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# Chapter 7 - Demonstration Problem for Chapter 7 Joint cost...

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Unformatted text preview: Demonstration Problem for Chapter 7: Joint cost allocation Comparison of Methods of Allocation Homestead Pottery, Inc., is divided into two operating divisions: pottery and retail. The company allocates power and human resources department costs to each operating division. Power costs are allocated on the bases of the number of machine hours and human resources costs on the basis of the number of employees. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data: Support Departments Power Overhead Costs Machine hours Number of employees \$100,000 2,000 20 Human Resources \$205,000 2,000 60 Operating Dvisions Pottery Retail \$80,000 3,000 60 \$50,000 5,000 80 Required: 1. Allocate the support service costs using the direct method 2. Allocate the support service costs using the sequential method 3. Allocate the support service costs using the reciprocal method Solution 1. Direct method: Proportion of: Machine hours........................................................... Number of employees............................................. Power: (0.375 × \$100,000)...................................................... (0.625 × \$100,000)...................................................... Human resources: (0.429 × \$205,000)...................................................... (0.571 × \$205,000)...................................................... Direct costs...................................................................... 2. Retail 0.625 0.571 \$ 37,500 \$62,500 87,945 80,000 \$ 205,445 117,055 50,000 \$ 229,5552 Sequential method: Machine hours.................. Number of employees..... Direct costs........................ Human resources: (0.125 × \$205,000)....... (0.375 × \$205,000)....... (0.500 × \$205,000)....... Power: (0.375 × \$125,625)....... (0.625 × \$125,625)....... 3. Pottery 0.375 0.429 Power — 0.125 \$ 100,000 25,625 (47,109) (78,516) \$ 0 Human Resources — — \$ 205,000 (25,625) (76,875) (102,500) Pottery 0.375 0.375 \$ 80,000 Retail 0.625 0.500 \$ 50,000 76,875 102,500 47,109 \$0 \$ 203,984 78,516 \$ 231,016 Reciprocal method: Human Resources Pottery Retail Machine hours............................. 0.200 0.300 0.500 Number of employees............. — 0.375 0.500 HR = \$205,000 + 0.200P P = \$100,000 + 0.125HR HR = \$205,000 + 0.200(\$100,000 + 0.125HR) P = \$100,000 + 0.125(\$230,769) HR = \$205,000 + \$20,000 + 0.025HR P = \$100,000 + 28,846 0.975HR = \$225,000 P = \$128,846 HR = \$230,769 Pottery Retail Human resources: (0.375 × \$230,769)........................... \$ 86,538 (0.500 × \$230,769)........................... \$115,385 Power: (0.300 × \$128,846).................................................... 38,654 (0.500 × \$128,846).................................................... 64,423 Direct costs.................................................................... 80,000 50,000 \$ 205,192 \$ 229,808 Power — 0.125 Joint cost allocation The joint manufacturing cost of two products is \$60 Products Units produced Sales value at split off Separable processing costs Sales value after processing A 40 \$ 2 per unit \$20 \$3 per unit B 20 \$3 per unit \$15 \$5 per unit Joint cost allocation is a ratio (proportion) problem. 1. Using a physical basis what is the joint cost allocation of the \$60 in joint cost? Product Physical measure Proportion (%)=(1) Joint cost =(2) A B 40 units 20 units 60 units 40/60 20/60 1 Joint cost allocation=(1)*(2) \$40 \$20 \$60 \$60 \$60 2. What is the joint cost allocation using the relative sales value technique if the sales values are known at the split-off point? Product Sales value Proportion (%)=(1) Joint cost =(2) A B =40 units*\$2=\$80 =20 units*\$3=\$60 \$140 \$80/\$140 \$60/\$140 1 Joint cost allocation=(1)*(2) \$34.29 \$25.71 \$60 \$60 \$60 3. What is the joint cost allocation using the net realizable value technique if A and B cannot be sold at the split-off point and the sales value at the split-off point is non-existent, i.e., it is not known? Product Sales value (a) A =40 units*\$3=\$120 =20 units*\$5=\$100 \$220 B Separable processing cost (b) \$20 Sales value at split-off=(a)-(b) \$100 Proportion (%) \$100/\$185 Joint cost =(2) \$60 Joint cost allocation=(1)*(2) \$32.43 \$15 \$85 \$85/\$185 \$60 \$27.57 \$185 1 \$60 4. What is the joint cost allocation using the net realizable value technique if only A can be sold at the split-off point and B’s sales value is not known at the split-off point? Product Sales value (a) A B =40 units*\$2=\$80 =20 units*\$5=\$100 \$180 Separable processing cost (b) \$0 \$15 Sales value at splitoff=(a)-(b) \$80 \$85 \$165 Proportion (%) \$80/\$165 \$85/\$165 1 Joint cost =(2) \$60 \$60 Joint cost allocation=(1)*(2) \$29.09 \$30.91 \$60 ...
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