Answer: TRUE 7) List three reasons why we allocate joint costs to individual products or services. Give a n example of when the particular cost allocation reason would come into use. Answer: a. For inventory costing, and cost of goods sold computations for financial accounting pur poses . Example: Cost of goods sold and ending inventory valuation is necessary for reports to sh areholders and for the inland revenue service. b. For internal costing and cost of goods sold computations for internal reporting purpose s . Example: These computations are necessary for division profitability analysis. c. Reimbursement under contracts . Example: A firm produces multiple products or services-and uses the same resources and facilities to produce the products or services. But not all the firm's products are under the contract. T he firm must allocate the cost of these shared facilities or resources to reflect the portion used by the product under the contract. d. Insurance settlement computations . Example: Where a business with multiple products or services claim losses under an insura nce policy and wants to calculate the loss. The insurance company and the insured must agree on the value of th e loss. e. Rate regulation . When companies are subject to rate regulation, the allocation of joint costs can be a significant factor in determining the regulated rates. Example: Crude oil and natural gas are produced out of a common well. 8) What are six reasons that joint costs should be allocated to individual products or servi ces?
Answer: The first reason joint costs should be allocated to compute inventoriable costs and c ost of goods sold is for financial accounting purposes and for income tax reporting. The second reason the cos ts should be allocated to also allow for computing cost of goods sold and inventoriable costs for int ernal reporting purposes to compute division profits and to evaluate division managers. The third reason that joint costs need to be allocated is so that costs will be reimbursed under contracts using a cost plus system, often found in government contracts. A fourth reason for the cost allocation is to allow for proper val uation and settlement in insurance claims for damages. A fifth reason is that joint products may be r egulated and proper costing is essential. The sixth reason for allocating joint costs is to support litigation where the joint product is a key input. Objective 16.3