33:010:451 Lecture Notes - Lecture 5: Gross Margin
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Cornerstone Exercise 7.10 (Algorithmic)
Allocating Joint Costs Using the Net Realizable Value Method
A company manufactures three products, L-Ten, Triol, and Pioze,from a joint process. Each production run costs $12,600. None ofthe products can be sold at split-off, but must be processedfurther. Information on one batch of the three products is asfollows:
Product | Gallons | Further Processing Cost per Gallon | Eventual Market Price per Gallon | |
|---|---|---|---|---|
| L-Ten | 3,300 | $0.40 | $2.50 | |
| Triol | 3,800 | 1.20 | 4.90 | |
| Pioze | 2,500 | 1.50 | 6.50 |
Required:
1. Allocate the joint cost to L-Ten, Triol, andPioze using the net realizable value method. Round your allocationpercentages to four decimal places and round the allocated costs tothe nearest dollar.
| Joint Cost | |
| Grades | Allocation |
| L-Ten | $ |
| Triol | |
| Pioze | |
| Total | $ |
2. What if it cost$2.20 to process each gallon of Triol beyond the split-off point?How would that affect the allocation of joint cost to the threeproducts? Round your allocation percentages to four decimal placesand round the allocated costs to the nearest dollar.
| Joint Cost | |
| Grades | Allocation |
| L-Ten | $ |
| Triol | |
| Pioze | |
| Total | $ |
Joint Costing
Am I on the right track to correct answers? May you providefeedback for me? If I am not on the right track, then, can you showme why or why not?
A. Rockwell Company manufactures products C and R from a jointprocess. The total joint costs are $120,000. The net realizablevalue at split off was $140,000 for 8,000 units of product C and$60,000 for 2,000 units of product R.
1. Using the information in Part a,calculate the amount of joint costs to be allocated to Products Cand R using the NET REALIZABLE VALUE METHOD.
$ 84,000_________ allocated to ProductC $ 36,000________allocated to Product R
B. Darvin Company manufactures products A and B from a jointprocess, which also yields a by-product, X. Darvin accounts for therevenues from its by-product sales as other revenue.
Additional information follows: A BX Total
Unitsproduced 9,000 15,000 6,000 30,000
JointCosts ? ? ? $117,000
Sales value @ split off point $100,000 $100,000 $100,000$300,000
2. Using the information in Part b, calculated the amount ofjoint costs to be allocated to the products :
PHYSICAL UNITSMETHOD $ 43,875___ A $73,125_____B $0______ X
NET REALIZABLE VALUE METHOD $58,500___A $ 58,500____B $ 0______ X
C. Meyer Corp. manufactures products W, X, Y, and Z from a jointprocess. The JOINT COSTS amount to $120,000. Additional informationfollows:
PRODUCT Unitsproduced Sales Value @ split offpoint Further processingcosts Sales value after further
processing
W 7,000 $70,000 $7,500 $90,000
X 5,000 $60,000 $6,000 $70,000
Y 4,000 $40,000 $4,000 $50,000
Z 4,000 $30,000 $3,500 $32,000
Totals 20,000 $200,000 $21,000 $242,000
3. Using the information in Part c, find the following:
Product | Incremental Revenue | Incremental Cost | Process further? yes or no | *Net Realizable Value | $Amt allocated to product using NRVmethod |
w | $20,000 | $7,500 | Yes | $62,500 | $40,800 |
x | $10,000 | $6,000 | Yes | $54,000 | $36,000 |
y | $10,000 | $4,000 | Yes | $36,000 | $24,000 |
z | $2,000 | $3,500 | No | $30,000 | $19,200 |
* must consider whether or not product will be sold at splitor processed further
Answer the following questions related to jointcosts:
Are joint costs allocated to By-products? (yes or )___NO____
What are 2 ways that the proceeds fromby-products can be shown on the Income Statement?
Use the proceeds from the by-productto reduce the joint cost.
The proceeds from the by-product areshown as other revenue in the revenue section of the incomestatement.
The two asset recognition methods:The net realizable value method that shows the net realizable valueof the by-products on the incomestatement as a deduction from thetotal manufacturing cost of the joint products in the period inwhich the by-product is produced. OR The other income at productionpoint method that shows the net realizable value of by-products onthe income statement as other income or other sales revenue in theperiod in which the by-product is
The two revenue methods:The other income at selling point method shows the net salesrevenue from a by-product sold at time of sale on the incomestatement as other income or other sales revenue. OR Themanufacturing cost reduction at selling point method shows the netsales revenue from a by-product sold at time of sale on the incomestatement as a reduction of total manufacturing cost.
What is the difference between BY-PRODUCTS and SCRAP?
By-products are incidental products with a relatively low orminor value in comparison with the sales value of the jointproducts, yet have a positive net realizable value; the proceedsfrom by-products can be shown on the income statement as otherrevenue or as a decrease to the joint cost. On the other hand,scrap is an incidental product that has a negative net realizablevalue; the disposal cost related to the scrap is added to jointcost, which is allocated to the main products.
