Joint, Standard, ABC

2nd Flr, GF Partners Bldg, 139 H.V. dela Costa, Salcedo Village, Makati City SUMMARY OF STUDY OBJECTIVES  When two or more different products are manufactured in the same production process it is called a Joint production process.  The major products resulting from a joint production process are called Joint products.  A products yield in joint production process with a relatively small value is a by – products.  The costs incurred in the joint production process which is common to all products are called Joint costs.  The split-off point is the point in the production process where the products become identifiable, and as a result of their separate identity, their production costs can be measured separately.  All costs incurred beyond the split-off point that is assignable to one or more individual products are called separable costs. METHODS OF ALLOCATING JOINT COSTS 1. Allocate joint costs using market value a. Sales Value at Split off – allocates joint costs to joint products on the basis of the relative sales value at the split off point. b. Approximated Net Realizable Value- allocates joint costs to joint products on the basis of relative estimated NRV(Final sales value minus the expected separable costs) c. Net Realizable Value at Split-off- allocates joint costs on the basis of estimated realizable value at split-off point. d. Constant Margin Approach- allocates joint costs in such a way that the overall gross margin percentage is identical for the individual products. 2. Allocate joint costs using physical measure a. Units of Production Method-allocates joint costs based on the number of units produced. b. Weighted Average Method-allocates joint costs based on the weight, units or other measure. ACCOUNTING FOR BY PRODUCTS 1. By products are accounted during production (Net Realizable Value approach) - NRV of the by products is treated as a reduction from the joint costs of the main products. Any loss of the by products or scrap is added to the cost to the cost of the main products 2. By products are accounted during sale (Realizable Value approach) – The realized value of the by products or scrap maybe reported as other sales revenue or other income. Standard Cost – the predetermined costs of manufacturing a single unit or a number of product units during a specific period in the immediate future.  The purpose of standard cost accounting is to control and promote efficiency.  Organizations have many reasons for using standard costs, including: Costs control; Pricing decisions; Performance appraisal; Cost awareness; and Management by objectives. Types of Variance A variance exists when standard costs differ from actual costs. I. II. III.

Materials a. Price variance b. Quantity variance Labor a. Rate variance b. Efficiency variance Factory Overhead 1. Two – variance method a. Controllable variance b. Volume variance 2. Three variance method a. Spending variance b. Idle capacity variance c. Efficiency variance a. Spending variance

b. Variable Efficiency variance c. Volume variance Material Price Variance AQ x AP AQ x SP = MPV

= Pxxx xxx = Pxxx

(AP – SP) X AQ = MPV

AQ = Actual Quantity AP = Actual Price SP = Standard Price

Material price variance is caused by paying a higher or lower price than the standard price for materials. Material Quantity Variance AQ x SP = Pxxx SQ x SP = xxx MQV = Pxxx

(AQ - SQ) X SP = MQV

AQ = Actual Quantity SQ = Standard Quantity SP = Standard Price

Material efficiency variance is caused by using more or less than the standard amount of materials to produce a product. Labor Rate Variance AH x AR = Pxxx AH x SP = xxx LRV = Pxxx

(AR - SR) X AH = LRV

AH = Actual Hours AR = Actual Rate SR = Standard Rate

Labor rate variance is caused by paying a higher or lower rate of pay than the standard to produce a product or complete a process. Labor Efficiency Variance AH x SP = Pxxx SH x SP = xxx LEV = Pxxx

(AH - SH) X SR = LEV

AH = Actual Hours SH = Standard Hours SR = Standard Rate

Labor efficiency variance is caused by using more or less than the standard amount of labor hours to produce a product or complete a process. Two Variance methods Controllable Variance AFO BASH CV

Pxxx (xxx) Pxxx

BASH = Fixed Overhead + Variable (SH x VR)

Pxxx (xxx) Pxxx

FOSH = SH x FOR

BASH = Budgeted Allowance based on Standard Hours VR = Variable Rate AFO = Actual Factory Overhead

Volume Variance BASH FOSH VV

FOSH = Factory Overhead Applied FOR = Factory Overhead Rate

The Golden Key Company produces three joint products: A, B, and C. Total production cost for November was P216,000. The units produced and unit sales prices at the split –off point were: Product A B C

Units Produced 60,000 80,000 100,000

Unit Sales Price P 2.20 1.25 1.28

Requirements: Allocation of joint costs using: 1. Market value method 2. Average unit cost method

Point 6 4 4

3.

weighted average method

The Marco Daniel Company produces three products: W, X and Y that maybe sold at the split off point or processed further. Additional processing costs are entirely variable and are traceable to the respective products produced. Total joint costs incurred amounted to P50,000. Product W X Y

Units Produced 20,000 15,000 15,000

Sales Value At Split-off P45,000 P75,000 P30,000

If processed further Additional cost Sales Value P20,000 P60,000 P20,000 P98,000 P16,000 P62,000

Requirements: A. Allocate joint costs and compute for the total cost using: 1. Market value at split-off point 2. Hypothetical market value method (assuming sales value at split-off point is not given)

MULTIPLE CHOICE Lee Co. produces two joint products, Bex and Rom. Joint production costs for June 2001 were P30,000. During June 2001, further processing costs beyond the split-off point needed to convert the products into salable form, were P25,000 and P35,000 for 1,600 units of Bex and 800 units of Rom, respectively. Bex sells for P50 per unit, and Rom sells for P100 per unit. Lee uses the net realizable value method for allocating joint product costs. 1. For June 2001, the joint costs allocated to product Bex were a. P20,000 b. P16,500 c. P13,500 d. P10,000 Life Co. manufactures products X and Y from a joint process that also yields a by-product, Z. Revenue from sales of Z is treated as a reduction of joint costs. Additional information is as follows:

Units produced Joint costs Sales value at split-off

PRODUCTS X Y 20,000 20,000 ? ? P300,000 P150,000

Z 10,000 ? P10,000

TOTAL 50,000 P262,000 P460,000

Joint costs were allocated using the sales value at split-off method. 2. The joint costs allocated to product X were a. P75,000 b. P100,000 c. P150,000 d. P168,000 Alpha Corp. manufactures a product that yields the by-product “Yum”. The only costs associated with Yum are selling costs of P.10 for each unit sold. Alpha accounts for sales of Yum’s separable costs from Yum’s sales, and then deducting this net amount from the major product’s cost of goods sold. Yum’s sales were 100,000 units at P1.00 each. 3. If Alpha changes its method of accounting for Yum’s sales by showing the net amount as additional sales revenue, then Alpha’s gross margin would a. Increase by P90,000 b. Increase by P100,000 c. Increase by P110,000 d. Be unaffected Bravo Company manufactures product J and K from a joint process. For product J, 4,000 units were produced having a sales value at split-off of P15,000. If product J were processed further, the additional costs would be P3,000 and the sales value would be P20,000. For product K, 2,000 units were produced having a sales value at split-off of P10,000. If product K were processed further, the additional costs would be P1,000 and the sales value would be P12,000.

4. Using the sales value at split-off method, the portion of the total joint costs allocated to product J was P9,000. What were the total joint costs? a. P14,400 b. P15,000 c. P18,400 d. P19,000 The Wooden Shoe Company produced three products at a joint cost of P100,000. Two of these products were processed further. Production and sales were: Product Weight Sales Additional Processing Costs A 300,000 lbs. P245,000 P200,000 B 100,000 lbs. 30,000 None C 100,000 lbs. 175,000 P100,000 5. If the net realizable value method is used, how much of the joint costs would be allocated to Product C? Assume that B is accounted for as a joint product. a. P38,889 b. P41,667 c. P50,000 d. P62,500 6. Assume B is a by-product whose sales value is credited to the joint processing costs. If net realizable value is used, how much of the joint costs would be allocated to Product C? a. P38,889 b. P43,750 c. P50,000 d. P62,500 7. If joint costs are allocated based on relative weight of the outputs, how much of the joint costs would be allocated to Product A? (All products are joint products). a. P43,750 b. P50,000 c. P60,000 d. P62,500 8. Delta Company produces two products from a joint processes: X and Z. Joint processing costs for this production cycle are P8,000.

X Z

Yard s 1,500 2,200

Sales price per yard at split-off P6.00 P9.00

Disposal cost per yard at split-off P3.50 P5.00

Further processing per yard P1.00 P3.00

Final sales Price per yard P7.50 P11.25

If X and Z are processed further, no disposal costs will be incurred or such costs will be borne y the buyer. Using a physical measure, what amount of joint processing cost is allocated to X and Z? a. P2,500 and P5,500 b. P3,243 and P5,500 c. P2,500 and P4,757 d. P3,243 and P4,757 9. Referring to number 8, using sales value at split-off, what is the total cost allocated to Z? a. P5,500 b. P12,100 c. P11,357 d. P4,757 10. Referring to number 8, if all units of product X were sold, what is the gross profit on sale of product X if the approximated net realizable value at split-off is used for allocating joint costs? a. P8,450 b. P5,071 c. P6,954 d. P9,750 11. Love Co. manufactures product A and B from a joint process. Sales value at split-off was P700,000 for 10,000 units of A and P300,000 for 15,000 units of B. Using the sales value at split-off approach, joint costs properly allocated to A were P140,000. Total joint costs were a. P98,000 b. P200,000 c. P233,333 d. P350,000

Ablen Corporation uses a process cost system and sells a variety of cooked meat. Four joint products produced out of the process are as follows: Product Pounds Produced Class A 1,000 Class B 9,000 Class C 400 Class D 5,100 The split-off point for these products occurs in Division B and the costs incurred up to this point are P20,000 for direct materials, P15,000 for direct labor, and P7,000 for factory overhead. 12. What are the joint cost allocated to Class A and Class B assuming the use of physical method for joint cost allocation. a. P1,000 and P9,000 b. P3,000 and P24,387 c. P20,000 and P15,000 d. P2,710 and P24,387 The Sunrise Corp. produces three production L, M and N from one input. The net realizable value of L at split-off is P100,000; M is P200,000; N is P20,000. Final sales value are P200,000, P300,000 and P20,000 for L, M and N respectively. However, these prices are subject to erratic change. Additional processing costs for L, M and N are P50,000, P75,000 and P 0 respectively. The numbers of units of each product are 60,000 of L, 60,000 for M and 30,000 of N. The total costs incurred up to the splitoff are P150,000. 13. If the physical quantities method is used, what amount of joint costs should be allocated to product L? Assume that product N is accounted for as a by-product whose income is credited to the joint costs of production. a. P46,875 b. P50,000 c. P62,500 d. P65,000

14. The expected net income for the Sunrise Corp. is a. P200,000 b. P225,000 c. P245,000 d. P370,000 Victoria Mills manufactures three products: A, B, and C in a joint process. For every ten kilos of materials input, the output is five kilos of A, three kilos of B, and two kilos of C, respectively. During the month, 50,000 kilos of raw materials costing P1,200,000 were process and completed with a joint conversion costs of P2,000,000. Conversion costs are allocated to the products salable, further processing which does not require additional raw materials was done at the following costs: A, P300,000; B, P200,000; C, P300,000. The unit selling price are: A, P100; B, P120 and C, P150. 15. The unit cost of product A is a. P80 b. P100 c. P253.20 d. P71.20 16. Assuming all units are sold, the gross margin on sale for product B is a. P800,000 b. P720,000 c. P600,000 d. P480,000 17. If all units of Product C are sold, and selling and administrative expenses are 20% of sales, the net income from the sale of Product C is a. P220,000 b. P180,000 c. P240,000 d. P640,000 Tiny Co produces three products: Bo Mo and Lo from same process. Joint costs for this production run are P2,100. Sales price

Disposal cost

Further

Bo Mo Lo

Pounds 800 1,100 1,500

Per lb at Split off P6.50 8.25 8.00

per lb at processing Final sales split off per lb. price per lb P3.00 P2.00 P7.50 4.20 3.00 10.00 4.00 3.50 10.50

If the products are process further, Tiny Co. will incur the following disposal costs upon sale: Bo, P3.00; Mo, P2.00 and Lo, P1.00. 18. Using sales value at split-off, what amount of joint processing cost is allocated to Mo? a. P700 b. P416 c. P725 d. P969 19. Using net realizable value at split –off, what amount of joint processing cost is allocated to Bo? a. P706 b. P951 c. P700 d. P444 20. Using physical measurement method, what amount of joint processing cost is allocated to Mo? a. P494 b. P679 c. P927 d. P700 Standard Costing 4. The following July information is for Kingston Company: Standard: Materials 3.0 feet per unit @ P4.20 per foot Labor 2.5 hours per unit @ P7.50 per hour Actual: Production 2,750 units produced during the month Material 8,700 feet used, 9,000 feet purchased @ P4.50 per foot Labor 7,000 direct labor hours @ P7.90 per hour What is the material price variance (calculated at point of purchase)? a. P2,700 U c. P2,610 F b. P3,105 F d. P1,890 U 5. Refer to number 1, what is the labor efficiency variance? a. P3,480 U c. P2,800 F b. P938 U d. P1,125 U 3. The following March information is available for Batt Manufacturing Company when it produced 2,100 units: Standard: Materials 2 pounds per unit @ P5.80 per pound Labor 3 direct labor hours per unit @ P10.00 per hour Actual: Materials 4,250 pounds purchased and used @ P5.65 per pound Labor 6,300 direct labor hours @ P9.75 per hour What is the material quality variance? a. P275 F c. P290 U b. PP637.50 U d. P630 F 4. Refer to number 3, what is the labor rate variance? a. P731.25 U c. P1,594 U b. P1,575 F d. P750 F 5. Information on Kennedy Company’s direct material costs is as follows: Standard price 3.60; Actual quantity purchased 1,600 units; standard quantity allowed for actual production, 1,450 units; material variance, P240 favorable. What was the actual purchase price per unit? a. P3.06 c. P3.45 b. P3.11 d. P3.75 6. Lab Corp. uses a standard cost system. Direct labor information for product CER for the month of October is as follows: standard rate P6.00 per hour; actual rate paid P6.10 per hour; standard hours allowed for actual production, 1,500 hours; direct labor efficiency variance P600 unfavorable. What are the actual hours worked? a. 1,400 c. 1,598 b. 1,402 d. 1,600

7. Redd Co. uses a standard cost system for its production process and applies overhead based on direct labor hours. The following information is available for August when Redd made 4,500 units: Standard:

Actual:

Direct labor hours per unit Variable overhead per direct labor hour Fixed overhead per direct labor hour Budgeted variable overhead Budgeted fixed overhead Direct labor hours Variable overhead Fixed overhead

2.5 hours P1.75 3.10 21,875 38,750 10,000 hrs. P26,250 38,000

Using the two-variance approach, what is the controllable variance? a. P5,812.50 U c. P3,625 F b. P4,375 F d. P2,187.50 U 8. Refer to number 7, what is the volume variance? a. P3,125 F c. P2,937.50 F b. P3,875 U d. P6,063 U 9. Actual fixed overhead is P33,300 (12,000 machine hours) and fixed overhead was estimated at P34,000 when the predetermined rate of P3.00 per machine hour was set. If 11,500 standard hours were allowed for actual production, applied fixed overhead is a. P33,300 c. P34,500 b. P34,000 d. P36,000 10. One unit requires 2 direct labor hours to produce. Standard variable overhead per unit is P1.25 and standard fixed overhead per unit is P1.75. If 330 units were produced this month, what total amount of overhead is applied to the units produced? a. P990 c. P660 b. P1,980 d. undeterminable

Activity Based Costing Olivia Enterprise is an exporter of souvenir items. The following overhead costs data have been accumulated: Activity Center Materials handling Painting Assembly

Cost Driver Grams handled Units painted Labor hours

Amt. of Activity 100,000 grams 50,000 units 4,000 hours

Center Costs P50,000 200,000 120,000

Job 1234 contains3,000 units. It weighs 10,000 grams and uses 300 hours of labor. Prime costs incurred amounts to P180,000. 1. The overhead costs that should be assigned to Job 1234 is a. P14,000 b. P26,000 c. P12,000 d. P9,000 2.

The cost to produce a unit of Job 1234 is a. P64.67 b. P68.67 c. P64.00 d. P60.00 Sekar Company manufactures two types of Electronic Toy,the Regular and SuperPro. The following data have been obtained: Regular Super Pro Direct material cost per unit P33 P38 Direct labor cost per unit P32 P44 Direct labor hours 12,000 3,000 Machine hours 2,000 4,000 Engineering hours 450 450 Number of set ups 5 20 Number of units 8,000 2,200 Currently, overhead costs are assigned to products on the basis of direct labor hours, but the company decided to adopt the ABC method of cost allocation. The overhead consist of the following items: Overhead Cost Item Setup costs Engineering costs

Cost Driver Amount No. of setups P250,000 No. of engineering hours 180,000

Machine costs

No. of machine hours

900,000

3.

Using direct labor hours to allocate overhead costs, the total cost of product Regular is a. P1,576,000 b. P1,056,000 c. P1,312,000 d. P520,000

4.

Using ABC, the total overhead costs assigned to product Super Pro is a. P1,576,000 b. P1,402,000 c. P890,000 d. P1,056,000

5.

Using ABC, the total manufacturing costs for product Regular is a. P1,576,000 b. P1,402,000 c. P520,000 d. P960,000

6.

Using ABC, the cost per unit of product SuperPro is a. P486.54 b. P82.00 c. P562.00 d. P682.00

In manufacturing Roller blades, Super Store Company’s plant used 400 direct labor hours, 500 machine hours and 20 setups. The following overhead costs were taken from the factory accounts: Overhead Expenses Machining center Setup center

Volume of Activities 20,000 machine hours 100 setups 4,000 direct labor hours The plant was using a factory wide overhead rate based on direct labor hours. A new ABC system will use machine hours in the Machining Department and number of setups in the Setup Department as cost drivers. P120,000 40,000

7.

The overhead costs assigned to roller blades using direct labor hours to allocate overhead cost is a. P160,000 b. P16,000 c. P12,000 d. P120,000

8.

Using ABC, the overhead costs assigned to roller blades is a. P160,000 b. P16,000 c. P12,000 d. P11,000

The controller of D’Day Chemical Supply has established the following activity centers with overhead costs and related cost drivers: Activity Centers Materials Handling Machine setups Hazardous waste Quality Control Others

Budgeted Overhead Costs P120,000 240,000 60,000 85,000 205,000

Cost Drivers Weight of raw materials Number of setups Weight of hazardous Materials Number of inspections Machine Hours

Budgeted Level for Cost Drivers 60,000 pounds 120 setups 12,000 pounds 1,000 inspections 102,500 hours

An order for 1,000 boxes of powdered chemicals has the following production requirements: Raw materials (in pounds) Machine setups Hazardous materials (in pounds) Inspections Machine hours 9.

10,500 5 1,850 13 490

Assume the company allocates overhead costs on a plant wide basis using machine hours, the plant wide overhead rate is a. P1.45/mhr b. P6.93/mhr c. P2.00/mhr d. P2.50/mhr

10. The same assumption as in number 9, the overhead cost per box of powdered chemicals is a. P3.396 b. P3,396 c. P2.50 d. P.98 11. Using ABC, the total overhead costs charged to the 1,000 boxes of powdered chemical is a. P120,000 b. P205,000 c. P42,335 d. P3,396 12. The same assumption as in number 11, the overhead costs per unit of powdered chemical is a. P42,335 b. P3,396 c. P120 d. P205 e. P42.335 The Chromosome Manufacturing Company produces two products, X and Y. X is selling at P12.70 per unit while Y is selling at P12.50 per unit. The following data are obtained for the current period. Product X Product Y Number of units 11,000 3,000 Direct material cost per unit P3.50 P3.00 Direct labor hours 10,000 2,500 Direct labor cost per unit P5.50 P4.00 Machine hours 2,100 2,800 Inspection hours 80 100 Purchase orders 10 30 Overhead costs Inspection costs Purchasing costs Machine costs

Amount P16,200 8,000 49,000

13. Using direct labor hours to allocate overhead costs, the gross margin of product X is a. P17,860 b. (P17,860) c. P32,500 d. (P32,500) 14. Using ABC, the total manufacturing costs for product Y is a. P64,000 b. P19,000 c. P35,640 d. P92,200 15. Using ABC, the total gross margin for the period is a. P185,700 b. P267,200 c. (P15,400) d. (P44,360) Amend Instrument Inc. manufactures two product: missile instruments and pressure gauges. During January, 50 range instruments and 300 pressure gauges were produced, Direct cost of P54,000 and P85,000 are incurred for Instruments and Gauges, respectively and overhead costs of P81,000 were incurred. An analysis of overhead costs reveals the following activities: Activity Material handling Machine setups Quality inspections

Cost Driver Number of requisitions Number of setups Number of inspections

Total Cost P30,000 P27,000 P24,000

The cost driver volume for each product was as follows: Cost Driver Number of requisitions Number of setups Number of inspections

Instruments 400 150 200

16. The amount of overhead assigned to product Instruments is a. P27,000 b. P30,000 c. P40,500

Gauges 600 300 400

Total 1,000 450 600

d.

P29,000

17. The total manufacturing cost of product Instrument is a. P83,000 b. P54,000 c. P85,000 d. P135,000 18. The cost per unit of product Gauge is a. P270 b. P553 c. P457 d. P283