Joint Costing

Problem 16-16: Joint-cost allocation, insurance settlement. Given: Quality Chicken grows and processes chickens. Each chicken is disassembled into five main parts. Information pertaining to production in July 2012 is: Parts Breasts Wings Thighs Bones Feathers

Pounds of Product 100 20 40 80 10

Final Wholesale SP/Pound $0.55 0.20 0.35 0.10 0.05

Joint cost of production in July 2012 was $50.

$50

A special shipment of 40 pounds of breasts and 15 pounds of wings has been destroyed in a fire. Quality Chicken's insurance policy provides reimbursement for the cost of the items destroyed. The insurance company permits Quality Chicken to use a joint-cost-allocation method. The splitoff point is assumed to be at the end of the production process. 1. Compute the cost of the special shipment destroyed using a. Sales value at the splitoff method Product Pounds of Produced Product Breasts 100 Wings 20 Thighs 40 Bones 80 Feathers 10 Total 250

SP per Sales Value Joint Cost Joint Cost Pound at Splitoff Pt. Allocated Per Pound $0.55 $55.00 $33.74 $0.3374 0.20 $4.00 $2.45 $0.1227 0.35 $14.00 $8.59 $0.2147 0.10 $8.00 $4.91 $0.0613 0.05 $0.50 $0.31 $0.0307 $81.50 $50.00

Cost of destroyed Product Product Joint Cost Produced Per Pound Breasts: $0.3374 Wings $0.1227 Total

Pounds Lost 40 15

Insurance Claim $13.50 $1.84 $15.34

b. Physical measures method Product Pounds of Produced Product Breasts 100 Wings 20 Thighs 40 Bones 80

Joint Cost Allocated $20.00 $4.00 $8.00 $16.00

Joint Cost Per # $0.2000 $0.2000 $0.2000 $0.2000

Feathers Total

10 250

$2.00 $50.00

$0.2000

Pounds Lost 40 15

Insurance Claim $8.00 $3.00 $11.00

$0.20

Cost of destroyed Product Product Joint Cost Produced Per Pound Breasts: $0.2000 Wings $0.2000 Total

2. What is joint-cost allocation would you recommend? Sales value at the splitoff method generates the higher insurance recovery value.

Problem 16-17 Joint products and byproducts (continuation of 16-16) Given: Quality Chicken grows and processes chickens. Each chicken is disassembled into five main parts. Information pertaining to production in July 2012 is: Parts Breasts Wings Thighs Bones Feathers

Pounds of Product Final Wholesale SP/Pound 100 $0.55 20 0.20 40 0.35 80 0.10 10 0.05

Joint cost of production in July 2012 was $50. Quality Chicken is computing the EI values for its July 31, 2012, balance sheet. EI amounts on July 31 are: Parts Pounds of Product Breasts 15 Wings 4 Thighs 6 Bones 5 Feathers 2 Quality Chicken's management wants to use the sales value at splitoff method. However, management wants you to explore the effect on ending inventory values of classifying one or more products as a byproduct rather than a joint product. 1. Compute the cost of the ending inventory if all products are accounted for as joint products. The sales values at the split-off point is used to assign joint manufacturing costs. Product Pounds of Produced Product Breasts 100 Wings 20 Thighs 40 Bones 80 Feathers 10 Total 250

SP per Sales Value Pound at Splitoff Pt. $0.55 $55.00 $ 0.20 $4.00 $ 0.35 $14.00 $ 0.10 $8.00 $ 0.05 $0.50 $81.50

Joint Cost Joint Cost Allocated Per # $33.7423 $0.3374 $2.4540 $0.1227 $8.5890 $0.2147 $4.9080 $0.0613 $0.3067 $0.0307 $50.0000

EI in Pounds 15 4 6 5 2

EI in Dollars $5.0613 $0.4908 $1.2883 $0.3067 $0.0613 $7.2086

2. Assume Quality Chicken uses the production method of accounting for byproducts. What are the EI values for each joint product on July 31, 2012, assuming breasts and thighs are the joint products and wings, bones, and feathers are byproducts? Product Pounds of Produced Product Breasts 100 Wings 20 Thighs 40 Bones 80

SP per Sales Value Pound at Splitoff Pt. $0.55 $55.0000 $ 0.20 $4.0000 $ 0.35 $14.0000 $ 0.10 $8.0000

Joint Cost Joint Cost Allocated Per # $29.8913 $0.2989 $4.0000 $0.2000 $7.6087 $0.1902 $8.0000 $0.1000

EI in Pounds 15 4 6 5

EI in Dollars $4.4837 $0.8000 $1.1413 $0.5000

Feathers Total

10 250

$ 0.05

$0.5000 $81.5000

$0.5000 $50.0000

$0.0500

2

$0.1000 $7.0250

3. Comment on the differences between the two methods.

Product Produced Breasts Wings Thighs Bones Feathers Total

EI in Pounds 15 4 6 5 2 32

Units Sold 85 16 34 75 8 218

(1) Joint Cost Per # $0.3374 $0.1227 $0.2147 $0.0613 $0.0307

(1) Cost of Goods Sold $28.680982 $1.963190 $7.300613 $4.601227 $0.245399 $42.791411

(1) EI in Dollars $5.0613 $0.4908 $1.2883 $0.3067 $0.0613 $7.2086

(1) (2) Total Joint Cost Costs Per # $33.7423 $0.2989 $2.4540 $0.2000 $8.5890 $0.1902 $4.9080 $0.1000 $0.3067 $0.0500 $50.0000

Both methods account for all of the $50 of joint manufacturing costs as either COGS or EI. Both methods are arbitrary and acceptable under GAAP.

(2) Cost of Goods Sold $25.407609 $3.200000 $6.467391 $7.500000 $0.400000 $42.975000

(2) EI in Dollars $4.4837 $0.8000 $1.1413 $0.5000 $0.1000 $7.0250

(2) Total Costs $29.8913 $4.0000 $7.6087 $8.0000 $0.5000 $50.0000

Problem 16-20: Alternative methods of joint-cost allocation, ending inventories.

Given: The Evrett Company operates a simple chemical process to convert a single material into three separate items, referr at a single splitoff point. Product X and Y are ready for sale immediately upon splitoff without further processing or a being sold. There is no available market price for Z at the splitoff point.

The selling prices quoted here are expected to remain the same in the coming year. During 2012, the selling prices of X: 75 tons sold for $1,800 per ton. Y: 225 tons sold for $1,300 per ton Z: 280 tons sold for $800 per ton

The total joint manufacturing costs for the year were $328,000. Evrett spent an additional $120,000 to finish product Z There were no beginning inventories of X, Y, or Z. At the end of the year, the following inventories of completed units X: 175 tons Y: 75 tons Z: 70 tons There was no beginning or ending work-in-process.

1. Compute the cost of inventories for X, Y, and Z for balance sheet purposes and the cost of goods sold for income s Relative Sales Value

Production (in Tons)

Separable Mfg. Costs

Final S. P. (per Ton)

$450,000

X

250

$0

$1,800

$390,000

Y

300

$0

$1,300

Estimated $160,000

Z

350

$120,000

$800

Sales Price per Ton $1,800 $1,300 $800

Relative SV at Split-off $450,000 $390,000 $160,000 $1,000,000

Joint Cost Allocated $147,600 $127,920 $52,480 $328,000

Joint Mfg. Costs $328,000

a. NRV method of joint-cost allocation Products Produced X Y Z Total

Sales in Tons 75 225 280 580

EI in Tons 175 75 70 320

Tons Produced 250 300 350 900

b. Constant gross-margin % NRV method of joint-cost allocation

Products Produced X Y Z Total

Sales in Tons 75 225 280 580

EI in Tons 175 75 70 320

Tons Produced 250 300 350 900

Calculation of Overall Gross Margin: Production based Sales Joint Manufacturing Costs Separable Manufacturing Costs Gross Margin Gross Margin %

Sales Price per Ton $1,800 $1,300 $800

$1,120,000 ($328,000) ($120,000) $672,000 60%

Production Based Sales $450,000 $390,000 $280,000 $1,120,000

Joint Cost Allocated (1) $180,000 $156,000 ($8,000) $328,000

(1) Note: The negative joint-cost alloca % NRV method. Some produ have the same gross-margin

Sales - GP - Separable Costs = Joi

o three separate items, referred to here as X, Y, and Z. All three end products are separated simultaneously thout further processing or any other additional costs. Product Z, however, is processed further before

ng 2012, the selling prices of the items and the total amounts sold were:

l $120,000 to finish product Z.

ventories of completed units were on hand:

st of goods sold for income statement purposes as of 12/31/12, using

Final Sales Value $450,000

$390,000

$280,000

Separable Mfg. Costs $0 $0 $120,000 $120,000

Total Assigned Mfg. Costs $147,600 $127,920 $172,480 $448,000

Cost per Ton $590 $426 $493

Cost of Goods Sold $44,280 $95,940 $137,984 $278,204 $448,000

Ending Inventory $103,320 $31,980 $34,496 $169,796

Actual Sales $ $135,000 $292,500 $224,000 $651,500

Gross Margin $90,720 $196,560 $86,016 $373,296

Separable Mfg. Costs $0 $0 $120,000 $120,000

Total Assigned Mfg. Costs $180,000 $156,000 $112,000 $448,000

Costs per Ton $720 $520 $320

Cost of Goods Sold $54,000 $117,000 $89,600 $260,600 $448,000

Ending Inventory $126,000 $39,000 $22,400 $187,400

Actual Sales $ $135,000 $292,500 $224,000 $651,500

Gross Margin $81,000 $175,500 $134,400 $390,900

e: The negative joint-cost allocation to Product Z illustrates one "unusual" feature of the constant gross-margin % NRV method. Some products may receive negative cost allocations in order that all individual products have the same gross-margin percentage.

s - GP - Separable Costs = Joint Cost Allocated

Gross Margin % 67.200% 67.200% 38.400%

Gross Margin % 60.000% 60.000% 60.000%

Problem 16-24: Accounting for a main product and a byproduct

Given: Tasty Inc. is a producer of potato chips. A single production process at Tasty Inc. yields potato chips as the main pro a byproduct that can also be sold as a snack. Both products are fully processed by the splitoff point, and there are no costs. For September 2012, the cost of operations is $500,000. Production and sales data are as follows: Sales (#) 42,640 6,500

Production (#)

Main Product: Potato Chips Byproduct

52,000 8,500

Selling Price per # 16 10

There were no beginning inventories.

1. What is the gross margin for Tasty, Inc. under the production method and the sales method of byproduct accountin

Production Method: Byproduct revenue is recognized as a reduction of the joint mfg. costs at time of production. Product Produced Potato Byproduct Total

Pounds EI in Sold Pounds 42,640 9,360 6,500 2,000 49,140 11,360

Pounds SP per Sales Value Joint Cost Produced Pound at Splitoff Pt. Allocated 52,000 $16 $832,000 $415,000 8,500 $10 $85,000 $85,000 60,500 $917,000 $500,000

Joint Cost Per Pound $7.98 $10.00

Note: The byproduct sales of $65,000 (6,500 X $10) and equivalent assigned cost of $65,000 are not displayed as e Sales Method: Byproduct revenue is recognized at the time of sale. Product Produced Potato Byproduct Total

Pounds EI in Sold Pounds 42,640 9,360 6,500 2,000 49,140 11,360

Pounds SP per Sales Value Joint Cost Produced Pound at Splitoff Pt. Allocated 52,000 $16 $832,000 $500,000 8,500 $10 $85,000 $0 60,500 $917,000 $500,000 Production Method--Y1

Revenues Main Product: Potato By-product: Snacks Total Revenues Cost of Goods Sold Total mfg. Costs Deduct byproduct revenue Net mfg. Costs Deduct main product inventory (EI) Total Cost of Goods Sold Gross Margin

42,640 6,500

8,500

$16 $10

$10

$682,240 $682,240 $500,000 (85,000) $415,000 (74,700) $340,300 $341,940

Joint Cost Per Pound $9.62 $0.00

Sales Method-- Y1

$

682,240 65,000 $747,240 $500,000 $500,000 (90,000) $410,000 $337,240

2. What are the inventory values that should be reported in the balance sheets under each method of byproduct acco Year 1: Production Method--Y1 Sales Method-- Y1

EI of Main Product (Potato) EI of By-product

9,360 Pounds 2,000 Pounds

$74,700 $20,000

$90,000 0

Overall proof: Production Method

GP - Y1 Sales - Y2 Main 9,360 ByPd 2,000 Byprod costs Total Revenues COGS GP - Y2 Total Gross Profit

$16 $10

Proof: Both Years Together Sales Main 52,000 $16 ByPd 8,500 $10 Jt. Mfg. Costs Total Gross Profit

Sales Method

$341,940

$337,240

$149,760 $20,000 (20,000) $149,760 (74,700) $75,060 $417,000

$149,760 $20,000 0 $169,760 (90,000) $79,760 $417,000

$832,000 $85,000 ($500,000) $417,000

ato chips as the main product and off point, and there are no separable re as follows:

$500,000

elling Price per #

d of byproduct accounting?

sts at time of production.

Cost of Gross Goods Sold Margin $340,300 $ 341,940 $ $ $340,300 $ 341,940 $435,000 $65,000 ?? Under reported COGS 000 are not displayed as either Sales or COGS.

es Method-- Y1

EI in Sales Dollars Dollars $74,700 $ 682,240 $20,000 $ $94,700 $ 682,240

EI in Dollars $90,000 $0 $90,000

Sales Dollars $ 682,240 $ 65,000 $ 747,240

Difference (SM - PM)

$

65,000 $65,000

$

85,000 $ 85,000 (15,300) $69,700 ($4,700)

method of byproduct accounting.

es Method-- Y1

Cost of Goods Sold $410,000 $0 $410,000 $500,000

Gross Margin $ 272,240 $ 65,000 $ 337,240

Difference (SM - PM)

($4,700)

$20,000 (15,300) $4,700 $0

Problem 16-25: Joint Costs & Byproducts Given: Royston, Inc. is a large food processing company. It processes 150,000 pounds of peanuts in the Peanuts Department at a cost of $180,000 to yield 12,000 pounds of product A, 65,000 pounds of product B, and 16,000 pounds of product C. Product A is processed further in the Salting Department to yield 12,000 pounds of salted peanuts at a cost of $27,000 and sold for $12 per pound. Product B (Raw Peanuts) is sold without further processing at $3 per pound. Product C is considered a byproduct and is processed further in the Paste Department to yield 16,000 pounds of peanut butter at a cost of $12,000 and sold for $6 per pound. The company wants to make a gross margin of 10% of revenues on Product C and needs to allow 20% of revenues for marketing costs on product C. 1. Compute unit costs per pound for products A, B, and C, treating C as a byproduct. Use the NRV method for allocating joint costs. Deduct the NRV of the byproduct produced from the joint cost of products A and B (Production method).

Salting Department Processed to Af A 12,000 Pounds Peanuts Department Processing $180,000

Product B Complete B 65,000 Pounds

Final Selling Price

Final Sales Value

Separable Separable Mfg. Marketing Costs Costs (20%)

Desired Gross Profit (10%)

Sales Value at Splitoff

Allocation Separable of Joint Mfg. Mfg. Costs Costs

Total Mfg. Costs

Total Mfg. Costs/#

$27,000 $12

$144,000

$27,000

$0

$117,000

$46,800

$27,000

$73,800

$6.15

49%

$3

$195,000

$0

$0

$195,000

$78,000

$0

$78,000

$1.20

60%

$6

$96,000

$12,000

$19,200

$55,200

$55,200

$12,000

$67,200

$4.20 $4.20

$367,200

$180,000

$39,000

$219,000 $219,000

Total Mfg. Costs

Total Mfg. Costs/#

$0

150,000 Pounds Paste Department Processed to Cf C (Byproduct) 16,000 Pounds

$12,000 $9,600

2. Compute unit costs per pound for products A, B, and C, treating all three as joint products and allocating costs by the NRV method.

Salting Department Processed to Af A 12,000 Pounds

Peanuts Department Processing $180,000

Product B Complete B 65,000 Pounds

Final Selling Price

Sales Value

Separable Separable Mfg. Marketing Costs Costs (20%)

Sales Value at Splitoff

Allocation of Joint Mfg. Costs

Separable Mfg. Costs

$27,000 $12

$144,000

$27,000

$0

$117,000

$55,892

$27,000

$82,892

$6.91

$3

$195,000

$0

$0

$195,000

$93,153

$0

$93,153

$1.43

$6

$96,000

$12,000

$19,200

$64,800

$30,955

$12,000

$42,955

$2.68

$376,800

$180,000

$39,000

$219,000

$0

150,000 Pounds

Paste Department Processed to Cf C 16,000 Pounds

$12,000

Note: Costs of individual products depend heavily on which assumptions are made and which accounting methods and techniques are used.

30% 10%?? Company wants to make a profit of 10%.

Problem 16-28: Comparison of alternative joint-cost-allocation methods, further-processing decision Given: The Chocolate Factory manufactures and distributes chocolate products. It purchases cocoa beans and processes them into two intermediate products: Chocolate-powder liquor base and Milkchocolate liquor base. These two intermediate products become separately identifiable at a single splitoff point. Every 1,500 pounds of cocoa beans yields 60 gallons of chocolate-powder liquor base and 90 gallons of milk-chocolate liquor base. The chocolate-powder liquor base is further processed into chocolate powder. Every 60 gallons of chocolate-powder liquor base yield 600 pounds of chocolate powder. The milk-chocolate liquor base is further processed into milk chocolate. Every 90 gallons of milk-chocolate liquor base yield 1,020 pounds of milk chocolate. Production and sales data for August 2012 are (assume no beginning inventory): Coco beans processed, 15,000 pounds Costs of processing cocoa beans to splitoff point (including purchase of beans), $30,000

Chocolate powder Milk chocolate

Production 6,000 pounds 10,200 pounds

Sales 6,000 pounds 10,200 pounds

Selling Price $4 per pound $5 per pound

Chocolate Factory fully processes both of its intermediate products into chocolate powder or milk chocolate. There is an active market for these intermediate products. In August 2012, Chocolate Factory could have sold the chocolate-powder liquor base for $21 a gallon and the milk-chocolate liquor base for $26 a gallon.

1. Calculate how the joint costs of $30,000 would be allocated between the chocolate-powder and milk-chocolate liqu Joint Processing Costs Allocated Using the Sales Value at the Splitoff Point Quantity of Split-off Product at Selling Splitoff Point Price

Chocolate Powder Liquor Processed to Chocolate Powder SP @ Splitoff

$21 600 Gallons

Final SP

$12,750 Separable Mfg. Costs

$4 6,000 Pounds

Cocoa Beans processing $30,000 Joint Mfg. Costs

15,000 Pounds Milk-Chocolate Liquor Base Processed to Milk Chocolate SP @ Splitoff

Final SP

600

21

$26 900 Gallons

$26,250 Separable Mfg. Costs

$5 10,200

900

26

1,500

Pounds

2. What are the gross-margin percentages of chocolate powder and milk chocolate under each of the above methods

Final Sales Joint manufacturing costs Separable manufacturing costs Gross Margin Gross Margin %

Overall Gross Margin $75,000 (30,000) (39,000) $6,000 8.00%

Relative Sales Value at Spiltoff Chocolate Milk Powder Chocolate $24,000 $51,000 (10,500) (19,500) (12,750) (26,250) $750 $5,250 3.125% 10.294%

3. Could Chocolate Factory have increased its operating income by a change in its decision to fully process both of i

Final Sales Value Sales Value at Splitoff Increase in Sales Value Separable manufacturing costs Incremental operating income Process further

Chocolate Milk Powder Chocolate $24,000 $51,000 12,600 23,400 $11,400 $27,600 (12,750) (26,250) ($1,350) $1,350 Yes Yes Chocolate-powder liquor base should be sold at splitoff point. Operating income would increase by $1,350 to $7,350. Note: Earlier calculations would change. (Change G77 to "No" to see changes.) No

rocessing decision

ases cocoa beans e and Milkfiable at a single owder liquor base

ery 60 gallons of ocolate liquor liquor base yield

Separable Processing $12,750 $26,250

powder or milk 12, Chocolate milk-chocolate

ate-powder and milk-chocolate liquor bases:

ssing Costs Allocated Using the Joint Processing Costs Allocated Using the Value at the Splitoff Point Net Realizable Value at the Splitoff Point Sales Allocation Quantity of Final Final Separable NRV Value of Joint Final Product Selling Sales Mfg. at at Splitoff Mfg. Costs Produced Price Value Costs Splitoff $12,600

$10,500

6,000

$4

$24,000

$12,750

$11,250

Allocation of Joint Mfg. Costs $9,375

$23,400

$19,500

10,200

$36,000

$30,000

16,200

$5

$51,000

$26,250

$24,750

$20,625

$75,000

$39,000

$36,000

$30,000

e under each of the above methods?

les Value at Spiltoff Total $75,000 (30,000) (39,000) $6,000 8.000%

NRV at the Splitoff Point Quantity Method Chocolate Milk Chocolate Milk Powder Chocolate Total Powder Chocolate $24,000 $51,000 $75,000 $24,000 $51,000 (9,375) (20,625) (30,000) (12,000) (18,000) (12,750) (26,250) (39,000) (12,750) (26,250) $1,875 $4,125 $6,000 ($750) $6,750 7.813% 8.088% 8.000% -3.125% 13.235%

s decision to fully process both of its intermediate products? Both Products $75,000 36,000 $39,000 (39,000) $0

der liquor base should be oint. Operating income by $1,350 to $7,350. alculations would change. o "No" to see changes.)

Total $75,000 (30,000) (39,000) $6,000 8.000%

Constant Gross Margin Meth Chocolate Powder $24,000 (9,330) (12,750) $1,920 8.000%

Quantity Joint Processing Costs Allocated Using the Method Constant Gross Margin Percentage (8%) NRV Method Allocation Quantity of Final Final Joint Cost Separable of Joint Final Product Selling Sales 92% of Sales Mfg. Mfg. Costs Produced Price Value Less Separable Costs $12,000

6,000

$4

$24,000

$9,330

$12,750

$9,330

$18,000

10,200

$30,000

16,200

Constant Gross Margin Method Milk Chocolate Total $51,000 $75,000 (20,670) (30,000) (26,250) (39,000) $4,080 $6,000 8.000% 8.000%

$5

$51,000

$20,670

$26,250

$75,000

$30,000

$39,000

$20,670

Problem 16-31 (12th edition): Joint and byproducts, NRV method (CPA) Given: The Harrison Corporation produces three products: Alpha, Beta, and Gamma. Alpha and Gamma are joint products, and Beta is a byproduct of Alpha. No joint costs are to be allocated to the byproduct. The production processes for a given year are as follows:

a. In Department 1, 110,000 pounds of DM, Rho, are processed at a total cost of $120,000. After processing in Dept. 1 60% of the pounds are transferred to Dept. 2, and 40% of the pounds (now Gamma) are transferred to Depart. #3. b. In Department 2, the material is further processed at a total additional cost of $38,000. Then 70% of the pounds (now Alpha) are transferred to Department 4; and 30% emerge as Beta, the byproduct, to be sold at $1.20 per pound. Separable marketing costs for Beta are $8,100. c. In Department 4, Alpha is processed at a total additional cost of $23,660. After this processing, Alpha is ready for sale at $5 per pound. d. In Department 3, Gamma is processed at a total additional cost of $165,000. In this department, a nornal loss of Gamma occurs, which equals 10% of the good pounds of output. The remaining good pounds of output are then sold for $12 per pound.

Department # 4 A

Department # 2 $38,000 D

C 66,000 Pounds 60%

Department #1

B $120,000 DM Rho is processed

Beta is a byproduct of Alpha

110,000 Pounds Department #3 $165,000 E 44,000 Pounds 40%

Waste = 10% of Good Output Let X = good output 44,000 - 0.1X = X

44,000 = 1.1X X= 44,000/1.1 X = 40,000 1. Prepare a schedule showing the allocation of the $120,000 joint manufacturing costs between Alpha and Gamma using the NRV method. The NRV of Beta should be treated as an addition to the sales value of Alpha. Relative sales value at point A: Relative sales value at point B Relative sales value at point C Less Department # 2 separable costs Relative sales value at point D Relative sales value at E Total sales value at 1st splitoff point Allocation of $120,000 joint mfg. Costs: To Alpha/Beta Path To Gamma Path

$207,340 15,660 $223,000 (38,000) $185,000 315,000 $500,000

$5 X 46,200 - $23,660 $1.20 X 19,800 - $8,100

$44,400 75,600 $120,000

$185,000/$500,000 * $120,000 $315,000/$500,000 * $120,000

$12 X 40,000 - $165,000

2. Independent of your answer to requirement 1, assume that $102,000 of total joint costs were appropriately allocate Alpha. Assume also that there were 48,000 pounds of Alpha and 20,000 pounds of Beta available to sell. Prepare a income statement through the gross-margin line item for Alpha using the following facts. a. During the year sales of Alpha were 80% of the pounds available for sale. There was no beginning inventory of b. The NRV of Beta available for sale is to be deducted from the cost of producing Alpha. The ending inventory of Alpha is to be based on the net cost of production. c. All other costs and selling-price data are listed in A through D above. Department # 4 A

Department # 2 $38,000 D

Department #1

C 66,000 Pounds 60% B

$120,000 DM Rho is processed 110,000 Pounds

Beta is a byproduct of Alpha

Department #3 $165,000 E 44,000 Pounds 40% Sales of Alpha Less: Cost of Goods Sold Joint mfg. costs assigned Separable mfg. costs: Depart. # 4 Separable mfg. costs: Depart. # 2 plus: sales of Byproduct beta Net mfg. costs Less ending inventory (20%) Cost of Goods Sold (80%) Gross Margin from sales of 80% of Alpha

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

.80 X 48,000 X $5

$1.20 X 20,000 - $8,100

ha and Gamma are joint products, ct. The production processes for

20,000. After processing in Dept. 1, ma) are transferred to Depart. #3.

8,000. Then 70% of the pounds oduct, to be sold at $1.20 per

his processing, Alpha is ready for

his department, a nornal loss of good pounds of output are then

Department # 4 $23,660

Alpha: $5 46,200 Pounds 70%

Separable Marketing Costs $8,100

Beta: $1.20

Beta is a byproduct of Alpha

10% of Good Output X = good output 000 - 0.1X = X

19,800 Pounds 30%

Gamma: $12 40,000 Pounds

4,000 = 1.1X = 44,000/1.1

osts between Alpha and n to the sales value of Alpha.

$5 X 46,200 - $23,660 $1.20 X 19,800 - $8,100

$12 X 40,000 - $165,000

$185,000/$500,000 * $120,000 $315,000/$500,000 * $120,000

t costs were appropriately allocated to of Beta available to sell. Prepare an

re was no beginning inventory of Alpha g Alpha. The ending inventory of

Department # 4 $23,660

Alpha: $5 48,000 Pounds 70%

Separable Marketing Costs $8,100

Beta: $1.20

Beta is a byproduct of Alpha 20,000 Pounds 30%

80 X 48,000 X $5

$1.20 X 20,000 - $8,100

Gamma: $12 40,000 Pounds

Chapter 16 Problem: Accounting for A Joint Manufacturing Process Doe Corporation grows, processes, cans, and sells three main pineapple products -- sliced pineapple, crushed pineapple, and pineapple juice. The outside skin is cut off in the Cutting Department and processed as animal feed. The skin is treated as a by-product. Doe's production process is as follows: 1. Pineapples first are processed in the Cutting Department. The pineapples are washed and the outside skin is cut away. Then the pineapples are cored and trimmed for slicing. The three main products and the by-product are recognized after processing in the Cutting Department. Each product is then transferred to a separate department for final processing. 2. The trimmed pineapples are forwarded to the Slicing Department where the pineapples are sliced and canned. Any juice generated during the slicing operation is packed in the cans with the slices. 3. The pieces of pineapple trimmed from the fruit are diced and canned in the Crushing Department Again, the juice generated during this operation is packed in the can with the crushed pineapple. 4. The core and surplus pineapple generated from the Cutting Department are pulverized into a liquid in the Juicing Department. There is an evaporation loss equal to 8% of the weight of the good output produced in this department which occurs as the juices are heated. 5. The outside skin is chopped into animal feed in the Feed Department. The Doe Corporation uses the net realizable value method (relative sales value method) to assign costs of the joint process to its main products. The by-product is inventoried at its market value. A total of 270,000 pounds were entered into the Cutting Department during May. The schedule presented below shows the costs incurred in each department, the proportion by weight transferred to the four final processing departments, and the selling price of each end product. Processing Data and Costs for the Month of May

Department Cutting Slicing Crushing Juicing Animal Feed

Costs Proportion of Product by Weight Incurred Transferred to Departments $60,000 --$4,700 35% $10,580 28% $3,250 27% $700 10% $79,230 100%

Selling Price Per Pound of Final Product --$0.60 $0.55 $0.30 $0.10

Required: 1. The Doe Corporation uses the NRV method to determine inventory values for its main products and by-product. Calculate: a. the pounds of pineapple that result as output for pineapple slices, crushed pineapple, pineapple juice, and animal feed. b. the net realizable value at the split-off point of the three main products. c. the amount of cost of the Cutting Department assigned to each of the main products and to the by-product in accordance with company policy. d. The total budgeted gross margins for each of the three main products. e. The anticipated gross margin % for each of the four products f. The amount of ending inventory valuation for the following units of ending inventory 1. Canned Sliced Pineapples: 4,000 2. Canned Crushed Pineapples: 3,000 3. Canned Pineapple Juice: 2,000 4. Animal Feed: 1,000

2. Comment on the significance to management of the gross margin information calculated above. 3. Discuss how a managers determine whether it is profitable to process a product post split-off. Solution: Question 1 $4,700 35%

Slicing Department

Separable Mfg. Costs

Final SP $0.60

94,500 Pounds

$10,580 28%

Crushing Department

Separable Mfg. Costs

$0.55

75,600 Pounds Cutting Department $60,000 270,000 pounds $3,250 27%

Juicing Department

72,900 Pounds 8% Evaporation Loss

Separable Mfg. Costs

$0.30

X = 72,900 - .08 X 1.08 X = 72,9000 X = 72,900/1.08 67,500 Pounds $700

10%

Feed Department

Separable Mfg. Costs

$0.10

27,000 Pounds Products Produced Sliced Crushed Juice Animal Feed Total

Pounds Sales Price Produced per Ton 94,500 $0.60 75,600 $0.55 67,500 $0.30 27,000 $0.10 264,600 (a)

Relative SV at Split-off $52,000 $31,000 $17,000 $2,000 $102,000 (b)

Joint Cost Allocated $30,160 $17,980 $9,860 $2,000 $60,000 (c)

Separable Total Assigned Mfg. Costs Mfg. Costs $4,700 $34,860 $10,580 $28,560 $3,250 $13,110 $700 $2,700 $19,230 $79,230

Solution: Question 2

The cost figures determined are based upon an arbitrary cost assignment process. Therefore, these cost figures have no Such arbitrary cost assignment is used for the financial accounting purposes of inventory valuation and income determinat Solution: Question 3

Managers must compare incremental revenues with incremental costs. If incremental revenues are greater than incremen

Product Produced Canned Sliced Pineapples

Canned Crushed Pineapples

Canned Pineapple Juice

Cost per Ton $0.36889 $0.37778 $0.19422 $0.10000

Total Cost of Sales Goods Sold $56,700 $34,860 $41,580 $28,560 $20,250 $13,110 $2,700 $2,700 $121,230 $79,230

Gross Gross Margin Margin % $21,840 38.519% $13,020 31.313% $7,140 35.259% $0 0.000% $42,000 34.645% (d) (e)

Ending Inventory $1,476 $1,133 $388 $100 $3,097 (f)

refore, these cost figures have no real value for planning and control purposes. y valuation and income determination.

venues are greater than incremental costs, then the products should be processes further.

Problem 16-30: Joint-cost allocation. Elsie Diary Products Corp buys one input, full-cream milk, and refines it. This churning process from each gallon of milk produces 2 cups (1 pound) of butter and 2 quarts (8 cups) of buttermilk. During May 2011, Elsie bought 10,000 gallons of full-cream milk for $15,000. Elsie spent another $5,000 on the churning process to separate the milk into butter and buttermilk. Butter could be sold immediately for $2 per pound and buttermilk could be sold immediately for $1.50 per quart. Elisie chooses to process the butter further into spreadable butter by mixing it with canola oil, incurring an additional cost of $.50 per pound. This process results in 2 tubs of spreadable butter for each pound of butter processed. Each tub of spreadable butter sells for $2.50. Required: 1. Diagram the churning production process. Churning Process

Selling Price per Processing

Spreadable

Selling price

Cost per pound of butter

Butter

per pound of

Mixing with Canola Oil

Tub

Butter

$0.50

$2.50

$2.00 $20,000

20,000

Cups

10,000

Pounds

80,000

Cups

20,000

Quarts

$45,000 $15,000 + $5,000 full-cream milk 10,000 Gallons $30,000 $1.50 Buttermilk per quart of Selling price

2. Allocate the $20,000 joint manufacturing cost to the spreadable butter and the buttermilk using the a. Physical-measure method (using cups) of joint cost allocation (20,000/100,000) X $20,000 =

$4,000

Butter

(80,000/100,000) X $20,000 =

$16,000

Buttermilk

b. Sales value at splitoff method of joint cost allocation (20,000/50,000) X $20,000 =

$8,000

Butter

(30,000/50,000) X $20,000 =

$12,000

Buttermilk

c. NRV method of joint cost allocation (45,000/75,000) X $20,000 =

$12,000

Butter

(30,000/75,000) X $20,000 =

$8,000

Buttermilk

d. Constant gross margin percentage method of joint cost allocation Sales:

Butter

$50,000

Buttermilk

$30,000

Costs Joint mfg. costs

($20,000)

Separable mfg. costs

($5,000)

Gross Margin

$55,000

GM Percentage

68.75%

$50,000 - (.6875 X $50,000) - ($.50 X 10,000) = $50,000 - $34,375 - $5,000 =

$10,625

Butter

$10,625

Butter

$9,375

Buttermilk

$9,375

Buttermilk

Cost/Tub $2.50 - (.6875 X $2.50) - ($.50/2) =

$0.5313

$30,000 - (.6875 X $30,000) = Cost/Quart $1.50 - (.6875 X $1.50) =

$0.4688

Problem 16-31: Further processing decision (continuation of 16-30) Elsie has decided that buttermilk may sell better if it was marketed for baking and sold in pints. This would involve additional packaging at an incremental cost of $.25 per pint. Each pint could be sold for $.90 (Note: 1 quart = 2 pints). 1. If Elsie uses the sales value at splitoff method, what combination of products should Elsie sell to maximize profits? Incremental sales value

Buttermilk

Final sales value

$.90 X 20,000 X 2 =

$36,000

Current sales value

$1.50 X 20,000 =

$30,000

Incremental costs

$.25 X 20,000 X 2 =

Disadvantage of further processing Incremental sales value

($4,000) Do not process further

Butter

Final sales value

$2.50 X 10000 X 2 =

$50,000

Current sales value

$2.00 X 10,000 =

$20,000

Incremental costs

$6,000 $10,000

$.50 X 10,000 =

Benefit of further processing

$30,000 $5,000 $25,000 Process further

2. If Elsie uses the physical- measure method, what combination of products should Elsie sell to maximize profits? Same as question #1

3. Explain the effect that the different cost allocation methods have on the decision

to sell the products at split off or to process them further. The method of joint manufacturing cost allocation has no effect on the process further decision.

Problem 16-35: Accounting for a byproduct Given: Sanjana's Silk Shirts (SSS) hand-makes blouses and sells them to high-end department stores. SSS buys bolts of silk for $300 each. Out of each bolt it gets 30 blouses, which it sells for $90 each. SSS's new manager has suggested taking the scraps left after cutting out the blouses and using them to make scarves. By carefully cutting the blouses, SSS can produce 6 scarves from each bolt, which it can sell for $25 each. During September, SSS buys 50 bolts of silk and spends an additional $10,500 on the cutting and sewing process. By the end of the month, SSS sells 1,200 blouses and 260 scarves made from these bolts. Because the scarves are lower in value than blouses, SSS decides to treat the scarves as a byproduct.

Blouses Selling price @ split off

$90

Production

Sales

1,500

1,200

$135,000

$108,000

Joint Mfg. Costs conversion costs added = silk bolts =

50

$10,500 $300

$15,000 $25,500 Production

Selling price @ split off

Sales

$25

300

260

Scarves

$7,500

$6,500

Required: 1. Assuming SSS accounts for the byproduct using the production method, complete the chart below. Production method:

Byproduct revenue is recognized as a reduction of the jt. mfg. costs at the time of production.

Products

Units

EI

Units

SP per

Sales Value

Joint Cost

Joint Cost

EI in

Sales

Cost of

Gross

Produced

Sold

Units

Produced

Unit

at Splitoff Pt.

Allocated

Per Unit

Dollars

Dollars

Goods Sold

Margin

Blouses

1,200

300

1,500

$90

Scarves

260

40

300

$25

$135,000

Total

$18,000

$12.00

$3,600

$

$7,500

$7,500

$25.00

$1,000

$

$142,500

$25,500

$4,600

$

108,000 108,000

$14,400 $

$14,400

$

93,600

$ $

93,600

2. Assuming SSS accounts for the byproduct using the sales method, complete the chart below. Sales Method: Byproduct revenue is recognized at the time of sale. Products

Units

EI

Units

SP per

Sales Value

Joint Cost

Joint Cost

EI in

Sales

Cost of

Gross

Produced

Sold

Units

Produced

Unit

at Splitoff Pt.

Allocated

Per Unit

Dollars

Dollars

Goods Sold

Margin

Blouses

1,200

300

1,500

$90

Scarves

260

40

300

$25

Total

$135,000

$25,500

$17.00

$7,500

$0

$0.00

$142,500

$25,500

$5,100

$

$0

$

$5,100

$

108,000

$20,400

$

87,600

6,500

$0

$

6,500

114,500

$20,400

$

94,100

3. Complete the following journal entries for September assuming SSS accounts for the byproduct using (a) the production method and (b) the sales method. If no entry is needed, indicate that that is the case by putting "NE" in the amount column. Use the following accounts: Account #

Account name

Account #

Account name

Account #

Account name

4

Cash (or A/R, or A/P)

12

FG, Inventory -- Blouses

18

Sales Revenue -- Blouses

6

Cost of Goods Sold -- Blouses

14

FG, Inventory -- Scarves

20

Sales Revenue -- Scarves

8

Cost of Goods Sold -- Scarves

16

Miscellaneous Accounts

22

WIP, Inventory

10

Direct Materials Inventory Production Method

Always select the best possible account.

Sales Method

Debit

Credit

Debit

Credit

Debit

Credit

Account #

Account #

Amount ($)

Amount ($)

Amount ($)

Amount ($)

a. Give the journal entry to record the purchase of silk bolts Direct Materials Inventory

10

Cash (or A/R, or A/P)

15,000 4

15,000 15,000

15,000

b. Give the journal entry to record the use of the silk bolts WIP, Inventory

22

Direct Materials Inventory

15,000 10

15,000 15,000

15,000

c. Give the journal entry to assign conversion costs WIP, Inventory

22

Miscellaneous Accounts

10,500 16

10,500 10,500

10,500

d. Give the JE to record the cost of goods manufactured FG, Inventory -- Blouses

12

FG, Inventory -- Scarves

14

WIP, Inventory

18,000

25,500

7,500 22

25,500

25,500

e. Give the JE to record the COGS associated with sales of blouses Cost of Goods Sold -- Blouses

6

FG, Inventory -- Blouses

14,400 12

20,400 14,400

20,400

f. Give the JE to record the sales of blouses Cash (or A/R, or A/P)

4

Sales Revenue -- Blouses

108,000 18

108,000 108,000

108,000

e. Give the JE to record the COGS associated with sales of scarves Cost of Goods Sold -- Scarves

8

FG, Inventory -- Scarves

NE 20

NE NE

NE

f. Give the JE to record the sales of scarves Cash (or A/R, or A/P)

4

6,500

FG, Inventory -- Scarves

14

Sales Revenue -- Scarves

20

6,500 6,500 6,500