15-41 (contd)
2. Further Processing Alpha Incremental revenue ($6.60 150,000) ($4.20 170,000) $990,000 $714,000 Incremental processing cost Incremental operating income Further Processing Beta Incremental revenue ($6.00 500,000) ($2.70 500,000) $3,000,000 $1,350,000 Incremental processing cost Incremental operating income Further Processing Delta Incremental revenue [$2.16 (330,000 1.25)] ($2.40 330,000) $891,000 $792,000 Incremental processing cost Incremental operating income Current Policy Sell Alpha at splitoff Process Beta further (net of separable costs) Sell Delta at splitoff Joint costs Operating income Preferred Options Sell Alpha at splitoff Sell Beta at splitoff Process Delta further (net of separable costs) Joint costs Operating income $ 714,000 1,350,000 801,000 2,865,000 2,160,000 $ 705,000 $ 714,000 1,320,000 792,000 2,826,000 2,160,000 $ 666,000
$276,000 300,000 $(24,000)
$1,650,000 1,680,000 $ (30,000)
$99,000 90,000 $ 9,000
Remarkable is $39,000 better off by changing two of its current policiesit should sell Beta at splitoff ($30,000 improvement) and process Delta further ($9,000 improvement).
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15-41 (contd)
3. (a) Remarkable would be better off by $14,400 by selling Dorzine to Dietriech Mills. Further Processing Dorzine Incremental revenue ($0.90 50,000) + $21,000a $45,000 + $21,000 Incremental processing cost Incremental operating income
aDisposal
$66,000 51,600 $14,400
costs avoided by processing further $0.42 50,000 = $21,000
(b) The decision to treat Dorzine should not affect decisions as to whether to process further or sell at the splitoff point. Accounting decisions about joint product/byproduct distinctions do not affect total revenues or total costs.
15-42 (60 min.) Joint Cost Allocation.
1. a. The Net Realizable Value Method allocates joint costs on the basis of the relative net realizable value (final sales value minus the separable costs of production and marketing). Joint costs would be allocated as follows: Deluxe Module $25,000 1,500 $23,500 0.7581 $18,194 $19,694 $ 39.39 Standard Module $ 8,500 1,000 $ 7,500 0.2419 $ 5,806 $ 6,806 $ 13.61 Total $33,500 2,500 $31,000 $24,000 $26,500
Final sales value of total production Deduct separable costs Net realizable value at splitoff point Weighting ($23,500; $7,500 $31,000) Joint costs allocated (0.7581; 0.2419 $24,000) Total production costs ($18,194 + $1,500; $5,806 + $1,000) Production costs per unit ($19,694; $6,806 500 units)
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Chapter 15
15-42 (contd)
b. Step 1 The constant gross-margin percentage NRV method allocates joint costs in such a way that the overall gross-margin percentage is identical for all individual products as follows:
Final sales value of total production: (Deluxe, $25,000; Standard, $8,500) Deduct joint and separable costs (Joint, $24,000 + Separable Deluxe, $1,500 + Separable Standard, $1,000) Gross margin Gross-margin percentage ($7,000 $33,500) Step 2 Final sales value of total production Deduct gross margin using overall gross margin percentage (20.8955%) Total production costs Step 3 Deduct separable costs Joint costs allocated Production costs per unit ($19,776; $6,724 500 units) c. 1,500 $18,276 $ 39.55 1,000 $5,724 $13.45 Deluxe Module $25,000 5,224 19,776
$33,500 26,500 $ 7,000 20.8955% Standard Module $8,500 1,776 6,724
Total $33,500 7,000 26,500
2,500 $24,000
The physical measure method allocates joint costs on the basis of the relative proportions of total production at the splitoff point, using a common physical measure such as the number of bits produced for each type of module. Allocation on the basis of the number of bits produced for each type of module follows:
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15-42 (contd)
Deluxe Module/ Chips Physical measure of total production (bits) Weighting (500,000; 250,000 750,000) Joint costs allocated (0.6667; 0.3333 $24,000) Total production costs ($16,000 + $1,500; $8,000 + $1,000) Production costs per unit ($17,500; $9,000 500 units) 500,000 0.6667 $16,000 $17,500 $ 35.00 Standard Module/ Chips 250,000 0.3333 $ 8,000 $ 9,000 $18.00
Total 750,000 $24,000 $26,500
Each of the methods for allocating joint costs has weaknesses. Because the costs are joint in nature, managers cannot use the cause-and-effect criterion in making this choice. Managers cannot be sure what causes the joint costs attributable to individual products. The net realizable value (NRV) method (or sales value at splitoff method) is widely used when selling price data are available. The NRV method provides a meaningful common denominator to compute the weighting factors. It allocates costs on the ability-to-pay principle. It is probably preferred to the constant gross-margin percentage method which also uses sales values to allocate costs to products. Thats because the constant gross-margin percentage method makes the further tenuous assumption that all products have the same ratio of cost to sales value. The physical measure method bears little relationship to the revenue-producing power of the individual products. Several physical measures could be used, such as the number of chips and the number of good bits. In each case, the physical measure only relates to one aspect of the chip that contributes to its value. The value of the module as determined by the marketplace is a function of multiple physical features. Another key question is whether the physical measure chosen portrays the amount of joint resources used by each product. It is possible that the resources required by each type of module depend on the number of good bits produced during chip manufacturing. But this cause-and-effect relationship is hard to establish. MMC should use the NRV method. But the choice of method should have no effect on their current control and measurement systems.
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15-42 (contd)
2. The correct approach in deciding whether to process further and make DRAM modules from the standard modules is to compare the incremental revenue with the incremental costs:
Incremental revenue from making DRAMs ($26 400) ($17 500) Incremental costs of DRAMs, further processing Incremental operating income from converting standard modules into DRAMs A total income computation of each alternative follows: Alternative 1: Sell Deluxe and Standard Total revenues ($25,000 + $8,500) $33,500 Total costs 26,500 Operating income $ 7,000 Alternative 2: Sell Deluxe and DRAM ($25,000 + $10,400) $35,400 ($26,500 + $1,600) 28,100 $ 7,300
$1,900 1,600 $ 300
Difference $1,900 1,600 $ 300
It is profitable to extend processing and to incur additional costs on the standard module to convert it into a DRAM module as long as the incremental revenue exceeds incremental costs. The amount of joint costs incurred up to splitoff ($24,000)and how these joint costs are allocated to each of the productsare irrelevant to the decision of whether to process further and make DRAM modules. Thats because the joint costs of $24,000 remain the same whether or not further processing is done on the standard modules. Joint-cost allocations using the physical measure method (on the basis of the number of bits) may mislead MMC, if MMC uses unit-cost data to guide the choice between selling standard modules versus selling DRAM modules. In requirement 2, allocating joint costs on the basis of the number of good bits yielded a cost of $16,000 for the Deluxe modules and $8,000 for the Standard modules. A product-line income statement for selling Deluxe modules and DRAM modules would appear as follows:
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15-42 (contd)
Deluxe Module
Revenues Cost of goods sold Joint costs allocated Separable costs Total cost of goods sold Gross margin $25,000 16,000 1,500 17,500 $ 7,500
DRAM Module
$10,400 8,000 2,600* 10,600 $ (200)
*Separable costs of $1,000 to manufacture the Standard module and further separable costs of $1,600 to manufacture the DRAM module.
This product-line income statement would erroneously imply that MMC would suffer a loss by selling DRAM modules, and as a result, it would suggest that MMC should not process further to make and sell DRAM modules. This occurs because of the way the joint costs are allocated to the two products. As mentioned earlier, the joint-cost allocation is irrelevant to the decision. On the basis of the incremental revenues and incremental costs, MMC should process the Standard modules into DRAM modules.
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