Ch11 Raiborn SM
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Chapter 11
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‘CHAPTER 11 COST ALLOCATION FOR JOINT PRODUCTS AND BY-PRODUCT/SCRAP QUESTIONS 1.
Joint processing output is classified based on the relative sales value of each type of output. Joint products are those outputs that have the largest sales value. Byproducts are those outputs that have some sales value, but not a sufficient amount to justify undertaking the joint process simply to obtain those outputs. Scrap is output that has no or very little sales value. Usually, the output classification is determined before production. Management decides whether a joint process output is a joint product, a byproduct, or scrap based on the judgment of the relative sales value of each type of output. However, in unusual cases, the actual outputs of the joint process may not result as planned. In such cases, management may classify the output differently than was originally intended.
2.
Processing of the outputs of a joint production process does not always stop at the splitoff point. Some products may not be able to be sold at that point and, as such, must be processed further before they can be sold. Other products may have a sales value at splitoff but further processing might result in sufficiently greater profitability to justify the additional costs.
3.
Three of the decision points are (1) before the joint process is undertaken, (2) at the splitoff point, and (3) after the splitoff point. The criterion for proceeding at any of these three points is whether the anticipated incremental revenues will exceed the anticipated incremental costs. A fourth decision point, occurring between (1) and (2), assesses whether this particular process is the best use of the facilities; the criteria for this decision is whether the incremental benefit from this process exceeds the incremental benefit of the best alternative facility usage.
4.
Cost allocation refers to the assignment of an indirect cost to a cost object using some reasonable method. Accountants allocate fixed production costs to products produced within a period, and allocate certain plant and equipment costs (through depreciation charges) to the time periods during which those assets are used and, in a manufacturing company, to the goods produced during a period. Since the production costs incurred in a joint process produce several outputs, those costs are indirect to the individual output produced and must, because of the cost principle, be assigned to the various outputs. Allocation is necessary to have appropriate inventory (and cost of goods sold) valuations for the joint products produced in the joint process.
5.
The two primary approaches to allocating joint process costs are those using (1) physical measures and (2) monetary measures. Physical measures (such as tons, barrels, © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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linear feet, etc.) are unchanging yardsticks; monetary measures change over time because of general and specific price level changes. Physical measures treat each physical unit of output as equally desirable by assigning a uniform amount of joint process cost to every unit of output produced. In contrast, monetary measures assign joint process costs to joint products proportionately to relative sales value. In most instances, because physical measures ignore the relative sales value of products, a monetary measure is deemed more appropriate. 6.
Use of approximated net realizable values are necessary when some or all of the joint products cannot be sold at the splitoff point. An approximated net realizable value is calculated by subtracting the incremental separate costs incurred between splitoff and point of sale from the expected final sales price of the product. Thus, to use the approximated NRV method, managers must make estimates of final sales prices and incremental separate costs.
7.
One approach is to ignore byproduct/scrap inventory completely until it is sold. At that point, the revenue generated by the sale of that inventory “acknowledges” the existence of the byproduct/scrap. This revenue is shown on the income statement as an increase to net income. This method is the realized value method. The second approach is to record the final net realizable value of the byproduct/scrap recovered at the splitoff point. The NRV is credited as a reduction of the joint process costs that gave rise to the byproduct. On one hand, this approach is theoretically preferable because it matches the benefit (NRV of byproduct/scrap) with the source of the benefit (the joint process costs that were incurred to produce the byproduct/scrap). However, on the other hand, it is possible that use of this method will overstate the value of the byproduct inventory (especially if it is never sold) and understate the cost of the joint products. Thus, the realizable value method is more likely to raise the potential for misleading earnings management.
8.
If a company using job order costing produces byproduct/scrap continuously from normal production, the net realizable value of that byproduct/scrap should be considered in setting the predetermined overhead rate. The estimated NRV of the byproduct/scrap should be deducted from total estimated overhead costs in setting the rate. That deduction causes the overall overhead allocation rate for all products to be reduced. When the by product or scrap is actually sold, its net realizable value is credited to Manufacturing Overhead. If a company using job order costing only produces byproduct/scrap items during a particular job, then the NRV of the byproduct/scrap should not be considered in setting the predetermined overhead rate. The NRV should be credited to the particular job that gave rise to the byproduct/scrap.
9.
For a notforprofit organization to appropriately evaluate the uses of its resources, the AICPA requires that multipurpose costs be allocated between program and support categories. Program expenses are those that are directly aimed at the accomplishment of the organization’s charitable objectives and are considered a more valid use of resources. Comparison of support expenses to total expenses may suggest a measure of © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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organizational efficiency. The AICPA is concerned with donors having knowledge of the relative and absolute magnitude of funds spent on fundraising.
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EXERCISES 10.
Each student will have a different answer. No solution is provided.
11. a. In a poultry processing plant, the joint input would be chickens and/or turkeys. The primary questions to be asked follow. (1) What specific poultry will be used; what customers will be served; and what is the estimated profitability of the business? The answer to these questions will determine what inputs will be purchased and, to some extent, what production processes will be performed. It also will help determine whether the process should be undertaken at all. (2) What specific cuts of poultry should be selected from the poultry inputs? The answer to this question will determine how the inputs are cut into salable parts. (3) How will the joint process output be classified: joint product, byproduct, scrap, or waste? The answer to this question determines which output is allocated part of the joint cost. (4) How much processing should be done to the individual cuts? The answer to this question will determine what specific processes will be necessary beyond the splitoff point and what types of equipment the poultry processing plant must have to execute the required conversion operations. To answer this question, the incremental costs and benefits must be compared before undertaking any additional processing. b.
In a poultry processing plant, the way joint cost is allocated can affect many decisions. For example, allocating joint cost to byproduct/scrap would likely cause it to be seen as a “money loser,” and as such, it might simply be disposed of as waste. Joint cost allocation is also important for reporting requirements, such as income determination and inventory valuation for IRS reporting purposes. Joint cost is also relevant in determining whether production should occur. However, once splitoff point is reached, joint cost is irrelevant in deciding whether additional conversion should be performed.
c.
Four categories of output may be obtained from joint production. Joint products are the primary products and are distinguished from other outputs by their relatively greater sales value. At the opposite end of the continuum, waste is incidental output of a joint production process and has no value. Byproduct and scrap have some value, but the value is substantially below that of joint products. By product has a somewhat greater market value than scrap.
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12. Products Boco Loco Roco Soco Moco Coco Doco Joco Voco
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# of Units 1,200 1,000 5,000 3,800 4,100 200 300 1,000 6,000
SV at SplitOff $6.000 $1.750 $2.500 $4.200 $1.900 $0.250 $1.800 $0.020 $0.001
Total SV $ 7,200 $ 1,750 $12,500 $15,960 $ 7,790 $ 50 $ 540 $ 20 $ 6
Classification Joint product Byproduct Joint product Joint product Joint product Scrap Scrap Scrap Waste
All classifications are based on the respective proportional sales values. It is even possible that Coco and Joco would be considered waste. A further consideration would be any selling or disposal costs that would affect the net inflows to Triscuit Co. 13. a. Allocation rate = $16,200,000 ÷ 36,000,000 feet = $0.45 per foot Grade A: $0.45 27,000,000 = $12,150,000 Grade B: $0.45 9,000,000 = $4,050,000 b. Incremental revenue (27,000,000 $0.80) Incremental costs (27,000,000 $0.75) Increase in income (27,000,000 $0.05)
$ 21,600,000 (20,250,000) $ 1,350,000
Based on the incremental change in net income, the company should process Grade A lumber further. 14. a. JP4539 JP4587 JP4591 b. JP4539 JP4587 JP4591 JP4539 JP4587 JP4591
4,500 18,000 13,500 36,000
0.125 $558,000 = 0.500 $558,000 = 0.375 $558,000 = 1.000 4,500 $14 = $ 63,000 18,000 $ 8 = 144,000 13,500 $18 = 243,000 $450,000
$ 69,750 279,000 209,250 $558,000 0.14 $558,000 = $ 78,120 0.32 $558,000 = 178,560 0.54 $558,000 = 301,320 1.00 $558,000
4,500 ($24 – $4) = $ 90,000 0.17 $558,000 = $ 94,860 18,000 ($15 – $5) = 180,000 0.33 $558,000 = 184,140 13,500 ($22 – $2) = 270,000 0.50 $558,000 = 279,000 $540,000 1.00 $558,000
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15. a. Final Product Butter Jam Syrup
Sales Value $ 6.00 14.00 3.60
SplitOff Sales Value $4.00 6.40 3.00
Increm. Revenue $2.00 7.60 0.60
Increm. Cost $3.00 4.00 0.40
Increm. Profit $(1.00) 3.60 0.20
Only jam and syrup should be processed beyond the splitoff point. b. Joint cost Less NRV of syrup ($3.60 – $0.40) × 1,000 Joint cost to be allocated
$123,200 3,200 $120,000
Unitbased allocation: Butter (10,000 ÷ 30,000) × $120,000 Jam (20,000 ÷ 30,000) × $120,000 Total
$ 40,000 80,000 $120,000
Weightbased allocation: Butter (10,000 × 16 ounces) Jam (20,000 × 8 ounces) Total product weight
160,000 160,000 320,000
Butter (0.50 $120,000) Jam (0.50 $120,000) Total
$ 60,000 60,000 $120,000
Sales value at splitoff allocation [from (a)] Butter (10,000 $4.00) Jam (20,000 $6.40) NRV
$ 40,000 128,000 $168,000
Butter (0.24 $120,000) Jam (0.76 $120,000) Total
$ 28,800 91,200 $120,000
16. a. Product Steaks Roasts Ground Beef Total
# of Pounds Proportion 3,312 24% 6,210 45 4,278 31 13,800 100%
Joint Cost $26,400 26,400 26,400
50% 50% 100%
24% 76% 100%
Allocated Joint Cost $ 6,336 11,880 8,184 $26,400
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The problem with this method is that the joint cost assigned to each product is approximately $1.91 per pound, which makes every pound of ground beef sold appear to lose $1.01. b. # of SV at Total Allocated Product Pounds Split Off SV Percent Joint Cost Steaks 3,312 $4.25 per lb. $14,076 34% $ 8,976 Roasts 6,210 $3.80 per lb. 23,598 57 15,048 Ground Beef 4,278 $0.90 per lb. 3,850 9 2,376 Total $41,524 $26,400 The problem mentioned in (a) is corrected with this method because the joint cost assigned to each pound of ground beef sold is now only $0.56. c. Selling price Allocated joint cost Special label Profit desired Allowable separate cost
$ 2.10 (0.56) (0.15) (0 .40) $ 0 .99
The $0.40 per pound should not be considered a “real” profit amount because the allocated joint cost would change simply based on the allocation method chosen. However, the sausage sale would be profitable because the incremental revenue of $1.20 ($2.10 – $0.90) is greater than the incremental cost of $1.14 ($0.15 + $0.99). 17. a. Revenues Separate costs NRV
Games News $ 34,040,000 $ 30,720,000 (31,040,000) (16,320,000) $ 3,000,000 $ 14,400,000
% of $96,000,000 total
3%
15%
Joint cost allocation: Games ($24,000,000 × 0.03) News ($24,000,000 × 0.15) Documentary ($24,000,000 × 0.82) Total Revenues Separate costs Allocated costs Net profit b.
82% $ 720,000 3,600,000 19,680,000 $24,000,000
Games News $ 34,040,000 $ 30,720,000 (31,040,000) (16,320,000) (720,000) (3,600,000) $ 2,280,000 $ 10,800,000
Games Revenues $34,040,000 % of $254,080,000 total 13%
Documentaries $ 189,320,000 (110,720,000) $ 78,600,000
News $30,720,000 12%
Documentaries $ 189,320,000 (110,720,000) (19,680,000) $ 58,920,000 Documentaries $189,320,000 75%
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Games ($24,000,000 × 0.13) News ($24,000,000 × 0.12) Documentaries ($24,000,000 × 0.75) Total Revenues Separate costs Allocated costs Net profit
Games $ 34,040,000 (31,040,000) (3,120,000) $ (120,000)
$ 3,120,000 2,880,000 18,000,000 $24,000,000 News Documentaries $ 30,720,000 $ 189,320,000 (16,320,000) (110,720,000) (2,880,000) (18,000,000) $ 11,520,000 $ 60,600,000
c. As the manager of the Games Group, I would be very concerned about the effects of allocating joint cost using the method in (b). The result of the allocation is to make the Games Group appear to be unprofitable. Points (some of which could be rebutted) students might make in their presentations include: (1) The allocation of joint cost is totally arbitrary; there is no cause and effect relationship represented in the allocations in (b). (2) The Games Group appears to have a different degree of facilities utilization than the News and Documentaries, given the high relationship of its separate costs to the separate costs of the other two groups. The allocations in (b) fail to consider this fact. (3) The Games Group could be a startup division and, as such, may be incurring substantially higher costs and may not have begun to reach its revenue potential. 18. a. Units of output allocation: Total bottles = 20,000 + 32,000 + 28,000 = 80,000 Perfume [(20,000 ÷ 80,000) × $1,080,000] Eau de Toilette [(32,000 ÷ 80,000) × $1,080,000] Body Splash [(28,000 ÷ 80,000) × $1,080,000] Total
$ 270,000 432,000 378,000 $1,080,000
Weightbased allocation: Total weight = (20,000 × 1) + (32,000 × 2) + (28,000 × 3) = 168,000 Perfume = 20,000 ÷ 168,000 = 12% Eau de Toilette = 64,000 ÷ 168,000 = 38% Body Splash = 84,000 ÷ 168,000 = 50% Perfume ($1,080,000 × 0.12) Eau de Toilette ($1,080,000 × 0.38) Body Splash ($1,080,000 × 0.50) Total Approximated NRV computation: Perfume [20,000 × ($16.50 – $2.50)] Eau de Toilette [32,000 × ($13.00 – $1.50)] Body Splash [28,000 × ($12.00 – $2.00)]
$ 129,600 410,400 540,000 $1,080,000 $280,000 368,000 280,000
30% 40% 30%
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Total Approximated NRV allocation: Perfume ($1,080,000 × 0.3) Eau de Toilette ($1,080,000 × 0.4) Body Splash ($1,080,000 × 0.3) Total b.
$928,000
100%
$ 324,000 432,000 324,000 $1,080,000
Cost assigned to inventory = Allocated joint cost + Separate costs Units of output allocation: Perfume [$270,000 + ($2.50 × 20,000)] $ 320,000 Eau de Toilette [$432,000 + ($1.50 × 32,000)] 480,000 Body Splash [$378,000 + ($2.00 × 28,000)] 434,000 Total $1,234,000 Ending inventory valuation based on units of output: Perfume [$320,000 × (600 ÷ 20,000)] Eau de Toilette [$480,000 × (1,600 ÷ 32,000)] Body Splash [$434,000 × (1,680 ÷ 28,000)] Total
Ending inventory valuation based on weight: Perfume ($129,600 + $50,000) = $179,600 total cost $179,600 ÷ 20,000 ounces = $8.98 per ounce 600 bottles 1 ounce $8.98 = Eau de Toilette ($410,400 + $48,000) = $458,400 total cost $458,400 ÷ 64,000 ounces = $7.16 per ounce 1,600 bottles × 2 ounces $7.16 = Body Splash ($540,000 + $56,000) = $596,000 total cost $596,000 ÷ 84,000 ounces = $7.10 per ounce 1,680 3 ounces $7.10 = Total Ending inventory valuation based on approximated NRV: Perfume ($324,000 + $50,000) = $374,000 total cost $374,000 ÷ 20,000 ounces = $18.70 per ounce 600 bottles 1 ounce $18.70 = Eau de Toilette ($432,000 + $48,000) = $480,000 total cost $480,000 ÷ 64,000 ounces = $7.50 per ounce 1,600 bottles 2 ounces $7.50 = Body Splash ($324,000 + $56,000) = $380,000 total cost
$ 9,600 24,000 26,040 $59,640
$ 5,388
22,912
35,784 $64,084
$11,220
24,000
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$380,000 ÷ 84,000 = $4.52 per ounce 1,680 3 ounces $4.52 = Total c.
22,781 $58,001
Relative to all of the products, once the joint cost is assigned and a cost per ounce is computed, Scent of Money does not appear to be selling its products at high enough prices. Perunit product losses of $2.20 are being generated on the sale of each bottle of perfume, $2.00 per bottle of eau de toilette, and $1.56 per bottle of body splash.
21. a.
Fabric $ 540,000 (360,000) $ 180,000 (120,000) $ 60,000
Final revenues Revenues at splitoff Incremental revenues Incremental costs Net benefit (cost) of further processing
Yarn $ 420,000 (300,000) $ 120,000 (102,000) $ 18,000
Both products should be processed further. b. The irrelevant item is the $120,000 joint cost.
22. Product JP#1 JP#2 JP#3
Increm. Revenues $50 $40 $65
Increm. Costs $55 $25 $45
Benefit/(Loss) $ (5) $15 $20
Process Further? No Yes Yes
22. Two ounces of each 16 ounces (or 12.5 percent) are lost to waste, leaving 87.5 percent of total lbs. available. a.
b.
Joint Products Fish Oil Meal
Unit Weight 0.500 0.250 0.125 0.875
Total Pounds 75,000 75,000 75,000
Joint Products Fish Oil Meal
Lbs. of Product 37,500 18,750 9,375
Selling Price per Lb. $4.50 6.50 2.00
Lbs. of Product 37,500 18,750 9,375 65,625
Total $168,750 121,875 18,750 $309,375
Percent 57 29 14 100
Percent 55 39 6 100
Allocated Joint Cost $ 81,396 41,412 19,992 $142,800 Allocated Joint Cost $ 78,540 55,692 8,568 $142,800
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Yh6nc. Although an unchanging measure, the physical measure of pounds treats all products as equally valuable. Because of inflation and market price variability, sales value is a changing measure; however, this method is a better way of matching joint cost to the benefits from the production process because of the substantial differences in per pound prices among the three products. 23. a. Sales value of milk Sales value of sour cream Total sales value
$377,400 (68%) 177,600 (32%) $555,000
Since the milk represents 68 percent of the total sales value at splitoff, $125,800 represents 68 percent of the total joint cost. Total joint cost for June is ($125,800 ÷ 0.68) or $185,000. (5) 190,000 pints = 95,000 quarts of sour cream Quarts of milk Quarts of sour cream Total quarts
240,000 (72%) 95,000 (28%) 335,000
Since the milk represents 72 percent of the total physical quantity produced, $125,800 represents 72 percent of the total joint costs. Total joint cost is ($125,800 ÷ 0.72) or $174,722. 19. a. Product Candied apples Apple jelly Apple jam
Final Revenues
SplitOff Sales Value
Increm. Revenue
Increm. Costs
Increm. Profit
$690,000
$670,000
$20,000
$26,000
$(6,000)
775,000
730,000
45,000
32,000
13,000
271,000
260,000
11,000
15,000
(4,000)
Management should not have further processed candied apples and apple jam because the incremental costs from further processing were greater than the incremental revenues. These products should have been sold at the splitoff point. b. Candied apples additional profit
$6,000
21. a. Sales value of blouses = Joint cost of blouse Total sales value Total allocated joint cost $80,000 ÷ $600,000 = X ÷ 360,000 $600,000X = ($80,000)($360,000) $600,000X = $2,880,000,000,000 X = $48,000 for blouses Total joint cost Joint cost for jackets and blouses ($138,000 + $48,000)
$ 360,000 (186,000)
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Joint cost assigned to dresses b.
c.
$ 174,000
Joint cost = $138,000 ÷ $230,000 = 60% of relative sales value at splitoff amounts $174,000 = 0.6X X = $290,000 sales value at splitoff for dresses Final sales value Sales value at split off Increase in value Additional costs Incremental benefit (loss)
Dresses $300,000 290,000 $ 10,000 (26,000) $ (16,000)
Jackets $268,000 230,000 $ 38,000 (20,000) $ 18,000
Blouses $210,000 80,000 $130,000 (78,000) $ 52,000
Jackets and blouses should be processed beyond splitoff.
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d. Joint cost allocated to jackets Additional costs Total cost for 16,000 jackets Sales (12,000 $16.75*) Cost for 12,000 jackets (0.75 $158,000) Gross profit
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$ 138,000 20,000 $ 158,000 $ 201,000 (118,500) $ 82,500
*$268,000 ÷ 16,000 = $16.75 per jacket 25. a. If the byproduct is accounted for at the time of production, byproduct inventory is recorded at its net realizable value and that amount reduces the joint cost included in the gasoline’s cost of sales. Therefore, cost of sales of the byproduct would be zero. Cost of sales for gasoline: Beginning inventory of gasoline Production costs to splitoff point Less NRV of byproduct Sales of byproduct $ 60,000 Production & Marketing (50,000) Current manufacturing costs of gasoline Ending inventory of gasoline Cost of sales for gasoline
$ 0 240,000 (10,000) $230,000 (30,000) $200,000
b. If GoGo had reduced the gasoline’s joint cost, the average cost per gallon of gasoline would have been decreased. Thus, the ending inventory value would have been slightly less, and the gross margin would have been slightly more. (CPA adapted) 26. a. b. c. d. e. f. g. h. i. j. k. l. m.
2 2 2 1 1 1 2 2 2 1 1 1 1
$337,500 27. Joint process cost Less net realizable value of byproduct inventory (65,000) Amount to be allocated $272,500
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Proration of amount to be allocated based on weight: Product Bushels Proportion Allocation Premium 16,500 0.25 $ 68,125 Good 43,560 0.66 179,850 Fair 5,940 0.09 24,525 66,000 1.00 $272,500 28. a. Joint cost Less NRV of byproduct [2,000 × ($1.50 – $0.30)] Joint cost to be allocated
$142,000 (2,400) $139,600
Approx. NRV of Fillet [18,000 × ($16 – $3)] Approx. NRV of Smoked [20,000 × ($13.00 – $5.20)] Total NRV Cost allocation: Fillet (0.6 $139,600) Smoked (0.4 $139,600) Total cost allocation b. Separate costs for Fillet Separate costs for Smoked Joint cost Separate costs Total costs Divide by pounds Cost per pound (rounded)
$234,000 60% 156,000 40% $390,000
$ 83,760 55,840 $139,600 = 18,000 $3.00 = $ 54,000 = 20,000 $5.20 = $104,000 Fillet $ 83,760 54,000 $137,760 ÷ 18,000 $ 7.65
Inventory values: Fillet (4,000 $7.65) Smoked (2,400 $7.99) Remnants (350 $1.20) Total inventory value
Smoked $ 55,840 104,000 $159,840 ÷ 20,000 $ 7.99 $30,600 19,176 420 $50,196
29. Because the byproduct has substantial value, the byproduct should be accounted for using NRV rather than realized value, which would result in distorted cost information. Whether the direct or indirect method is used would be dependent on the timing of the sale of byproduct and joint products. If both product groups sell shortly after they are produced, then the choice of method is less important. However, if the byproduct tends to sell in a different period than the related joint products, use of the direct method would provide a stronger match between costs and benefits. 30. a. Total joint cost Revenue from tours
$20,000,000 $ 800,000
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Expenses of tours Joint cost to be allocated
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(480,000)
(320,000) $19,680,000
Greedy CEOs $10,000,000 (6,800,000) $ 3,200,000
Sequel $ 58,000,000 (41,200,000) $ 16,800,000
Gross revenues Separate costs Net realizable value Joint cost allocation: Greedy CEOs Sequel
NRV $ 3,200,000 16,800,000 $20,000,000
b. Gross revenues Separate costs Net realizable value Joint cost Net profit
16% 84% 100%
Allocation $ 3,148,800 16,531,200 $ 19,680,000
Greedy CEOs $10,000,000 (6,800,000) $ 3,200,000 (3,148,800) $ 51,200
31. Total sales value (1,200 × $335) Less costs (1,200 × $250) Reduction of joint cost
Sequel $ 58,000,000 (41,200,000) $ 16,800,000 (16,531,200) $ 268,800
$ 402,000 (300,000) $ 102,000
The gross margin for the major products will decrease by $102,000, but net income will remain the same. 32. a. Sales of lumber (160,000 × $10) Cost of sales: Production costs Byproduct revenue (40,000 pounds ÷ 100 = 400 bags; 400 $4) Gross margin b.
$1,600,000 $664,000 (1,600)
Sales would increase to $1,601,600 while cost of sales would be $664,000, resulting in the same gross margin of $937,600.
33. Sales of byproduct Cost of byproduct sales (135,000 $0.06) Net realizable value of by product a.
(662,400) $ 937,600
Zeena Foods Income Statement For Month Ended May 31, 2013 Sales revenue (joint products)
$20,250 (8,100) $12,150
$ 319,000
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Cost of goods sold: Joint cost (90% × $82,000) $73,800 Separate costs (90% × $48,000) 43,200 Byproducts 8,100 Gross profit Nonfactory expenses Income from operations Other revenues (byproduct sales) Net income before taxes b. Zeena Foods Income Statement For Month Ended May 31, 2013 Sales revenue (joint products) Cost of goods sold ($73,800 + $43,200) Gross profit Nonfactory expenses Income from operations Other income (byproduct sales) Net income before taxes c. Joint cost NRV of byproduct Joint cost to allocate
(125,100) $ 193,900 (47,850) $ 146,050 20,250 $ 166,300
$ 319,000 (117,000) $ 202,000 (47,850) $ 154,150 12,150 $ 166,300
$ 82,000 (12,150) $ 69,850 Zeena Foods Income Statement For Month Ended May 31, 2013
Sales revenue Cost of goods sold [(90% × $69,850) + $43,200] Gross profit Nonfactory expenses Net income before taxes d.
$ 319,000 (106,065) $ 212,935 (47,850) $ 165,085
The approach in (c) is better than either (a) or (b) because it consistently matches the NRV of the byproduct with the costs of the joint production operations that produced the byproduct.
34. a. Estimated OH Estimated NRV of byproduct Estimated OH to be covered Divided by estimated billable hours Predetermined OH rate per billable hour b. Cash 9,700 Manufacturing Overhead To record sale of byproduct c. Total actual OH Total actual NRV of byproduct
$415,200 (9,200) $406,000 ÷ 70,000 $ 5.80 9,700 $ 410,500 (9,700)
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Total adjusted actual OH Total applied OH (70,900 × $5.80) Overapplied overhead
$ 400,800 (411,220) $ 10,420
35. a. $315,000 ÷ 45,000 = $7 per DLH b. DM DL ($20 × 125) OH ($7 × 125) Total
$ 890 2,500 875 $4,265
c. Cash 93 Manufacturing Overhead To record disposal value of spoiled work incurred on Job XX (stained glass window) d.
93
OH rate = ($297,200 + $25,200) ÷ 45,000 = $7.16 (rounded) DM $ 890 DL ($20 × 125) 2,500 OH ($7.16 × 125) 895 Total $4,285 Scrap sales value (93) Total cost of job $4,192
36. a. Cash Work in Process Inventory—Hedge Fund To record sale of Hedge Fund model
8,500 8,500
Cash 8,500 Manufacturing Overhead To record sale of Hedge Fund model b.
8,500
c. The NRV approach is preferable because it allows MaeDoff to reduce the cost of the Hedge Fund Extraordinaire building to ascertain a more reasonable profit amount. 37. a. Joint Services Rental Sales Totals
Increase in Revenues $770,000 105,000 $875,000
0.88 0.12 1.00
Allocated Cost $28,600 3,900 $32,500
b. Joint Services Rental Sales Totals
Increase in Net Income $104,500 0.55 85,500 0.45 $190,000 1.00
Allocated Cost $17,875 14,625 $32,500
c.
The allocation based on increase in net income may be better because it matches the advertising cost to the direct net benefit of the advertising. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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38. a. Training cost = $120,000 ÷ 6,000 = $20 per hour Overhead cost = $55,500 ÷ 6,000 = $9.25 per hour Cost Assignment: Direct costs (4,000 $20; 2,000 $20) Overhead cost (4,000 $9.25; 2,000 $9.25) Total cost assigned
Children $ 80,000 37,000 $117,000
Adults $40,000 18,500 $58,500
b. Application rate = $55,500 ÷ [($35 4,000) + ($65 2,000)] = $55,500 ÷ ($140,000 + $130,000) = $55,500 ÷ $270,000 = $0.21 per dollar of sales value (rounded)
Cost Assignment: Direct costs (4,000 × $20; 2,000 $20) Overhead cost ($140,000 0.21; $130,000 0.21) Total cost assigned (off due to rounding) c.
Children Adults $ 80,000 $40,000 29,400 27,300 $109,400 $67,300
Both methods result in higher charges to the Children’s group. The training hours method would be appropriate if hours spent with clients were considered the most important cost driver. However, it is also appropriate to assign costs based on an “ability to bear” such as occurs when costs are assigned using the sales value method of allocation. Based on the information in this problem, it seems that the selling price per hour for children’s lessons is too low. There is probably a higher need for supervision, greater rates for insurance, and more equipment damage for children than for adults.
39. a. Joint Activity Fundraising Program Total
Percent 0.10 0.90 1.00
b.
Percent 0.02 0.98 1.00
Joint Activity Fundraising Program Total
Joint Cost Allocated $ 26,100 234,900 $261,000 Joint Cost Allocated $ 5,220 255,780 $261,000
40. Each student will have a different answer. No solution is provided.
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PROBLEMS 41. Each student will have a different answer. No solution is provided. One good source of information is “Corn Farmers Smile as Ethanol Prices Rise, but Experts on Food Supplies Worry” at http://www.public.iastate.edu/~yikes/iowa_corn.html. 42. a. Joint cost allocation: Forever ($238,365 ÷ $317,820) × $76,950 Fantasy ($79,455 ÷ $317,820) × $76,950 Total
$57,712.50 19,237.50 $76,950.00
Total cost: Forever = $57,712.50 + $3,180.00 = $60,892.50 Fantasy = $19,237.50 + $2,940.00 + $4,680.00 + $6,195.00 = $33,052.50 b.
Work in Process Inventory—Combining Raw Material Inventory Wages Payable Manufacturing Overhead
59,715.00
Work in Process Inventory—Heating Work in Process Inventory—Combining
59,715.00
Work in Process Inventory—Heating Raw Material Inventory Wages Payable Manufacturing Overhead
17,235.00
Work in Process Inventory—Heating Raw Material Inventory
3,180.00
Work in Process Inventory—Heating Raw Material Inventory Wages Payable Manufacturing Overhead
13,815.00
Finished Goods Inventory—Forever Finished Goods Inventory—Fantasy Work in Process Inventory—Heating
60,892.50 33,052.50
42,000.00 11,340.00 6,375.00 59,715.00 9,150.00 3,225.00 4,860.00 3,180.00 2,940.00 4,680.00 6,195.00
93,945.00
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Work in Process—Combining DM 42,000 To Heating DL 11,340 OH 6,375 Bal. 0
59,715
Work in Process—Heating DM 9,150 To FG—Forever DL 3,225 To FG—Fantasy OH 4,860 Prev. Dept. 59,715 DM 3,180 DM 2,940 DL 4,680 OH 6,195 Bal. 0 FG Inv.—Forever Beg. XXX CGM 60,892.50 43. a. Oil (5,000,000 bushels × 11 lbs.) Meal (5,000,000 bushels × 44 lbs.) Total
FG Inv.—Fantasy Beg. XXX CGM 33,052.50 55,000,000 220,000,000 275,000,000
Joint cost allocation: Oil (0.20 × $49,800,000) Meal (0.80 × $49,800,000) Total
20% 80%
$ 9,960,000 39,840,000 $49,800,000
b. Cost of goods sold (in millions): Oil (0.60 $9,960,0000) Meal (0.75 $39,840,000) Total c. Ending finished goods (in millions): Oil (0.40 × $9,960,000) Meal (0.25 × $39,840,000) Total
60,892.50 33,052.50
$ 5,976,000 29,880,000 $35,856,000 $ 3,984,000 9,960,000 $13,944,000
44. a. Joint cost allocation: Skim (1,555,500 ÷ 1,830,000) × $872,000 Cream (274,500 ÷ 1,830,000) × $872,000 Total
$741,200 130,800 $872,000
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b. Skim [($741,200 + $67,660) ÷ 1,555,500] = $808,860 ÷ 1,555,500 = $0.52; $0.52 × (1,555,500 – 1,550,000) = $0.52 × 5,500 = $2,860 Cream [($130,800 + $83,310) ÷ 274,500] = $214,110 ÷ 274,500 = $0.78; $0.78 × (274,500 – 274,000) = $0.78 × 500 = $390 Total finished goods inventory = $2,860 + $390 = $3,250
c.
Beginning finished goods inventory Cost of goods manufactured Goods available for sale Ending finished goods inventory Cost of goods sold
$ 0 1,022,970 $ 1,022,970 (3,250) $ 1,019,720
Sales ($1,472,500 + $282,220) Cost of goods sold Gross margin
$ 1,754,720 (1,019,720) $ 735,000
The dairy could test the fat content of the milk before purchase and only purchase milk that, when processed, would result in minimal loss.
45. a. Relative sales value: Oil ($0.50 × 55,000,000) Meal ($0.20 × 220,000,000) Total
$27,500,000 38% (rounded) 44,000,000 62% (rounded) $71,500,000 100%
Oil (0.38 × $49,800,000) Meal (0.62 × $49,800,000) Total
$18,924,000 30,876,000 $49,800,000
b. Cost of goods sold: Oil (0.60 × $18,924,000) Meal (0.75 × $30,876,000) Total
$11,354,400 23,157,000 $34,511,400
c. Ending finished goods: Oil (0.40 × $18,924,000) Meal (0.25 × $30,876,000) Total
$ 7,569,600 7,719,000 $15,288,600
d.
Each method allocates a different amount of joint cost to the joint products and results in a different perunit cost for each product. In Problem 43, using the physical measure assigned more joint cost to the meal. This problem’s allocation resulted in a lower cost of goods sold amount and a higher value in ending inventory.
46. a. Skim: $1,472,500 ÷ 1,550,000 gallons = $0.95 per gallon Cream: $282,220 ÷ 274,000 gallons = $1.03 per gallon © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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b. Relative sales values: Skim ($0.95 1,555,500) Cream ($1.03 274,500) Total
$1,477,725 282,735 $1,760,460
Joint cost allocation: Skim (0.84 $872,000) Cream (0.16 $872,000) Total
$732,480 139,520 $872,000
84% (rounded) 16% (rounded) 100%
c. Skim [($732,480 + $67,660) ÷ 1,555,500] = $800,140 ÷ 1,555,500 = $0.51 (rounded); $0.51 (1,555,500 – 1,550,000) = $0.51 5,500 = $2,805 Cream [($139,520 + $83,310) ÷ 274,500] = $222,830 ÷ 274,500 = $0.81 (rounded); $0.81 × (274,500 – 274,000) = $0.81 × 500 = $405 Total finished goods inventory = $2,805 + $405 = $3,210 Beginning finished goods inventory Cost of goods manufactured Goods available for sale Ending finished goods inventory Cost of goods sold
$ 0 1,022,970 $ 1,022,970 (3,210) $ 1,019,760
Sales ($1,472,500 + $282,220) Cost of goods sold Gross margin
$ 1,754,720 (1,019,760) $ 734,960
47. a. Joint cost allocation: Checking: $800,000 × ($1,914,000 ÷ $3,300,000) Credit cards: $800,000 × ($1,386,000 ÷ $3,300,000) Total b. Revenues Joint cost Separate costs Gross margin unadjusted Identity theft insurance revenue Overall gross margin
= $464,000 = 336,000 $800,000
Checking Credit Cards $1,914,000 $1,386,000 (464,000) (336,000) (850,000) (380,000) $ 600,000 $ 670,000
c. $800,000 – $26,000 = $774,000 Checking: $774,000 × ($1,914,000 ÷ $3,300,000) Credit Cards: $774,000 × ($1,386,000 ÷ $3,300,000)
Total $ 3,300,000 (800,000) (1,230,000) $ 1,270,000 26,000 $ 1,296,000
= $448,920 = 325,080
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Total
$774,000
The gross margin will be the same because the joint costs of the two joint products are $26,000 less than in (b). 48. a. Peaches Labor Overhead (40% of labor) Joint cost b.
c.
Joint Product Premium Good
Sales Value $30,000 15,000
$15,000 700 280 $15,980
Add’l Cost $1,500 4,200
NRV at SplitOff $28,500 10,800 $39,300
Percent * 73 27 100
Joint Cost * $11,665 4,315 $15,980
rounded
*
d. Raw Material Inventory Cash (A/P) To record purchase of peaches
15,000
Work in Process Inventory—Clean & Sort Raw Material Inventory Wages Payable Manufacturing Overhead To record joint processing cost
15,980
Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Cutting (Good) Work in Process Inventory—Clean & Sort
11,665 4,315
15,000
15,000 700 280
15,980
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To transfer joint cost to Packaging and Cutting Work in Process Inventory—Cutting (Good) Various accounts To record cutting and canning costs for good peaches
2,000
Work in Process Inventory—Packaging (Good) Work in Process Inventory—Cutting (Good) To move good peaches from Cutting to Packaging
6,315
Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Packaging (Good) Various accounts To record packaging and delivery costs
1,500 2,200
2,000
6,315
3,700
Finished Goods Inventory (Premium) Work in Process Inventory—Packaging (Premium) To record completed production of premium peaches
13,165 13,165
Finished Goods Inventory (Good) Work in Process Inventory—Packaging (Good) To record completed production of good peaches
8,515
Cash Various accounts Other Income To record sale of fair peaches
4,500
e. Total cost Estimated NRV of scrap Joint cost to allocate Joint Product Premium Good
Sales Value $30,000 15,000
8,515
500 4,000
$15,980 (4,000) $11,980 Add’l Cost $1,500 4,200
NRV at SplitOff Percent * $28,500 73 10,800 27 $39,300 100
Joint Cost* $ 8,745 3,235 $11,980
rounded
*
f. Raw Material Inventory Cash (A/P) To record purchase of peaches Work in Process Inventory—Clean & Sort Raw Material Inventory Wages Payable Manufacturing Overhead
15,000
15,980
15,000
15,000 700 280
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To record joint cost Work in Process Inventory—Packaging (Fair) Work in Process Inventory—Clean & Sort To recognize byproduct
4,000
Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Cutting (Good) Work in Process Inventory—Clean & Sort To allocate joint cost
8,745 3,235
Work in Process Inventory—Cutting (Good) Various accounts To record cutting cost for good peaches
2,000
Work in Process Inventory—Packaging (Good) Work in Process Inventory—Cutting (Good) To move good peaches from Cutting to Packaging
5,235
Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Packaging (Good) Work in Process Inventory—Packaging (Fair) Various accounts To record packaging cost
1,500 2,200 500
Finished Goods Inventory (Premium) Finished Goods Inventory (Good) Finished Goods Inventory (Fair) Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Packaging (Good) Work in Process Inventory—Packaging (Fair) To move completed production to finished goods
4,000
11,980
2,000
5,235
4,200 10,245 7,435 4,500 10,245 7,435 4,500
49. a. 2,500 × ($2.50 – $1.00) = 2,500 × $1.50 = $3,750 b. $36,000 + $43,750 + $3,000 – $3,750 = $79,000 c. CGS for apparel = BI + Purchases – EI = $35,000 + $181,350 – $21,500 = $194,850 Personal Training Apparel Gross revenues $ 753,000 $289,000 Separate costs: Cost of goods sold (194,850) Labor (231,000) (33,250) Supplies (151,300) (700) Equipment depreciation (165,000) (1,200) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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Administration Net realizable value
(103,000) $ 102,700 65%
Personal Training ($79,000 0.65) = $51,350 Apparel ($79,000 0.35) = $27,650 e. Personal Training Gross revenues $ 753,000 Separate costs: Cost of Goods Sold Labor (231,000) Supplies (151,300) Equipment depreciation (165,000) Administration (103,000) Joint cost (51,350) Operating income $ 51,350
(3,700) $ 55,300 35%
d.
Apparel $ 289,000 (194,850) (33,250) (700) (1,200) (3,700) (27,650) $ 27,650
50. a. Joint cost = $44,200 + $33,800 = $78,000 Sales value of orange juice = $5.25 22,400 = $117,600 Sales value of marmalade = $3.45 26,880 = $92,736 Sales value of pulp = $0.05 6,720 = $336
b.
56,000 gallons of output in Dept. 1: Transferred to Dept. 2 (40%) = 22,400 gallons Transferred to Dept. 3 (60%) = 33,600 gallons
c.
33,600 gallons of input to Dept. 3: Pulp (20%) = 6,720 gallons © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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Marmalade (80%) = 26,880 gallons d.
e.
Sales value (6,720 × $0.05) $336 Distribution expense (90) NRV $246 Joint Product Juice Marmalade
Gallons 22,400 26,880
Sales Price $5.25 3.45
Total Separate Sales Costs $117,600 $9,620 92,736 6,204*
NRV $107,980 86,532
*$6,450 – $246
f.
Joint Product Juice Marmalade
g.
Joint Product Juice Marmalade
NRV $107,980 86,532 $194,512
Joint Cost $43,680 $34,320
Percent 56% (rounded) 44% (rounded) 100%
Separate Costs $9,620 $6,204
Joint Cost $43,680 34,320 $78,000
Total Inv. Value of Cost % End. Inv. $7,995.00 $53,300 0.15 $6,078.60 $40,524 0.15
51. a. ByProduct Inventory—Corma Work in Process Inventory—Zilla (5,000 × $30) To record completed production of byproduct
150,000
b. ByProduct Inventory—Corma (5,000 $45) Various accounts Work in Process Inventory—Zilla To record completed production of byproduct
225,000
(Alternative) Work in Process Inventory—Corma Various accounts To record production of byproduct
150,000
50,000 175,000
50,000 50,000
Work in Process Inventory—Corma Work in Process Inventory—Zilla To record reduction of main product for NRV of byproduct
175,000
ByProduct Inventory—Corma Work in Process Inventory—Corma To record completed production of byproduct
225,000
c. Sales value of Zilla at splitoff (70 × 5,000 × $3.50)
175,000
225,000
$1,225,000 (89%)*
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Sales value of Corma at splitoff (5,000 × $30)
150,000 (11%)* $1,375,000
rounded
*
Total joint costs Proportion of Corma sales value at splitoff Joint cost assignable to Corma
$875,000 0.11 $ 96,250
Work in Process Inventory—Corma Work in Process Inventory—Zilla Various accounts To allocate joint cost
96,250 778,750
Work in Process Inventory—Corma Various accounts To record separate processing costs of Corma Finished Goods Inventory—Corma Work in Process Inventory—Corma To record completed production of Corma
52. a. Joint process cost: Direct material Direct labor Overhead Total Less byproduct NRV Amount to be allocated
50,000
146,250
875,000
50,000
146,250
$40,000 23,400 10,000 $73,400 (4,600) $68,800
Allocation on the basis of sales value at splitoff: Product Sales Value Proportion * Tenderloin $132,000 0.55 Roast 86,000 0.36 Ham 22,400 0.09 $240,400 1.00 * rounded
Allocation $37,840 24,768 6,192 $68,800
Allocation on the basis of pounds produced: Product Pounds Proportion * Tenderloin 8,600 0.26 Roast 13,400 0.41 Ham 10,800 0.33 32,800 1.00 * rounded
Allocation $17,888 28,208 22,704 $68,800
Computation of EI values under each allocation base: Sales Value Approach: Product Allocation Units Unit Cost * Units in EI
EI Value
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Tenderloin Roast Ham
87
$37,840 24,768 6,192
6,440 16,740 8,640
Physical Pounds Approach: Product Allocation Units Tenderloin $17,888 6,440 Roast 28,208 16,740 Ham 22,704 8,640
$5.88 1.48 0.72
1,000 2,600 1,000
$5,880 3,848 720
Unit Cost * $2.78 1.69 2.63
Units in EI 1,000 2,600 1,000
EI Value $2,780 4,394 2,630
b. (1) For financial statement purposes, the sales value allocation approach assigns joint cost according to the relative market values of the products, while the physical measure allocation approach treats every pound of output as equally worthy and, thus, assigns the same cost per pound to all outputs and ignores that some products have a higher selling price than others. Pounds are, however, an unchanging measure of output, while the value of money changes as the purchasing power of the monetary unit changes. (2) Because joint cost is sunk once the joint process has been conducted, the allocated cost and the bases used to allocate that cost are irrelevant to decisions about processing beyond the splitoff point. However, using an inappropriate base to allocate joint cost could make it appear that certain products are not “worth” producing because the allocation would make the products appear to be unprofitable. 53. a. Total joint cost: Direct material Direct labor Overhead
$37,500 12,000 11,000 $60,500 (1,620) $58,880
Sales value of scrap ($0.45 × 3,600 lbs.) Joint cost to be allocated b.
Revenues Separate costs NRV per unit Multiply by # of units produced Total NRV NRV %
Robes $ 20.00 (6.80) $ 13.20 6,000 $79,200 55%
Joint cost assignable to robes (55% × $58,880) Joint cost assignable to towels (45% × $58,880) Work in Process Inventory—Robes Work in Process Inventory—Towels Work in Process Inventory—Cutting To allocate joint costs to robes and towels
Beach Towels $ 7.00 (1.60) $ 5.40 12,000 $ 64,800 45% $32,384 26,496 $58,880 32,384 26,496 58,880
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Finished Goods Inventory—Scrap Work in Process Inventory—Cutting To record production of scrap c. Allocated joint cost Separate costs: $6.80 × 6,000 $1.60 × 12,000 Total to finished goods 54. a. Product Alpha Beta Gamma Total
Units Produced 2,500 5,000 7,500
Sales Value at SplitOff $250,000 400,000 150,000 $800,000
Sales Price $100 80 20
1,620 1,620 Robes $32,384
Beach Towels $26,496
40,800 $73,184
19,200 $45,696
Joint Allocated % Costs Joint Costs 31.25% $720,000 $225,000 50.00 720,000 360,000 18.75 720,000 135,000 100.00% $720,000
b. Joint costs of Beta [from (a)] Additional processing costs Total cost of Beta
$360,000 150,000 $510,000
c. Alpha should not be processed further: Incremental revenue [($150 – $100) $2,500] Incremental processing cost Decline in income if processed further Net realizable value of products: Units Selling Produced Price Revenue Alpha (sold at splitoff) 2,500 $100 $250,000 Beta (processed further) 5,000 115 575,000 Gamma (processed further) 7,500 30 225,000 Joint costs Net realizable value of Gamma Joint costs to be allocated Allocation of joint costs: Net Realizable Product Value Alpha $250,000 Beta 425,000 Totals $675,000
% 37% 63 100%
$ 125,000 (150,000) $ (25,000) Processing Costs
Net Realizable Value
$ 0
$250,000
150,000
425,000
100,000
125,000
$ 720,000 (125,000) $ 595,000 Joint Processing Final Cost Allocation Costs Cost $595,000 $220,150 $ 0 $220,150 595,000 374,850 150,000 524,850 $595,000 $150,000 $745,000 (CIA adapted)
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55. a. With many scrap and waste materials it is often an issue of who is to bear the cost. Undoubtedly, the resulting costs in this case to the firms and society far exceeded the cost the individual or firm would have incurred to properly dispose of the hazardous waste materials. If caught, those involved with this type of illegal disposal of materials could be subject to damage claims, very large fines, and prison time. Furthermore, it is likely that the costs of the cleanup would be imposed on them. b.
Firms have an obligation to ensure proper waste disposal and to educate their employees in proper methods of waste disposal. Employees should be made aware of the risks associated with improper disposal including the legal repercussions. Thus, the least expensive and most effective way to control waste is for each firm to assume responsibility for its own waste. Beyond internal measures, the larger society can assume a greater oversight role through increased regulation and monitoring of waste control efforts. Much of this activity is currently monitored by the EPA, but the role of this agency could be expanded. Further, laws could be tightened, and the penalty structure for improper disposal of waste materials could be improved. Lastly, waste recycling opportunities for manufacturing firms could be improved, and companies could pursue other alternatives to reduce the costs of waste disposal.
c.
The vendor/manufacturer must bear some of the responsibility for proper use and disposal of its products. Manufacturers should have superior knowledge about chemical properties and the risks associated with their products’ components. Further, while giving due consideration to relative cost, manufacturers have an obligation to make products with materials and components that are the least toxic and the most convenient to recycle. If product materials are extraordinarily toxic to the environment, manufacturers should be directly responsible for proper waste disposal. 56. Each student will have a different answer. However, some information on various by products follows. Pork ByProducts: insulin for the regulation of diabetes; valves for human heart surgery; suede for shoes and clothing; and gelatin for many food and nonfood uses. Swine by product are also important parts of such products as water filters, insulation, rubber, antifreeze, certain plastics, floor waxes, crayons, chalk, adhesives, and fertilizer. Since the first operation in 1971, tens of thousands of pig heart valves have been used to replace human heart valves weakened by disease or injury. Wheat/Soybean/Cottonseed ByProducts: livestock, poultry, and fish/shrimp feed Rice ByProducts: pet foods; rice flour Lumber ByProducts: animal bedding, sawdust (and particleboard), wood chips, mulch; slabs and chips produce paper; firewood Fish ByProducts: used in organic farming, fish meal production, and production of formulated bait (crab, crawfish, and lobster), and formulated food (aquaculture). Skins from carp have been used to make leather products. Animal ByProducts: © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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Glue made from cow hide is preferred when binding books because animal glue can withstand high temperatures and has the ability to dissolve in water, making recycling possible. Plastic and rubber are made using fatty acids which come from animal and vegetable fats. Animal gelatins are an ingredient in a wide range of foods like candies, marshmallows, flavorings and of course JellO. Gelatin is also a common food stabilizer in items such as mayonnaise and ice cream, “lite” products, and frozen foods. Gelatins are used to clarify beverages like fruit juices, beer and wine. Purified bone ash is used to refine sugar and to make china. Animal fats are used in making maple syrup. Plastic, cardboard and paper containers, cellophane and wax paper all involve animal products, as do plywood, drywall, and insulation. Freon for air conditioning and refrigerators contains a derivative from animal fat. Egg whites are used in ceramic tile and catalase enzyme is used to make foam rubber. Laundry detergents and fabric softeners contain animal products, as do many disinfectants, household cleaners, and polishes. Animals provide ingredients for cold and allergy medicines as well as the gelatin capsules they come in. Stomach remedies, vitamins, and mineral supplements are also derived from animals. Cortison and treatments for anemia, emphysema, malaria, stroke, and heart attacks are animalbased. Latex surgical gloves contain tallow, xray film contains gelatin, and wool grease is used to make thermometers heat sensitive. Sheep wool gives baseballs their bounce. Gelatin helps golf balls roll straight. Leather, foam rubber, and plastics are used in most types of sports equipment. Sheep intestines are used to string some types of sports racquets, and poultry feathers are thought to make the best darts and fishing lures. Animal products are used in making electrical circuitry, ink toners to print onto copy paper, and paper. Steel ball bearings, lubricants, and fire extinguishers contain animal products. Animal products are used in brushes, art supplies, and in instruments such as drums and pianos.
57. The purpose, audience, and content criteria are met, and the joint costs should be allocated. The purpose criterion is met because the materials call for recipient action (encouraging parents to counsel their children and informing the parents on drug abuse detection) that will help accomplish the entity’s mission. This same call for action means that the materials meet the content criterion. The audience criterion is met because the audience (high school students’ parents) was chosen because of an actual or potential need for the action called for by the program component. (American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable= MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)
(AICPA adapted) 58. a. The purpose, audience, and content criteria are met, and the entire $24,000 should be allocated. The activity calls for specific action by the recipient (exercising) that will © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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help accomplish the entity’s mission. The purpose criterion is met based on the other evidence, because (a) performing such programs helps accomplish Entity D’s mission, and (b) the objectives of the program are documented in a letter to the public relations firm that developed the brochure. The audience criterion is met because the audience (residents over 65) is selected based on its need to use or reasonable potential for use of the action called for by the program component. The content criterion is met because the activity calls for specific action by the recipient (exercising) that will help accomplish the entity’s mission (increasing the physical activity of senior citizens), and the need for and benefits of the action are clearly evident (explains the importance of exercising). b. The cost of the first brochure should be split between fundraising and program; the cost of the second brochure should be charged entirely to program. c.
The content and audience criteria are met. The purpose criterion is not met, however, because a majority of compensation or fees for the fund-raising consultant varies based on contributions raised for this discrete joint activity. All costs should be charged to fund raising, including the costs of the second brochure and any other costs that otherwise might be considered program or management and general costs if they had been incurred in a different activity. (American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata& blobtable=MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)
(AICPA adapted) 59. The purpose, audience, and content criteria are not met. All costs should be charged to fund-raising. The purpose criterion is not met because the activity has no call for specific action; the program only educates the audience about causes (describing its programs and showing the needy children). (Although the executive producer will be paid $5,000 if the activity raises over $1,000,000, that amount would not be a majority of the executive producer’s total compensation for this activity; as such, this compensation is not relevant.) Also, the operating policies and internal management memoranda state that these programs are designed to educate the public about the needs of children in developing countries with no call for specific action by recipients and to raise contributions, indicate that the purpose is fund-raising. The audience criterion is not met because the audience is a broad segment of the population of a country that is not in need of or has no reasonable potential for use of the program activity. The content criterion is not met because the activity does not call for specific action by the recipient that will help accomplish the entity’s mission. (American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable= MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)
(AICPA adapted) 60. a. Yes, it would meet the audience criterion because the attendees were “selfselected” and were not invited based on their ability or likelihood to contribute. b. Asking attendees to take a quiz about diabetes, volunteer to distribute pamphlets about the disease to local businesses, write letters to their insurance companies about © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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additional coverage availability, and participate in the Medicare Advocacy Program to gather information and identify problems encountered by beneficiaries and providers were all “calls for action.” c. Program (0.65 $360,000) Management/general (0.25 $360,000) Fundraising (0.10 × $360,000) Total
$234,000 90,000 36,000 $360,000
d. Other than time, and assuming that no one type of discussion prevailed over the others, the joint cost could be allocated 1/3, 1/3, and 1/3, which would be rational and systematic. e. All of the $430,000 would be allocated to fundraising because the compensation test of the purpose criterion was violated in that the consultant’s fee was based on the quantity of money raised by the lecture. 61. Each student will have a different answer. No solution is provided. However, the following information may be appropriate: The “cost to raise a dollar” appears to reflect the relative importance of capital campaigns to each sector. Hospitals often have the most capital fundraising activities and, often, the lowest fundraising cost. Education and human services have a mix of operating and capital fundraising and seem to fall in the middle of the range. Higher education ratios are lower than nonhigher education, as higher ed is more capital–campaign intensive. Arts and culture and nonhospital health are typically raising mostly operating funds and thus would have the highest fundraising cost. 62. a. The income statement provided is incomplete if the Center for Entrepreneurship produces joint products. One of two approaches would make the income statement more accurate. First, part of the costs shown on the income statement could be assigned to fundraising using one of the methods discussed in the chapter. The remaining costs would be those reasonably allocated only to the executive development activity. An alternative approach would be to add to the revenues reported on the income statement a portion of the proceeds generated by all of the fundraising activities of the college. b. The Center for Entrepreneurship should continue its operations if you can persuade the dean that the Center produces a net financial benefit for the college rather than a $250,000 loss. As outlined in the solution to (a), one of two approaches could be taken. The first approach is to argue that some portion of the costs incurred by the Center should appropriately be allocated against resources generated through fundraising rather than charged against fees generated from executive development activity. For example, one could effect such an allocation using a monetary measure such as total cash and fair market value of other assets generated by the center from fundraising and fees. To present a credible argument, the cash and fair market value of other assets derived from fundraising would be limited to contributions to the college from parties primarily associated with the college through the Center. The result of this approach would be to assign a portion of the Center’s total costs to fundraising and a portion to © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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executive development. If more than $250,000 of costs can be justifiably charged to fundraising, the executive development program will be profitable. In short, this approach allocates some costs out of the Center and to fundraising. The alternative approach would be to keep all costs in the Center and to allocate some of the cash and fair market value of other property raised through fundraising to the Center. This approach would require one to credibly demonstrate that a portion of the total value of cash and property raised for the college from fundraising should be assigned to the Center. The Center’s portion of the total value of cash and property raised through college fundraising would be established by demonstrating which contributors were primarily connected to the college or university through relationships with the Center. With this approach, the Center’s costs would be as reported in the condensed statement, but reported revenues would increase by the amount allocated to the Center. If the allocated revenues exceed $250,000, the Center would report a net profit and should remain in operation. 63. Each student will have a different answer. No solution is provided.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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