Chapter 15 - Joint & Byproducts.

CHAPTER 15 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS 15-1

Exhibit 15-1 presents nine examples from four different general industries. These

include: Industry

Separable Products at the Splitoff Point

Agriculture: • Lamb • Lamb cuts, tripe, hides, bones, fat • Turkey • Breasts, wings, thighs, poultry meal Extractive: • Petroleum • Crude oil, gas, raw LPG 15-2 A joint cost is a cost of a single production process that yields multiple products simultaneously. Separable costs are costs incurred beyond the splitoff point that are assignable to one or more individual products.

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 a relatively 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 as well as 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.

The chapter lists the following six reasons for allocating joint costs: Inventory cost and cost-of-goods-sold computations for financial accounting purposes and reports for income tax authorities. Inventory costing and cost-of-goods-sold computations for internal reporting purposes. Cost reimbursement under contracts when only a portion of a business' products or services is sold or delivered to a single customer. Insurance settlement computations. Rate regulation when one or more of the jointly-produced products or services are subject to price regulation. Litigation in which product cost numbers are key inputs.

15-6 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.

15-1

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

15-8

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 product's 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).

15-9

Limitations of the physical measure method of joint-cost allocation include: a. The physical weights used for allocating joint costs may have no relationship to the revenue-producing power of the individual products. b. The joint products may not have a common physical denominator––for 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 postsplitoff 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.

15-11 The constant gross-margin percentage NRV method takes account of the postsplitoff point “profit” contribution earned on individual products, as well as joint costs, when making cost assignments to joint products. In contrast, the sales value at splitoff point and the estimated NRV methods allocate only the joint costs to the individual products. 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 by 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.

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 depreciation).

15-14 Two methods to account for byproducts are: a.

Production method - recognizes byproducts in the financial statements at the time production is completed. 15-2

b.

Sales method - delays 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 was the below 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-point method. Pounds of Product

Wholesale Selling Price per Pound

Breasts Wings Thighs Bones Feathers

100 $1.10 20 0.40 40 0.70 80 0.20 10 0.10 250 Costs of Destroyed Product Breasts: $0.6750 × 20 Wings: $0.2450 × 10

Sales Value at Splitoff

Weighting: Sales Value at Splitoff

$110 8 28 16 1 163

0.675 0.049 0.172 0.098 0.006 1.000

= =

$13.50 2.45 $15.95

Pounds Weighting: of Physical Product Measures 0.400 Breasts 100 0.080 Wings 20 0.160 Thighs 40 0.320 Bones 80 0.040 Feathers 10 250 1.000 Costs of Destroyed Product Breast: $0.40 × 20 = Wings: $0.40 × 10 =

Joint Costs Allocated $ 40.00 8.00 16.00 32.00 4.00 $100.00

b.

Joint Costs Allocated

Allocated Costs per Pound

$67.50 4.90 17.20 9.80 0.60 $100.00

0.6750 0.2450 0.4300 0.1225 0.0600

Physical measures method

15-3

$8 4 $12

Allocated Costs per Pound $0.400 0.400 0.400 0.400 0.400

15− − 16 (Cont’d.) Note: Although not required, it is useful to highlight the individual product profitability figures:

Product Breasts Wings Thighs Bones Feathers

Sales Value $110 8 28 16 1

Sales Value at Splitoff Method Joint Costs Gross Income Allocated $42.50 $67.50 3.10 4.90 10.80 17.20 6.20 9.80 0.40 0.60

Physical Measures Method Joint Costs Gross Allocated Income $70.00 $40.00 0.00 8.00 12.00 16.00 (16.00) 32.00 (3.00) 4.00

2. The sales-value at splitoff method captures the benefits-received criterion of cost allocation. The costs of processing a chicken are allocated to products in proportion to the ability to contribute revenue. Chicken Little's decision to process chicken is heavily influenced by the revenues from breasts and thighs. The bones provide relatively few benefits to Chicken Little despite their high physical volume. The physical measures method shows profits on breasts and thighs and losses on bones and feathers. Given that Chicken Little 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.

15-17 (10 min.) Joint products and byproducts (continuation of 15-16). 1. Ending inventory: Breasts, 10 × $0.6750 Wings, 4 × 0.2450 Thighs, 3 × 0.4300 Bones, 5 × 0.1225 Feathers, 2 × 0.0600

$6.7500 0.9800 1.2900 0.6125 0.1200 $9.7525

2. Joint products Breasts Thigh

Byproducts Wings Bones Feathers

Revenues of byproducts: Wings $ 8 Bones 16 Feathers 1 15-4

$25 15− − 17 (Cont’d.) Joint costs to be allocated: Joint costs - Revenues of byproducts $100 - $25 = $75 Pounds of Product

Wholesale Selling Price per Pound

Sales Value at Splitoff

Weighting: Sales Value at Splitoff

Joint Costs Allocated

Allocated Costs Per Pound

100 40

$1.10 0.70

$110 28 138

110/138 28/138

$59.78 15.22 $75.00

$0.5978 0.3805

Breast Thighs

Ending inventory: Breasts, 10 × $0.5978 Thighs, 3 × 0.3805

$5.9780 1.1415 $7.1195

3. Treating all products as joint products does not require judgments as between joint and byproducts. In contrast, the approach in requirement 2 results in inventory values being shown for only two of the five products.

15-18 (10 min.) Estimated net realizable value method. A diagram of the situation is in Solution Exhibit 15-18 (all numbers are in thousands). Cooking Oil Expected final sales value of production, CO, 1,000 × $50; SO, 500 × $25 Deduct expected separable costs to complete and sell Estimated net realizable value at splitoff point

Weighting Joint costs allocated, CO, 0.8 × $24,000; SO, 0.2 × $24,000

Soap Oil

Total

$50,000

$12,500

$62,500

30,000

7,500

37,500

$20,000

$ 5,000

$25,000

$20,000 = 0.8 $25,000

$5,000 = 0.2 $25,000

$19,200

15-5

$ 4,800

$24,000

SOLUTION EXHIBIT 15-18

Joint Costs

Separable Costs Processing $30,000

Cooking Oil: 1,000units at $50per unit

Processing $24,000

Processing $7,000

Splitoff Point

15-6

Soap Oil: 500units at $25per unit

15-19 (40 min.)

Alternative joint-cost-allocation methods, further process decision.

A diagram of the situation is in Solution Exhibit 15-19. 1.

Methanol Physical measure of production (gallons)

2,500

Turpentine

Total

7,500

Weighting

2,500 10,000

Joint costs allocated, M, 0.25 × $120,000; T, 0.75 × $120,000

$ 30,000

$ 90,000

$120,000

Methanol

Turpentine

Total

$105,000

$157,500

15,000

22,500

$ 90,000

$135,000

2.

= 0.25

Expected final sales value of production, M, 2,500 × $21.00; T, 7,500 × $14.00 $ 52,500 Deduct expected separable costs to complete and sell, M, 2,500 × $3.00; T, 7,500 × $2.00 7,500 Estimated net realizable value at splitoff point $ 45,000 Weighting Joint costs allocated, M, 1/3 × $120,000; T, 2/3 × $120,000

$ 45,000 1 = $135,000 3

$ 40,000

15-7

7,500 10,000

10,000 = 0.75

$ 90,000 2 = $135,000 3

$ 80,000

3 3

$120,000

15-19 (Cont'd.) 3.

a.

Physical-measure (gallons) method:

Sales Cost of goods sold: Joint costs Separable costs Total costs Gross margin

Methanol $52,500

Turpentine $105,000

Total $157,500

30,000 7,500 37,500 $15,000

90,000 15,000 105,000 $ 0

120,000 22,500 142,500 $ 15,000

Turpentine $105,000

Total $157,500

80,000 15,000 95,000 $ 10,000

120,000 22,500 142,500 $ 15,000

b.

Estimated net realizable value method: Methanol Sales $52,500 Cost of goods sold: Joint costs 40,000 Separable costs 7,500 Total costs 47,500 Gross margin $ 5,000 4.

Wood Alcohol Expected final sales value of production, WA, 2,500 × $60.00; T, 7,500 × $14.00 Deduct expected separable costs to complete and sell, WA, 2,500 × $12.00 + 0.20 × $150,000; T, 7,500 × $2.00 Estimated net realizable value at splitoff point

Joint costs allocated, WA, 0.5 × $120,000; T, 0.5 × $120,000

15-8

Total

$150,000

$105,000

$255,000

60,000

15,000

75,000

$ 90,000

$ 90,000

$180,000

$90,000 = 0.5 $180,000

Weighting

Turpentine

$ 60,000

$90,000 = 0.5 $180,000

$ 60,000

1.0

$120,000

15-19 (Cont'd.) An incremental approach demonstrates that the company should use the new process: Incremental revenue, ($60.00 – $21.00) × 2,500 Incremental costs: Added processing, $9.00 × 2,500 Taxes, (0.20 × $60.00) × 2,500 Incremental operating income from further processing Proof:

$ 97,500 $22,500 30,000

52,500 $ 45,000

Total sales of both products Joint costs Separable costs Cost of goods sold New gross margin Old gross margin Difference in gross margin

$255,000 120,000 75,000 195,000 60,000 15,000 $ 45,000

SOLUTION EXHIBIT 15-19

Joint Costs

Separable Costs 2,500 gallons

Processing $3 per gallon

Methanol: 2,500 gallons at $21 per gallon

7,500 gallons

Processing $2 per gallon

Turpentine: 7,500 gallons at $14 per gallon

Processing $120,000 for 10,000 gallons

Splitoff Point

15-9

15-20 (30 min.) Joint-cost allocation, process further. 1.

Joint Costs Purchase Costs + Joint Processing $1,800

Crude Oil (Non-Salable)

Processing $175

Cruse Oil $2,700

NGL (Non-Salable)

Processing $105

NGL $750

Gas (Non-Salable)

Processing $210

Gas $1,040

Splitoff Point 2.

1. 2. 3. b. 1. 2. 3. 4. 5.

a.

Physical Measure Method

Physical measures Weighting Joint costs allocated (Weights × $1,800) Estimated NRV Method Expected final sales value of production Deduct expected separable costs Estimated NRV at splitoff Weighting Joint costs allocated (Weights × $1,800)

Crude Oil 150 0.15

NGL 50 0.05

Gas 800 0.80

Total 1,000 1.00

$270

$90

$1,440

$1,800

Crude Oil

NGL

Gas

Total

$2,700

$750

$1,040

$4,490

175 $2,525 0.63125

105 $645 0.16125

210 $ 830 0.20750

490 $4,000 1.000

$1,136.25

$290.25

$373.50

$1,800

15-10

15-20 (Cont'd.) 3. The operating-income amounts for each product using each method is: (a) Physical Measures Method Crude Oil NGL Gas Total $2,700 Sales $750 $1,040 $4,490 Operating Costs Joint costs 270 90 1,440 1,800 Separable costs 175 105 210 490 Total operating costs 445 195 1,650 2,290 Operating margin $2,255 $555 $ (610) $2,200 (b) Estimated NRV Method Crude Oil NGL Gas Total Sales $2,700.00 $750.00 $1,040.00 $4,490.00 Operating Costs Joint costs 1,136.25 290.25 373.50 1,800.00 Separable costs 175.00 105.00 210.00 490.00 Total operating costs 1,311.25 395.25 583.50 2,290.00 Operating margin $1,388.75 $354.75 $ 456.50 $2,200.00 4. Neither method should be used for product emphasis decisions. It is inappropriate to use joint-cost-allocated data to decide dropping individual products, or pushing individual products, as they are joint by definition. Product-emphasis decisions should be made based on relevant revenues and relevant costs. The con of each method is that either can lead to product emphasis decisions not leading to maximization of operating income. 5. A letter to the taxation authorities would stress the conceptual superiority of the estimated 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 is used. The physical-measures method requires non-homogeneous products (liquids and gases) to be converted to a common denominator.

15-11

15-21

1. 2. 3. 4. 5.

(20 min.)

Joint-cost allocation, physical measures method. (continuation of 15-20)

Expected final sales value of production Deduct expected separable costs Estimated NRV at splitoff Weighting Joint costs allocated (Weights × $1,800)

Sales Operating Costs Joint costs Separable costs Total operating costs Operating margin 2. gas:

Crude Oil

NGL

Total

$2,700.00

$ 750.00

$ 3,450

175.00 $2,525.00 0.796500

105.00 $ 645.00 0.203500

280 $3,170 1.000

$1,433.70

$366.30

$1,800

Crude Oil $2,700.00

NGL $750.00

Total $3,450

1,433.70 175.00 1,608.70 $1,091.30

366.30 105.00 471.30 $278.70

1,800 280 2,080 $1,370

The State's proposed method results in large profits on crude oil and large losses on

Sales Operating Costs Joint costs Separable costs Total operating costs Operating margin

Crude Oil $2,700

NGL $750

$

Gas

270 175 445 $2,255

90 105 195 $555

1,440 0 1,440 $(1,440)

0

Total $3,450 1,800 280 2,080 $1,370

The main points to note are: a. Gas is not a salable product. It is simply a recycled output that adds no revenues. Indeed, costs are incurred to recycle the gas. b. The physical measure method has all the problems alluded to in the literature––e.g., it ignores the revenue earning potential of products, and it may not have a consistent denominator.

15-12

15-22 (40 min.)

Alternative methods of joint-cost allocation, ending inventories.

Total production for the year was: Sold X Y Z

Ending Inventories

120 340 475

Total Production

180 60 25

300 400 500

A diagram of the situation is in Solution Exhibit 15-22. 1.

a.

Estimated net realizable value (NRV) method: X

Expected final sales value of production, X, 300 × $1,500; Y, 400 × $1,000; Z, 500 × $700 Deduct separable costs Estimated net realizable value at splitoff point Weighting: Joint costs allocated, 0.45, 0.40, 0.15 × $400,000

Y

Z

$450,000 -

$400,000 -

$350,000 200,000

$1,200,000 200,000

$450,000

$400,000

$150,000

$1,000,000

$400 = 0.40 $1,000

$150 = 0.15 $1,000

1.0

$180,000

$160,000

$ 60,000

$ 400,000

X 180 300 60%

Y 60 400 15%

$450 = 0.45 $1,000

Ending Inventory Percentages: Ending inventory Total production Ending inventory percentage

15-13

Z 25 500 5%

Total

15-22 (Cont'd.) Income Statement

Y

Z

Total

$180,000

$340,000

$332,500

$852,500

180,000 180,000

160,000 160,000

60,000 200,000 260,000

400,000 200,000 600,000

108,000 72,000 $108,000

24,000 136,000 $204,000

13,000 247,000 $ 85,500

145,000 455,000 $397,500

60%

60%

25.71%

X Sales, X, 120 × $1,500; Y, 340 × $1,000; Z, 475 × $700 Cost of goods sold: Joint costs allocated Separable costs Cost of goods available for sale Deduct ending inventory, X, 60%; Y, 15%; Z, 5% Cost of goods sold Gross margin Gross-margin percentage b.

Constant gross-margin percentage NRV method:

Step 1: Total final sales value, (300 × $1,500) + (400 × $1,000) + (500 × $700) = Deduct joint and separable costs, $400,000 + $200,000

$1,200,000 600,000

Gross margin

$ 600,000

Gross-margin percentage, $600,000 ÷ $1,200,000

=

X Expected final sales value of production, X, 300 × $1,500; Y, 400 × $1,000; Z, 500 × $700 Step 2: Deduct gross margin, using overall gross-margin percentage of sales, 50% Step 3: Deduct separable costs Joint costs allocated

50%

Y

Z

$450,000

$400,000

$350,000

$1,200,000

225,000

200,000

175,000

600,000

$225,000

$200,000

200,000 $(25,000)

200,000 $ 400,000

15-14

Total

15-22 (Cont'd.) 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 in order that all individual products have the same gross-margin percentage. Income Statement Sales X, 120 × $1,500; Y, 340 × $1,000; Z, 475 × $700 Cost of goods sold: Joint costs allocated Separable costs Cost of goods available for sale Deduct ending inventory, X, 60%; Y, 15%; Z, 5% Cost of goods sold Gross margin Gross-margin percentage

X

Y

Z

Total

$180,000

$340,000

$332,500

$852,500

225,000 225,000

200,000 200,000

(25,000) 200,000 175,000

400,000 200,000 600,000

135,000 90,000 $ 90,000 50%

30,000 170,000 $170,000 50%

8,750 166,250 $166,250 50%

173,750 426,250 $426,250 50%

X

Y

Z

Total

$108,000 72,000

$ 24,000 136,000

$ 13,000 247,000

$145,000 455,000 $600,000

$135,000 90,000

$ 30,000 170,000

$

$173,750 426,250 $600,000

Summary a. Estimated NRV method: Inventories on balance sheet Cost of goods sold on income statement

b.

Constant gross-margin percentage NRV method

Inventories on balance sheet Cost of goods sold on income statement

2.

8,750 166,250

Gross-margin percentages: X 60% 50%

Estimated NRV method Constant gross-margin percentage NRV

15-15

Y 60% 50%

Z 25.71% 50.00%

15-22 (Cont'd.)

SOLUTION EXHIBIT 15-22

Joint Costs

Separable Costs Product X: 300 tons at $1,500 per ton

Joint Processing Costs $400,000

Product Y: 400 tons at $1,000 per ton

Processing $200,000 Splitoff Point

15-16

Product Z: 500 tons at $700 per ton

15-23

(30 min.) Process further or sell, joint-cost allocation.

A diagram of the situation is in Solution Exhibit 15-22. 1. Product A (5,000 units disposed at splitoff point)* Incremental revenues, 5,000 × $0 Incremental costs, 5,000 × $0.20 Incremental operating income Product A (5,000 units processed further) Incremental revenues, 5,000 × $1.50 Incremental processing costs Fixed Variable, 5,000 × $0.90 Incremental operating income

0 1,000 $(1,000)

$7,500 $6,000 4,500

Product B (15,000 units sold at splitoff point) Incremental revenues, 15,000 × $0.50 Incremental processing costs, 15,000 × $0 Incremental operating income

10,500 $(3,000)

$7,500 0 $7,500

Product B (15,000 units processed further) Incremental revenues, 15,000 × $1.50 Incremental processing costs Fixed Variable, 15,000 × $1 Incremental operating income

$22,500 $1,000 15,000

Product C (10,000 units disposed of at splitoff) Incremental revenues, 10,000 × $0 Incremental costs, 10,000 × $0.90 Incremental operating income Product C (10,000 units processed further) Incremental revenues, 10,000 × $5.40 Incremental processing costs Fixed Variable, 10,000 × $1.10 Incremental operating income

$

16,000 $ 6,500

$

0 9,000 $9,000

$54,000 $10,000 11,000

15-17

21,000 $33,000

15-23 (Cont'd.) Summary of the alternatives is: Dispose Product at Splitoff A $(1,000) B 7,500 C (9,000) $(2,500)

Process Further $(3,000) 6,500 33,000 $36,500

Preferred Alternative $(1,000) 7,500 33,000 $39,500

2. Revenues Product B, 15,000 × $0.50 Product C, 10,000 × $5.40 Costs Joint costs, $5,000 + (5,000 × $2) Disposal costs, A: 5,000 × $0.20 Processing costs C: $10,000 + $11,000 Selling and administrative costs Gross margin

$ 7,500 54,000

Dispose at splitoff Sell at splittoff Process further

$61,500

$15,000 1,500 21,000 14,000

51,000 $10,500

Solution Exhibit 15-23 Joint Costs

Separable Costs

$5,000 + $2.00 per unit

B $0.50 per unit

Splitoff Point

15-18

Processing $6,000 + $0.90 per unit

A $0.50 per unit

Processing $1,000 + $1.00 per unit

B $0.50 per unit

Processing $10,000 + $1.10 per unit

C $0.50 per unit

15-24 (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 raw bulk coal without further processing. (This analysis ignores any value related to coal fines.) Incremental sales revenues: Sales revenue after further processing (9,500,000 tons × $36) Sales revenue from bulk raw coal (10,000,000 tons × $27) Incremental sales revenue Incremental costs: Direct labor Supervisory personnel Heavy equipment costs ($25,000 × 12 months) Sizing and cleaning (10,000,000 tons × $3.50) Outbound rail freight (9,500,000 tons ÷ 60 tons) × $240 per car Incremental costs Incremental gain (loss)

$342,000,000 270,000,000 72,000,000

600,000 100,000 300,000 35,000,000 38,000,000 74,000,000 $(2,000,000)

2. The analysis shown below indicates that the potential revenue from the coal fines byproduct would result in additional revenue, ranging between $5,250,000 and $9,000,000, depending on the market price of the fines. 1.

Coal fines

= = =

75% of 5% of raw bulk tonnage .75 × (10,000,000 × .05) 375,000 tons

Potential additional revenue:

Additional revenue

Market price Maximum Minimum $14 per ton $24 per ton $5,250,000 $9,000,000

Since the incremental loss is $2 million, as calculated in requirement 1, including the coal fines in the analysis indicates that further processing provides a positive result and is, therefore, favorable.

15-19

15− − 24 (Cont’d.) 3. Other factors that should be considered in evaluating a sell-or-process-further decision include: • Stability of the current customer market 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 of 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.

15-20

15-25 (30 min.)

Accounting for a main product and a byproduct. Method A, Recognized at Production

1.

Revenues Main product

$160,000 ---__

Byproduct Total revenues Cost of goods sold Total manufacturing costs Deduct byproduct revenue

120,000 4,000 116,000 23,200 92,800 $ 67,200

Cost of goods sold Gross margin 8,000 × $20.00 2,000 × $2.00   2,000 c.  × $116,000  = $23,200  10,000 

a. b.

d. e.

$160,000 d

2,800 162,800

160,000

Net manufacturing costs Deduct main product inventory

2.

a

Method B, Recognized at Sale

b

120,000 0 120,000

c

24,000 96,000 $ 66,800

e

1,400 × $2.00

  2,000 × $120,000  = $24,000   10,000 

Method A, Recognized at Production $23,200 a 1,200

Rainbow Dew Resi-Dew

a.

Ending inventory shown at unrealized selling price. BI + Production - Sales = EI 0 + 2,000 - 1,400 = 600 Ending inventory = 600 × $2 = $1,200

15-21

Method B, Recognized at Sale $24,000 0

15-26 (35-45 min.)

Joint costs and byproducts.

A diagram of the situation is in Solution Exhibit 15-26. 1.

Computing byproduct deduction to joint costs:

L W Totals

Marketing price of X, 100,000 × $3 Deduct: Gross margin, 10% of sales Marketing costs, 25% of sales Department 3 separable costs Estimated net realizable value of X

$300,000 30,000 75,000 50,000 $145,000

Joint costs Deduct byproduct contribution Net joint costs to be allocated

$800,000 145,000 $655,000

Quantity 50,000 300,000

Deduct Unit Final Separable Sales Sales Processing Value Cost Price $10 $ 500,000 $100,000 2 600,000 $1,100,000 $100,000

Joint Costs Allocation L W Totals

$262,000 393,000 $655,000

Add Separable Processing Costs

Est. Net Realizable Value at Splitoff $ 400,000 600,000 $1,000,000

Weighting 40% 60%

Allocation of $655,000 Joint Costs $262,000 393,000 $655,000

Total Costs

Units

Unit Cost

$362,000 393,000 $755,000

50,000 300,000 350,000

$7.24 1.31

$100,000 $100,000

Unit cost for X: $1.45 + $0.50 = $1.95, or $3.00 – $0.30 – $0.75 = $1.95.

15-22

15-26 (Cont'd.) 2.

If all three products are treated as joint products:

L W X Totals

Quantity 50,000 300,000 100,000

Deduct Unit Final Separable Sales Sales Processing Price Value Cost $10 $ 500,000 $100,000 2 600,000 3 300,000 50,000 $1,400,000 $150,000

Joint Costs Allocation L W X Totals

$256,000 384,000 160,000 $800,000

Add Separable Processing Costs

Est. Net Realizable Value at Splitoff $ 400,000 600,000 250,000 $1,250,000

Weighting 40/125 60/125 25/125

Allocation of $800,000 Joint Costs $256,000 384,000 160,000 $800,000

Total Costs

Units

Unit Cost

$356,000 384,000 210,000 $950,000

50,000 300,000 100,000 450,000

$7.12 1.28 2.10

$100,000 50,000 $150,000

Call the attention of students to the differing unit "costs" between the two assumptions regarding the relative importance of Product X. The point is that costs of individual products depend heavily on which assumptions are made and which accounting methods and techniques are used.

15-23

SOLUTION EXHIBIT 15-26

Joint Costs

Separable Costs

50,000 pounds

Processing of 600,000 lbs:

Processing $100,000

L

Processing $50,000

X

W 300,000 pounds

100,000 pounds Splitoff Point

15-24

15-27 (40 min.) Alternative methods of joint-cost allocation, product-mix decision. 1. a.

Joint costs = $300,000 Sales value at splitoff method Select

1. 2. 3. 4.

Sales value at splitoff (30,000 × $8, 50,000 × $4, 20,000 × $3) Weighting (240/500, 200/500, 60/500) Joint cost allocated (0.48, 0.40, 0.12 × $300,000) Total cost computation Joint costs Separable processing Total costs Total units Unit cost

b.

Physical-measures method

1.

Physical measure of production (board feet) Weighting (30/100, 50/100, 20/100) Joint costs allocated (0.30, 0.50, 0.20 × $300,000) Total cost computation Joint costs Separable processing Total costs Total units Unit cost

White

Knotty

$240,000

$200,000

$60,000

$500,000

0.48

0.40

0.12

1.00

$144,000

$120,000

$36,000

$300,000

$144,000 60,000 $204,000 25,000 $5.76

$120,000 90,000 $210,000 40,000 $5.25

$36,000 15,000 $51,000 15,000 $3.40

$300,000 165,000 $465,000

White

Knotty

Select

2. 3. 4.

Total

Total

30,000

50,000

20,000

100,000

0.30

0.50

0.20

1.00

$90,000

$150,000

$60,000

$300,000

$90,000 60,000 $150,000 25,000 $6.00

$150,000 90,000 $240,000 40,000 $6.00

$60,000 15,000 $75,000 15,000 $5.00

$300,000 165,000 $465,000

15-25

15− − 27 (Cont’d.)

c.

Estimated net realizable value method

1.

Expected final sales value of production (25,000 × $16, 40,000 × $9, 15,000 × $7) Deduct expected separable costs Estimated NRV at splitoff Weighting (340/700, 270/700, 90/700) Joint costs allocated (0.4857, 0.3857, 0.1286 × $300,000) Total cost computation Joint costs Separable processing Total costs Total units Unit cost

Select

2. 3. 4. 5.

2. a.

White

Knotty

Total

$400,000 60,000 $340,000 0.4857

$360,000 90,000 $270,000 0.3857

$105,000 15,000 $90,000 0.1286

$865,000 165,000 $700,000

$145,710

$115,710

$38,580

$300,000

$145,710 60,000 $205,710 25,000 $8.23

$115,710 90,000 $205,710 40,000 $5.14

$38,580 15,000 $53,580 15,000 $3.57

$300,000 165,000 $465,000

White

Knotty

Select

Total

Sales value at splitoff ($5.76 × 1,000, $5.25 × 1,000, $3.40 × 500)

b.

Physical measures

$5,760

$5,250

$1,700

6,000 8,230

12,000 10,280

2,500 1,785

($6.00 × 1,000, $6.00 × 2,000, $5.00 × 500)

c.

Estimated NRV ($8.23 × 1,000, $5.14 × 2,000, $3.57 × 500)

3.

Raw to Select Oak Incremental revenues: $400,000 - $240,000 Deduct incremental processing costs Increase in operating income

$160,000 60,000 $100,000

Raw to White Oak Incremental revenues: $360,000 - $200,000 Deduct incremental processing costs Increase in operating income

$160,000 90,000 $ 70,000

Raw to Knotty Oak Incremental revenues: $105,000 - $60,000 Deduct incremental processing costs Increase in operating income

$ 45,000 15,000 $ 30,000

Pacific Lumber is maximizing its total August 2001 operating income by fully processing each raw oak product into its finished product form.

15-26

15-28 (40 min.) Alternative methods of joint-cost allocation, product-mix decisions. A diagram of the situation is in Solution Exhibit 15-28. 1.

Computation of joint-cost allocation proportions: a.

Sales Value at Splitoff $ 50,000 30,000 50,000 70,000 $200,000

A B C D

Allocation of $100,000 Joint Costs $ 25,000 15,000 25,000 35,000 $100,000

Proportions 50/200 = 0.25 30/200 = 0.15 50/200 = 0.25 70/200 = 0.35 1.00

b. A B C D

Physical Measure 300,000 gallons 100,000 gallons 50,000 gallons 50,000 gallons 500,000 gallons

Allocation of $100,000 Joint Costs $ 60,000 20,000 10,000 10,000 $100,000

Proportions 300/500 = 0.60 100/500 = 0.20 50/500 = 0.10 50/500 = 0.10 1.00

c.

A B C D

Final Sales Value $300,000 100,000 50,000 120,000

Separable Costs $200,000 80,000 – 90,000

Estimated Net Realizable Value $100,000 20,000 50,000 30,000 $200,000

Proportions 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

Computation of gross-margin percentages: a.

Sales value at splitoff method:

Sales Joint costs Separable costs Total costs Gross margin Gross-margin percentage

Super A Super B $300,000 $100,000 25,000 15,000 200,000 80,000 225,000 95,000 $ 75,000 $ 5,000 25% 15-27

5%

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%

15-28 (Cont'd) b.

Physical-measure method:

Sales Joint costs Separable costs Total costs Gross margin Gross-margin percentage

c.

Super A Super B $300,000 $100,000 60,000 20,000 200,000 80,000 260,000 100,000 $ 40,000 $ 0 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%

Estimated net realizable value method:

Sales Joint costs Separable costs Total costs Gross margin Gross-margin percentage

Super A $300,000 50,000 200,000 250,000 $ 50,000

Super B $100,000 10,000 80,000 90,000 $ 10,000

C $50,000 25,000 0 25,000 $25,000

16.67%

10%

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%

Summary of gross-margin percentages: Joint-Cost Allocation Method

Super A

Super B

C

Super D

Sales value at splitoff

25.00%

5%

50%

(4.17%)

Physical measure

13.33%

0%

80%

16.67%

Estimated net realizable value

16.67%

10%

50%

12.50%

15-28

15-28 (Cont'd.) 2.

Further Processing of A into Super A: Incremental revenue, $300,000 – $50,000 Incremental costs Incremental operating income from further processing

$250,000 200,000 $ 50,000

Further processing of B into Super B: Incremental revenue, $100,000 – $30,000 Incremental costs Incremental operating income from further processing

$ 70,000 80,000 ($ 10,000)

Further Processing of D into Super D: Incremental revenue, $120,000 – $70,000 Incremental costs Incremental operating income from further processing

$ 50,000 90,000 $ (40,000)

Operating income can be increased by $50,000 if both B and D are sold at their splitoff point.

SOLUTION EXHIBIT 15-28

Joint Costs

Separable Costs

Processing $100,000

A, 300,000 gallons $50,000

Processing $200,000

Super D $120,000

B, 100,000 gallons $30,000

Processing $80,000

Super D $120,000

Processing $90,000

Super D $120,000

C, 50,000 gallons $50,000 D, 50,000 gallons $70,000

Splitoff Point

15-29

15-29 (40-60 min.) Comparison of alternative joint-cost allocation methods, further process decision, chocolate products. 1.

a.

Sales value at splitoff method: ChocolatePowder Liquor Base Sales value at splitoff, 200a × $21; 300b × $26 Weighting

$4,200 $4,200 = $12,000 0.35

Allocation of joint costs, 0.35 × $10,000; 0.65 × $10,000 a(2,000/200) × 20

b.

$3,500

MilkChocolate Liquor Base $7,800

Total $12,000

$7,800 = $12,000 0.65 $6,500

$10,000

b(3,400/340) × 30

Physical-measure method: 200 (10 × 20) gallons; 300 (10 × 30) gallons

Weighting Allocation of joint costs, 0.40 × $10,000; 0.60 × $10,000

200 gallons

300 gallons

200 = 0.40 500

300 = 0.60 500

$4,000

$6,000

Estimated net realizable value method: ChocolatePowder Liquor Base Expected sales value of production, 2,000 × $4; 3,400 × $5 $8,000 Deduct expected separable cost of further processing 4,250 Estimated net realizable value at splitoff point $3,750

500 gallons

$10,000

c.

Weighting

Allocation of joint costs, 0.3125 × $10,000; 0.6875 × $10,000

$3,750 = $12,000 0.3125 $3,125

15-30

MilkChocolate Liquor Base

Total

$17,000

$25,000

8,750

13,000

$ 8,250

$12,000

$8,250 = $12,000 0.6875 $6,875

$10,000

15-29 (Cont'd.) d.

Constant gross-margin percentage NRV method:

Step 1: Total final sales value of production, (2,000 × $4) + (3,400 × $5) Deduct joint and separable costs, ($10,000 + $4,250 + $8,750) Gross margin

$25,000 23,000 $ 2,000

Gross-margin percentage ($2,000 ÷ $25,000)

8%

Step 2: ChocolatePowder Liquor Base Expected final sales value of production (2000 × $4); (3,400 × $5) Deduct gross margin, using overall gross-margin percentage of sales (8%) Cost of goods sold

MilkChocolate Liquor Base

Total

$8,000

$17,000

$25,000

640 7,360

1,360 15,640

2,000 23,000

4,250 $3,110

8,750 $ 6,890

13,000 $10,000

ChocolatePowder Liquor Base

MilkChocolate Liquor Base

Total

$8,000 3,500 4,250 7,750 $ 250

$17,000 6,500 8,750 15,250 $ 1,750

$25,000 10,000 13,000 23,000 $ 2,000

3.125%

10.294%

8%

Step 3: Deduct separable cost of further processing Joint costs allocated 2.

a.

Sales Joint costs Separable costs Total costs Gross margin Gross-margin percentage

15-31

15-29 (Cont'd.) b.

$8,000 4,000 4,250 8,250 $ (250)

$17,000 6,000 8,750 14,750 $ 2,250

$25,000 10,000 13,000 23,000 $ 2,000

(3.125)%

13.235%

8%

Sales Joint costs Separable costs Total costs Gross margin

$8,000 3,125 4,250 7,375 $ 625

$17,000 6,875 8,750 15,625 $ 1,375

$25,000 10,000 13,000 23,000 $ 2,000

Gross-margin percentage

7.812%

Sales Joint costs Separable costs Total costs Gross margin

$8,000 3,110 4,250 7,360 $ 640

Sales Joint costs Separable costs Total costs Gross margin Gross-margin percentage

c.

d.

Gross-margin percentage 3.

8%

8.088%

8%

$17,000 6,890 8,750 15,640 $ 1,360

$25,000 10,000 13,000 23,000 $ 2,000

8%

8%

Further processing of chocolate-powder liquor base into chocolate powder: Incremental revenue, $8,000 – $4,200 Incremental costs Incremental operating income from further processing

$ 3,800 4,250 $ (450)

Further processing of milk-chocolate liquor base into milk chocolate: Incremental revenue, $17,000 – $7,800 Incremental costs Incremental operating income from further processing

$ 9,200 8,750 $ 450

Roundtree Chocolates could increase operating income by $450 (to $2,450) if chocolatepowder liquor base is sold at the splitoff point and if milk-chocolate liquor base is further processed into milk chocolate.

15-32

15-30 (30 min.)

Joint-cost allocation, process further or sell.

1. a. Relative sales value method at splitoff. Monthly Selling Unit Price Output Per Unit Studs (Building) 75,000 $8 Decorative Pieces 5,000 60 Posts 20,000 20 Totals

Relative Sales Value at Splitoff $600,000 300,000 400,000 $1,300,000

% of Sales 46.15% 23.08 30.77 100.00%

Allocated Joint Costs $461,539 230,769 307,692 $1,000,000

b. Physical output (volume) method at splitoff. Physical Unit Volume 75,000 5,000 20,000 100,000

Studs (Building) Decorative Pieces Posts Totals

% of Total Unit Volume 75.00% 5.00 20.00 100.00%

Allocated Joint Costs $750,000 50,000 200,000 $1,000,000

c. Estimated net realizable value method.

Studs (Building) Decorative Pieces Posts Totals

Monthly Unit Output 75,000 4,500 20,000

a

Fully Processed Selling Price per Unit $8 100 20

Estimated Net Realizable Value $600,000 350,000 400,000 $1,350,000

b

% of Sales 44.44% 25.93 29.63 100.00%

Allocated Joint Costs $444,445 259,259 296,296 $1,000,000

Notes: a. 5,000 monthly units of output - 10% normal spoilage = 4,500 good units. b. 4,500 good units X $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 split-off. Units 5,000 500 4,500

Monthly unit output Less: Normal further processing shrinkage Units available for sale Final sales value (4,500 units @ $100 per unit) Less: Sales value at splitoff Differential revenue Less: Further processing costs Additional contribution from further processing

Dollars

$450,000 300,000 150,000 100,000 $50,000

15-33

15− − 30 (Cont’d.) 3. Assuming Sonimad Sawmill Inc. announces that in six months it will sell the rough-cut product at split-off, due to increasing competitive pressure, at least three types of likely behavior that will be demonstrated by the skilled labor in the planing and sizing process include the following. • • •

Poorer quality. Reduced motivation and morale. Job insecurity, leading to nonproductive employee time looking for jobs elsewhere.

Management actions that could improve this behavior include the following. • • •

Improve communication by giving the workers a more comprehensive explanation as to the reason for the change in order to better understand the situation and bring out a plan for future operation of the rest of the plant. The company can offer incentive bonuses to maintain quality and production and align rewards with goals. The company could provide job relocation and internal job transfers.

SOLUTION EXHIBIT 15-30 Joint Costs

Separable Costs Studs $8 per unit

Processing $1,000,000

Raw Decorative Pieces $60 per unit

Posts $20 per unit Splitoff Point

15-34

Processing $1,000

Decorative Pieces $100 per unit

15-31 (30 min.)

Joint and byproducts, estimated net realizable value method.

A diagram of the situation is in Solution Exhibit 15-31. 1. Allocate joint costs between Alpha and Gamma Alpha: Sales value, 46,200 pounds of Alpha × $5 (19,800 pounds of Beta × $1.20) Deduct marketing costs (Beta) Estimated net realizable value (Beta) Total final sales value Deduct additional costs: Processing (Department Two) Processing (Department Four) Estimated net realizable value at splitoff point

$231,000 $23,760 8,100 15,660 246,660 38,000 23,660

$185,000

Gamma: Sales value, 40,000 pounds × $12 Deduct processing (Department Three) Estimated net realizable value at splitoff point

Alpha Gamma

Estimated Net Realizable Value $185,000 315,000 $500,000

$480,000 165,000 $315,000

Weighting 37% 63 100%

15-35

61,660

Allocation of $120,000 Joint Costs $ 44,400 75,600 $120,000

15-31 (Cont'd.) 2.

Income Statement through Gross Margin for Alpha: Sales (38,400 pounds × $5) Production costs: Allocated joint costs Department Two Department Four Total costs of production Deduct estimated net realizable value of Beta Net cost of production Deduct ending inventory Cost of goods sold Gross margin

$192,000 $102,000 38,000 23,660 163,660 15,900 147,760 29,552 118,208 $ 73,792

Estimated net realizable value of Beta equals the revenue from Beta ($24,000) minus its related marketing costs ($8,100). Ending inventory equals the net cost of production ($147,760) times 20%.

15-36

15-31 (Cont'd.) SOLUTION EXHIBIT 15-31

Separable Costs

Joint Costs

Dept. 4 Processing $23,660 66,000 pounds

Alpha: 46,200 pounds at $5 a pound

Dept. 2 Processing $38,000 Separable Marketing $8,100

Dept. 1 Processing of 110,000 lbs: $120,000

44,000 pounds

Splitoff Point

a. Computation of pounds of Gamma:

Let X = Good output 44,000 – 0.1X = X X = 40,000

15-37

Dept. 3 Processing $165,000

Beta: 19,800 pounds at $1.20 a pound

Gamma: 40,000 poundsa at $12 a pound

15-32 (30 min.)

Joint-cost allocation, relevant costs.

1. The "six-day progressive product trimming" ignores the fundamental point that the $300 cost to buy the pig is a joint cost. A pig is purchased as a whole. The butcher's challenge is to maximize the total revenues minus incremental costs (assumed zero) from the sale of all products. At each stage, the decision taken ignores the general rule that product emphasis decisions should consider relevant relevants and relevant costs. Allocated joint costs are not part of the relevant cost numbers. For example, the Day I decision to drop pig's feet ignores the fact that the $300 point cost has been paid to acquire the who pig. The $15 of revenues are relevant inflows. This same position also holds for the Day 2 to Day 6 decisions. 2. The revenue amounts are the figures to use in the sales value at splitoff method:

Pork chops Ham Bacon Pig's feet Hide

Revenue $120 150 160 15 50 $495

Weighting 0.2425 0.3030 0.3232 0.0303 0.1010 1.0000

Joint Costs Allocated $72.75 90.90 96.96 9.09 30.30 $300.00

3. No. The decision to sell or not sell individual products should consider relevant revenues and relevant costs. In the butcher's 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 selling price at the consumer level and what the butcher may receive for pig parts in unprocessed form.

15-38

15-33 (30 min.) 1.

a.

Estimated net realizable value method, byproducts.

For the month of November, 2000, Princess Corporation's 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

a

Net pounds: 1.08 net pounds Net pounds

Input Proportion 270,000 lbs. 0.33 270,000 0.30 270,000 0.27 270,000 0.10 1.00 = = =

Total Pounds 89,100 81,000 72,900 27,000 270,000

Pounds Lost – – 5,400 – 5,400

Net Pounds 89,100 81,000 67,500a 27,000 264,600

72,900 – (0.08 × net pounds) 72,900 67,500

b. The estimated net realizable value for each of the three main products is calculated below:

Product Slices Sauce Juice

Net Pounds 89,100 81,000 67,500

Price $0.80 0.55 0.40

15-39

Revenue $ 71,280 44,550 27,000 $142,830

Separable Costs $11,280 8,550 3,000 $22,830

Estimated Net Realizable Value $ 60,000 36,000 24,000 $120,000

15-33 (Cont'd.) 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

a.

= = = =

Byproduct revenue – Separable costs $0.10 (270,000 × 10%) – $700 $2,700 – $700 $2,000

= Joint costs – NRV of byproduct = $60,000 – $2,000 = $58,000

Product

Revenue

Separable Costs

Slices Sauce Juice

$ 71,280 44,550 27,000 $142,830

$11,280 8,550 3,000 $22,830

Joint a

Costs $29,000 17,400 11,600 $58,000

Gross Margin $31,000 18,600 12,400 $62,000

Allocated using estimated NRV of the three joint products from requirement 1(b): Slices ($60,000 ÷ $120,000) x $58,000 = $29,000 Sauce ($36,000 ÷ $120,000) x $58,000 = 17,400 Juice ($24,000 ÷ $120,000) x $58,000 = 11,600

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 grossmargin information are of little significance for planning and control purposes. The allocation is made only for purposes of inventory costing and income determination.

15-40

15-34 (20–30 min.) Joint product/byproduct distinctions, ethics. (continuation of 15-33) 1. The 2000 method gives Princess managers relatively little discretion vis-a-vis the pre2000 method. The 2000 method recognizes all four products in the accounting system at the time of production. The pre-2000 method recognizes only two products (apple slices and applesauce) at the time of production. Consider the data in the question. The $60,000 of joint costs would be allocated as follows (using the $60,000 and $36,000 estimated NRV amounts): $60,000 Apple Slices: × $60,000 = $37,500 $96,000 $36,000 Applesauce: × $60,000 = $22,500 $96,000 The gross margin on each product is: ($71,280 – $37,500 – $11,280) = 31.57% Apple Slices = $71,280 ($44,550 – $22,500 – $8,550) Applesauce = = 30.30% $44,550 The gross margins on the two "byproducts" are: $27,000 – $3,000 Apple juice = = 88.89% $27,000 $2,700 – $700 Animal feed = = 74.07% $2,700 With the pre-2000 method, managers have flexibility as to when to sell the apple juice and the animal feed. Both are frozen and 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? 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 the two joint products, there would be grounds for further investigating whether managers are abusing the bonus system.

15-41

15-35

( 60 min.)

Joint-cost allocation, process further or sell byproducts.

1. Altox

Processing $1,800,000

$1,400,000

Lorex

Hycol

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

Altox

Lorex

Hycol

Total

$595,000

$2,500,000

$660,000

$3,755,000

–

1,400,000

–

1,400,000

$595,000 0.253 $455,400

$1,100,000 0.467 $840,600

$660,000 0.280 $504,000

$2,355,000 1.000 $1,800,000

a($3.50 × 170,000); ($5.00 × 500,000); ($2 × 330,000) b($595,000 ÷ 2,355,000); ($1,100,000 ÷ $2,355,000); ($660,000 ÷ $2,355,000) c$1,800,000 × 0.253; 0.467; 0.280

15-42

15-35 (Cont'd.) 2.

Further processing Altox Incremental revenue ($5.50 × 150,000) – ($3.50 × 170,000) $825,000 – $595,000 $230,000 Incremental processing cost 250,000 Incremental operating income $ (20,000) Further processing Lorex Incremental revenue ($5.00 × 500,000) – ($2.25 × 500,000) $2,500,000 – $1,125,000 $1,375,000 Incremental processing cost 1,400,000 Incremental operating income $ (25,000) Further processing Hycol Incremental revenue ($1.80 × (330,000 × 1.25)) – ($2 × 330,000) $742,500 – $660,000 $82,500 Incremental processing cost 75,000 Incremental operating income $ 7,500 Current Policy Sell Altox at splitoff $ 595,000 Process Lorex further 1,100,000 Sell Hycol at splitoff 660,000 2,355,000 Joint costs 1,800,000 Operating income $ 555,000 Preferred Options Sell Altox at splitoff $ 595,000 Sell Lorex at splitoff 1,125,000 Process Hycol further 667,500 2,387,500 Joint costs 1,800,000 Operating income $ 587,500 Goodson is $32,500 better off by changing two of its current policies––it should sell Lorex at splitoff ($25,000 improvement) and process Hycol further ($7,500 improvement).

15-43

15-35 (Cont'd.) 3. a. Goodson would be better off by $12,000 by selling Dorzine to Dietriech Mills. Further processing Dorzine Incremental revenue ($0.75 × 50,000) + $17,500a $55,000 $37,500 + $17,500 Incremental processing cost 43,000 Incremental operating income $12,000 aDisposal costs avoided by processing further $0.35 × 50,000 = $17,500

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.

15-44