# Topic Four - 16-1 Topic Four – COST ALLOCATION 2 16-2 A...

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Unformatted text preview: 16-1 Topic Four – COST ALLOCATION 2 16-2 A joint costis a cost of a production process that yields multiple products simultaneously. A separable cost is acost incurred beyond the splitoff point that is assignable to each of the specific products identified at the splitoff point. 16-3 The distinction between a joint product and a byproduct is based on relative sales value. A joint productis a product from a joint production process (a process that yields two or more products) that has a relatively high total sales value. A byproductis a product that has a relatively low total sales value compared to the total sales value of the joint (or main) products. 16-16 (20-30 min.) Joint-cost allocation, insurance settlement. 1. (a) Sales value at splitoff method: Pounds of Product Wholesale Selling Priceper Pound Sales Value at Splitoff Weighting:Sales Valueat Splitoff Joint Costs Allocated Allocated Costs per Pound Breasts Wings Thighs Bones Feathers 100 20 40 80 10250\$0.55 0.20 0.35 0.10 0.05 \$55.00 4.00 14.00 8.00 0.50\$81.500.675 0.049 0.172 0.098 0.0061.000\$33.75 2.45 8.60 4.90 0.30\$50.000.3375 0.1225 0.2150 0.0613 0.0300 Costs of Destroyed Product Breasts: \$0.3375 per pound ×40 pounds = \$13.50 Wings: \$0.1225 per pound ×15 pounds = 1.84\$15.34b. Physical measure method: Pounds of Product Weighting: Physical Measures Joint Costs Allocated Allocated Costs per Pound Breasts Wings Thighs Bones Feathers 100 20 40 80 102500.400 0.080 0.160 0.320 0.0401.000\$20.00 4.00 8.00 16.00 2.00\$50.00\$0.200 0.200 0.200 0.200 0.200 Costs of Destroyed Product Breast: \$0.20 per pound ×40 pounds = \$ 8 Wings: \$0.20 per pound ×15 pounds = 3\$11Note: Although not required, it is useful to highlight the individual product profitability figures: 16-2 Sales Value at Splitoff Method Physical Measures Method Product Sales Value Joint Costs Allocated Gross Income Joint Costs Allocated Gross Income Breasts Wings Thighs Bones Feathers \$55.00 4.00 14.00 8.00 0.50 \$33.75 2.45 8.60 4.90 0.30 \$21.25 1.55 5.40 3.10 0.20 \$20.00 4.00 8.00 16.00 2.00 \$35.00 0.00 6.00 (8.00) (1.50) 16-3 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 Chicken’s 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. allocates a disproportionate amount of costs to wings, bones and feathers....
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## This note was uploaded on 08/30/2009 for the course BUSINESS ACCT3104 taught by Professor Sandra during the Spring '09 term at École Normale Supérieure.

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Topic Four - 16-1 Topic Four – COST ALLOCATION 2 16-2 A...

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