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Marketing
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MKT 300
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Margaret Buckby
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134 Cost Management Chapter 9 Joint Product and By-Product Costing LEARNING OBJECTIVES Chapter 9 addresses the following questions: LO1 Describe a joint process, and explain the difference between a by-product and a main product. LO2 Allocate joint costs. LO3 Explain the factors that are considered in choosing a joint cost allocation method. LO4 Identify the relevant information for deciding whether to process a joint product beyond the split-off point. LO5 Apply the methods that are used to account for the sale of by-products. LO6 Explain how a sales mix affects joint cost allocations. LO7 Evaluate the uses and limitations of joint cost information. These learning questions (LO1 through LO7) are cross-referenced in the textbook to individual exercises and problems. © 2012 John Wiley and Sons Canada, Ltd. 135 Cost Management QUESTIONS 9.1 Some goods are produced jointly; many products result from a common process. These are called joint products. Main products have high sales value relative to other products when split-off occurs. By-products have low sales value relative to the main products’ values. 9.2 Because all of the other products are sold at $200 or more, the product that sells for only $10 would probably be considered a by-product. Main products have relatively high sales values compared to by-products. 9.3 There are two methods of recognizing revenue from by-products. The revenue can be recognized at the split-off point, or recognized at the time of sale. The treatment depends on whether the NRV is positive or negative, and also on whether it is recognized at the time of production or sale. Negative NRV is always added to joint costs. When positive NRV is recognized at time of production, it is subtracted from joint costs. When positive NRV is recognized at time of sale, it may be treated as revenue, treated as non-revenue income, or subtracted from COGS. 9.4 Products from any of the following industries would be appropriate: oil and gas, chemical, lumber products, tour companies, meat production, wheat production, milling companies. 9.5 Joint costs are product costs that cannot be separately traced to individual products, so they are indirect with respect to individual products. Separable costs are the direct costs of producing separate products (but these costs may or may not be direct with respect to individual units). 9.6 The split-off point in a joint process occurs at the point when the individual joint products become separately identifiable. All costs incurred up to the split-off point are joint costs and (assuming no further split-off points) the costs that follow are separable costs identifiable with a specific joint product. 9.7 Here are a few examples; students may think of others that are also appropriate. A professor may do some consulting work that simultaneously generates ideas for a journal article (main product), a case for a book (main product), and a problem for an exam (by- product). A CA firm may work on client development that simultaneously produces prospective engagements for the auditing and tax services (all probably main products). A research scientist may have an individual project that results in twenty-two patentable items (some may be main products, some may be by-products, and some may be scrapped). 9.8 Once the joint product emerges, the joint cost should be viewed as a "sunk" cost; it is a past cost that should not influence subsequent product decisions. Further processing decisions should be made based on the additional revenues obtained in relation to the additional separable costs needed to obtain those revenues. © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 136 9.9 If all joint products were sold in the period produced, costs might not need to be allocated. But for financial reporting, all production costs must be assigned to cost of goods sold and ending inventories of the joint products to match revenues and expenses. 9.10 The contribution of each product is the selling price less separable costs. Revenues and separable costs are relatively easy to identify and measure. Therefore accountants know each product’s contribution. However, if profit is defined to mean accounting income, all costs including fixed and joint costs are allocated. To allocate costs, an allocation base must be chosen. Different allocation bases result in different profit figures. Hence, the profitability of one joint product cannot be uniquely determined, but will vary with different allocation bases. 9.11 Because the products have relatively equal value, they should all be treated as main products. 9.12 To perform market based joint cost allocations (net realizable value and constant gross margin NRV), an estimate is made of the sales value of each product. Common and separable costs are known with reasonable certainty, but price may be estimated. If the market for goods is not volatile, the price can be determined from past experience. If prices change frequently, information sources such as competitor’s prices or a list of commodity prices could be used for estimates. 9.13 Following are qualitative factors that might influence managers to process a joint product beyond the split-off point. The organization may offer a product mix, and dropping one of the products could affect sales of other products, so a group of products are always processed further. An example of this would be meat related products. Even though round steak does not need to be processed further, some people want very lean hamburger and customers may shop elsewhere if lean hamburger is not sold. Manager preferences might affect the decision to process further. For example, managers of a dairy might have a preference for a particular type of cheese that other dairies do not produce, and so they continue producing it even though sales are low and the milk could be used for other products. Resource scarcity encourages managers to consider new processes for raw materials such as sawdust and wood chips. Environmental issues also influence joint product decisions. Sometimes companies choose to convert waste into a by-product that can be sold to avoid contributing to waste disposal. Another factor is the effect on employees and local communities. Managers may choose to continue additional processing even when the financial results are relatively weak to avoid closing production facilities and laying off employees. 9.14 Some by-products are valuable and could be stolen, and so internal controls and records are kept. For by-products that are unlikely to be stolen, no controls or records need to be kept. An example of a by-product that could be stolen is raw malachite, a by-product of copper production that can be further processed into cabochons for jewellery. An example of a by-product that would not need controls is whey from dairy product processing. © 2012 John Wiley and Sons Canada, Ltd. 137 Cost Management 9.15 Some managers may be responsible for the success of certain main products. If the profit varies widely depending on the joint cost method used, managers of products with relatively large allocations of cost will feel that the system is unfair. It is possible that some products would even appear to be unprofitable under a particular joint cost allocation method, and managers would then be penalized unfairly. When allocated joint costs affect managers’ performance evaluations, then the “fairness” of the allocation becomes their concern. © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 138 MULTIPLE-CHOICE QUESTIONS 9.16 SMT Ltd. manufactures three products. Production begins with a joint process, and the three outputs of the joint process are processed further to produce products L, M, and N. The outputs at split-off have no market value. Last year, the joint costs amounted to $600,000. Other data for last year are as follows: Product L Product M Product N Selling price per unit $160 $300 $400 Costs per unit after split-off point to complete and$100l $200 $350 Total output at split-off point used in producti16,400 kg 10,000 kg 8,400 kg Production in units 20,000 10,000 7,000 Sales in units 18,000 8,000 7,000 Using the estimated (approximate) net realizable value method of joint costing, the inventory cost per unit of product M is: a) $226.91 b) $223.53 c) $221.52 d) $220.00 e) $217.24 Ans: B [L: ($160-$100) * 20,000 = $1,200,000 NRV; M: ($300-$200)*10,000 = $1,000,000 NRV; N: ($400-$350) * 7,000 = $350,000 NRV; Total NRV = $1,200,000+$1,000,000+$350,000 = $2,550,000; M: $1,000,000/$2,550,000 * $6,000,000 = $235,294 allocated joint costs M: ($235,294/10,000 ) + $200 = $223.57 total unit costs. The following information pertains to Questions 9.17 and 9.18: Omega Company manufactures three chemicals in a joint process. The manufacturing costsof the joint process include $25,000 of direct materials and $35,000 of conversion costs. All threechemicals can be sold in their unrefined form immediately after the split- off point, or they canbe further refined before they are sold. During May, all three chemicals were further refined. Thefollowing table shows data regarding production for the month of May: Chemical A B C Sales price per litre before refining $ 20 $ 25 $ 10 Sales price per litre after refining $ 35 $ 40 $ 18 Cost of refining $28,000 $10,000 $12,000 Total output of chemical at split-off 2,500 L 1,600 L 3,000 L Total output of chemical after refining 2,300 L 1,500 L 2,700 L © 2012 John Wiley and Sons Canada, Ltd. 139 Cost Management 9.17 Using the sales value at split-off method, the total joint cost allocated to Chemical A in May(rounded to the nearest hundred dollars) is: a) $21,100 b) $25,000 c) $22,600 d) $25,500 e) $33,600 Ans: B ($20*2,500)/[($20*2,500)+($25*1,600)+($10*3,000)] * ($25,000+$35,000) = $25,000 9.18 Now assume that Omega Company uses the physical measures method, that the refining processfor Chemical C also produces a hazardous by-product that must be disposed of at a cost of $5 perlitre, and that refining 1,000 L of Chemical C results in 100 L of this by- product. For the monthof May, what effect would refining Chemical C have on Omega Company's profits as comparedwith its profits if Chemical C was sold at split-off without being further refined (rounded to thenearest $100)? a) $17,100 more profits by refining b) $20,300 less profits by refining c) $8,100 more profits by refining d) $5,100 more profits by refining e) $8,400 less profits by refining Ans: D ($18*2,700)-12,000-(300*$5) = $35,100; $35,100-($10*3,000) =$5,100 The following information pertains to Questions 9.19 and 9.20: Omega Company manufactures three chemicals in a joint process. The manufacturing costsof the joint process include $25,000 of direct materials and $35,000 of conversion costs. Allthree chemicals are then processed further before they are sold. Other pertinent data are asfollows: Chemicals Sales Value at Split-ofSeparable Costs Final Sales Value A $50,000 $28,000 $100,000 B 40,000 10,000 60,000 C 30,000 12,000 40,000 9.19 Using the estimated net realizable value method, the joint costs allocated to ChemicalA would be: a) $16,800 b) $25,000 c) $28,800 d) $30,000 e) $33,600 Ans: C in thousands ($100-$28)/[($100-$28)+($60-$10) + ($40-$12)]*($25+$35)=$28.8 © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 140 9.20 The decision to process all three chemicals beyond the split-off point is suboptimal. If the optimaldecision had been made, the income of Omega Company would have improved by: a) $2,000 b) $10,000 c) $30,000 d) $60,000 e) $12,000 Ans:A (Only C should not be processed passed split-off. Selling C at split-off will increase revenue by $2,000). © 2012 John Wiley and Sons Canada, Ltd. 141 Cost Management EXERCISES 9.21 Identifying Joint Products A. The following are joint products 1. Sand produced with three levels of fineness. The sand is produced by processing raw dirt and includes a number of joint costs such as labour and equipment. Some of the products are processed further. 3. Milk products are joint products because they all come from one liquid that is processed further, depending on the product. 6. Airlines could be considered as incurring joint costs because a large proportion of cost is common to all of the products. The following are not joint products 2. Automobiles and trucks because either one can be manufactured without producing the other. 4. Motorcycles and mopeds because either one can be manufactured without producing the other. 5. Clothing can be manufactured in any style without producing other styles and is therefore not a joint product. B. Two other product groups would include tour services or cruise lines, products manufactured from crude oil such as gasoline, diesel, and heating oil, and many types of food products such as beverage manufacture, cereals, milling operations, and so on. 9.22 Identifying Joint and Separable Costs - Cowboy Cattle Company 1. Joint All cattle require veterinary work, and the cost per specific cow is incurred before the split-off point. 2. Separable The cost occurs after the split-off point and can be traced directly to hamburger. 3. Joint The cost is incurred before the split-off point. 4. Joint The cost is incurred before the split-off point. 5. Separable The cost is incurred after the split-off point, specifically for leather. 6. Separable The cost is incurred after the split-off point, specifically for steaks and roasts. 7. Joint Cost of production incurred before the split-off point. © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 142 9.23 Profitability of Joint Products – Larry Dean A. The total joint cost is $700, which represents the costs incurred before puppies were born. The rest of the costs are separable. First calculate the NRV by type of puppy and in total: 2 Chocolate Males [2 puppies × ($300 – $160 – $40)] $ 200 2 Yellow Males: [2 puppies × ($400 – $160)] 480 2 Yellow Females: [2 puppies × ($450 – $160)] 580 Total NRV $1,260 Then use each product’s relative proportion of NRV to allocate the joint cost: 2 Chocolate Males [($200/$1,260) × $700] $111.11 2 Yellow Males [($480/$1,260) × $700] 266.67 2 Yellow Females [$580/$1,260 × $700] 322.22 Total allocated $700.00 B. Gross profit on sale of each puppy: Chocolate Male [$300 – $160 – $40 – ($111.11)/2)] $ 44.44 per puppy Yellow Male [$400 – $160 – ($266.67/2)] 106.67 per puppy Yellow Female [$450 – $160 – ($322.22/2)] 128.89 per puppy 9.24 By-Product Further Processing Decision According to the following calculations, the contribution margin is higher if the by- product is sold at the split-off point rather than processed further. Therefore, the by- product should not be processed further. Sold at split-off: 100 x $8 = $800 Processed further: 100 x ($19 - $12) = $700 © 2012 John Wiley and Sons Canada, Ltd. 143 Cost Management 9.25 NRV Method, Contribution Margin, Further Processing for a Service - Deluxe Tours A. First-Class Tourist-Class Number of passengers 100 200 Revenue $200,000 $200,000 Incremental costs 30,000 30,000 Net realizable value 170,000 170,000 Allocated lease cost 100,000 a 100,000 b Margin $ 70,000 $ 70,000 a $200,000 lease cost * [$170,000/($170,000+$170,000] = $100,000 b $200,000 lease cost * [$170,000/($170,000+$170,000] = $100,000 B. The answer to this question depends upon what is meant by “the contribution margin generated by first-class passengers.” An accountant could determine it is $70,000, the margin after deducting a share of the lease cost. However, a more accurate reflection would be $170 per passenger, the revenue generated by first-class passengers, less the incremental costs of serving those passengers. An alternative answer is to consider the amount of margin generated by having a separate class of passengers rather than filling the entire cruise ship with tourist-class passengers. Assume that 25 tourist-class berths replaced 20 first-class berths. (Students could make any reasonable assumption concerning how many tourist-class berths would replace first- class berths.) So, the trade-off is 25 tourist-class versus 20 first-class berths. Incremental contribution margin if first-class cabins are sold to tourist-class passengers: Contribution per passenger for first-class: $200 - $30 = $170 Contribution per passenger for tourist-class: $100 - $15 = $85 Contribution for 20 first class passengers (20 x $170) $3,400 Contribution for 25 tourist class passengers (25 x $85) 2,125 Additional contribution for first class $1,275 C. In the example above, no allocated costs were considered because they are essentially sunk costs for the decision to use the space for first-class or tourist class. Those costs are incurred either way, so only incremental contribution is analyzed. © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 144 9.26 Four Joint Cost Allocation Methods with Sales Mix, Further Processing Decision - The Palm Oil Company A. Computation of $100,000 joint-cost allocation using four allocation methods: (1) Sales value at split-off point Sales Value at Allocation Product Split-Off Point Proportions of $100,000 Soap grade $ 50,000 50/200 = 0.25 $ 25,000 Cooking grade 30,000 30/200 = 0.15 15,000 Light moisturizer 50,000 50/200 = 0.25 25,000 Heavy moisturizer 70,000 70/200 = 0.35 35,000 $200,000 $100,000 (2) Physical volume Allocation Physical volume Proportion of $100,000 Soap grade 100,000 litres 100/500 = 0.20 $ 20,000 Cooking grade 300,000 litres 300/500 = 0.60 60,000 Light moisturizer 50,000 litres 50/500 = 0.10 10,000 Heavy moisturizer 50,000litres 50/500 = 0.10 10,000 500,000litres $100,000 (3) Estimated Net Realizable Value Estimated Net Final Sales Separable Realizable Allocation Product Value Costs Value Proportion of $100,000 Fine Soap $300,000 $200,000 $100,000 100/200=0.50 $ 50,000 Superior Cooking Oil 100,000 80,000 20,000 20/200=0.10 10,000 Light moisturizer 50,000 0 50,000 50/200=0.25 25,000 Premium Moisturizer 120,000 90,000 30,000 30/200=0.15 15,000 $200,000 $100,000 (4) Constant Gross Margin Method First calculate the gross profit margin ratio for all products: Product Final Sales Value Separable Costs Contribution Fine Soap $300,000 $200,000 $100,000 Superior Cooking Oil 100,000 80,000 20,000 Light Moisturizer 50,000 0 50,000 Premium Moisturizer 120,000 90,000 30,000 Total $570,000 $370,000 200,000 Less joint costs 100,000 Gross margin $100,000 Gross profit margin ratio = $100,000/$570,000 = 0.175439 © 2012 John Wiley and Sons Canada, Ltd. 145 Cost Management Second, apply the gross profit margin ratio to each product to determine cost of goods sold. Then subtract separable costs from cost of goods sold to determine the joint cost allocation for each product. Gross Separable Allocation Product Revenue Margin* COGS Costs of $100,000 Fine Soap $300,000 $ 52,632 247,368 $200,000 $ 47,368 Superior Cooking Oil 100,000 17,544 82,456 80,000 2,456 Light Moisturizer 50,000 8,772 41,228 0 41,228 Premium Moisturizer 120,000 21,052 98,948 90,000 8,948 $570,000 $100,000 $100,000 * Gross margin = Revenue x Gross profit margin ratio = Revenue x 0.175439 B. Contribution from Processing Soap Grade into Fine Soap: Incremental revenue = $300,000 - 50,000 $250,000 Incremental costs 200,000 Incremental operating income $ 50,000 Contribution from Processing Cooking grade oil into Superior Cooking Oil: Incremental revenue = $100,000 - 30,000 $ 70,000 Incremental costs 80,000 Incremental operating income $(10,000) Contribution from Processing Heavy Moisturizer into Premium Moisturizer: Incremental revenue = $120,000 - 70,000 $ 50,000 Incremental costs 90,000 Incremental operating income $(40,000) Operating income can be increased by $50,000 if both Cooking Grade Oil and Heavy Moisturizers are sold at the split-off point. Soap Grade should continue to be processed further. 9.27 Sales Value at Split-Off, Physical Output, NRV Methods,Further Processing Decision - Flowering Friends A. 1. Sales value at split-off point method Allocation Sales Value at Split-off Point Percent of $15,000 Premium ($5*2,000) $10,000 29% $ 4,350 Regular ($3*8,000) 24,000 71 10,650 $34,000 100% $15,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 146 2. Physical output method Allocation Number of Pots Percent of $15,000 Premium 2,000 20% $ 3,000 Regular 8,000 80 12,000 10,000 100% $15,000 3. Net realizable value method Allocation Net Realizable Value Percent of $15,000 Premium ($25*2,000) $ 50,000 38% $ 5,700 Regular ($10*8,000) 80,000 62 9,300 $130,000 100% $15,000 B. Based on a comparison of the contributions for each alternative, the company should process further: Sell as premium $25 Process further ($35 – $20/4 - $3) 27 Extra contribution from processing further $ 2 9.28 NRV and Physical Output Methods, Further Processing Decision - Click and Clack Recyclers A. There are no separable costs for these products, so each product’s net realizable value is the revenue per litre. However, one litre of oil yields 0.7 motor oil and 0.3 fuel oil, so for each litre of oil produced, the total NRV is 0.7*$3 + 0.3*$1.50 = $2.55. The total costs per litre are $0.75 + $1.25 = $2.00. The inventory cost per litre of residual fuel oil is ($1.50*0.3)/$2.55*$2.00 = $0.3529 B. If allocated cost were based on physical output, the cost per litre for residual fuel oil is 0.3*$2.00 = $0.60. C. Special fuel would need to match the contribution for residual fuel oil. The contribution for residual fuel oil is $1.50 per litre. The minimum acceptable price for Special Fuel Oil is $1.50 plus the $0.40 per litre for additional processes or $1.90 per litre. At this price the managers would be indifferent to selling residual oil or processing it further. © 2012 John Wiley and Sons Canada, Ltd. 147 Cost Management 9.29 By-product Value Recognized at Time of Production Versus Time of Sale - Mile High Lumber Mill A. Income Statement with By-Product Value Recognized at the Time of Sale Revenue: Lumber (270,000 BF x $3) $810,000 Scraps (900 logs x $10) 9,000 Total Revenue a 819,000 Cost of Goods Sold (270,000BF x $2 ) 540,000 Gross Margin $279,000 aCost is calculated as follows: $600,000/300,000 bd ft = $2 per BF B. Income Statement with By-Product Value Recognized at the Time of Production Value of inventory for the main product: Joint product costs incurred $600,000 Less NRV of by-product (1,000 logs x $10) 10,000 Net joint product cost $590,000 Product cost per board foot ($590,000/300,000 bd ft) $1.966667 Income statement: Revenue (270,000 BF x $3.00) $810,000 Cost of Goods Sold (270,000 BF x $1.966667) 531,000 Gross Margin $279,000 Notice that there is no difference between gross margins under the two methods. This will be true only under rigid conditions: (1) the proportion of main products sold is equal to the proportion of by-products sold during the period, and (2) there is either no beginning inventory or by-products in beginning inventory are sold for the exact amount estimated during the prior period. However, as long as by-product values are immaterial, the methods have little effect on the income statement and balance sheet. 9.30 Physical Output, NRV, and Constant Gross Margin NRV Methods,Further Processing Decision - The Paint Palette Company A. Physical output method: For Premium: (30% * $10,000) $ 3,000 For regular: (70% * $10,000) 7,000 Total allocated $10,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 148 B. NRV method For premium [30%*4,000 litres * ($5 - $1)] $ 4,800 For regular [70%*4,000 litres * ($2.5 – $.25)] 6,300 Total NRV $11,100 Allocation: Allocated to premium ($4,800/$11,100)*$10,000 $ 4,324 Allocated to regular ($6,300/$11,100)*$10,000 5,676 Total allocated costs $10,000 C. Constant Gross Margin NRV Method First, determine gross margin percentage: Total revenue (30%*4,000*$5)+ (70%*4,000*$2.5) $13,000 Less: Separable costs ($1*4,000*30%) + ($.25*4,000*70%) $ 1,900 Common costs 10,000 11,900 Gross margin $ 1,100 Gross margin percentage ($1,100/$13,000) 8.46153% Next, allocate common cost: Premium Regular Total Revenue $6,000 $7,000 $13,000 Gross Margin (508) (592) (1,100) Separable costs (1,200) (700) (1,900) Allocated Common Cost $4,292 $5,708 $10,000 D. Compare the contribution per litre of the two alternatives: Contribution per litre if processed further ($22 - $11 - $1) $10 Continue with current process: ($10 - $.25x4) 9 Increase in contribution per litre if process further $ 1 © 2012 John Wiley and Sons Canada, Ltd. 149 Cost Management 9.31 Calculate Missing Information for Sales Value at Split-off Point Method - The Chile Salsa Company This problem can be solved in a series of steps, where the answers for some parts are needed to answer others. If joint costs are allocated based on the sales value at split-off point method, the joint costs for Spicy Hot are: ($25,000/$100,000) * $60,000 = $15,000 (1) Therefore, the joint cost for Medium is ($60,000 - $24,000 - $15,000) = $21,000 (2) Now the values for sales at split-off for medium and mild can be calculated: Medium: [($21,000/$60,000)*$100,000] = $35,000 (3) Mild: ($100,000 - $35,000 - $25,000) = $40,000 (4) Mild Medium Spicy Hot Total Units produced 24,000 ? ? 48,000 Joint costs $24,000 (2)$21,000 (1)$15,000 $60,000 Sales value at split-off point (4) $40,000 (3) $35,000 $25,000 $100,000 Additional cost if process further $9,000 $7,000 $5,000 $21,000 Sales value if processed further $55,000 $45,000 $30,000 $130,000 Notice that the information about units produced was irrelevant in this problem. 9.32 Further Processing Profit and Decision - Conrad Miller A. Allocation for Very Flexible under the sales value at split-off point method: $120,000/($1,500,000) * $900,000 = $72,000 Gross profit: Revenue – Separable costs – Allocated joint costs = $135,000 - $12,000 - $72,000 = $51,000 B. Based on a comparison of the contribution of the two alternatives, the company should process further: Sell at split-off $120,000 Process further ($135,000 - $12,000) 123,000 Contribution from processing further $ 3,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 150 9.33 Accounting for Main Products and By-products - Nutri-Smoothie A. Gross margin if by-product value is recognized at time of production Value of inventory for main product Joint product costs incurred $12,000 Less NRV of by-product (2,000) Net joint product cost $10,000 Income statement Revenue (18,000 * $2.00) $36,000 Joint costs ($10,000/20,000 *18,000) (9,000) Gross margin $27,000 B. Gross margin if by-product value is recognized at the time of sale Revenues: Smoothies (18,000 * $2.00) $36,000 Revenues: Compost 2,000 Total revenue 38,000 Joint Costs ($12,000/20,000)*18,000 (10,800) Gross Margin $27,200 C. Inventories if by-product value is recognized at the time of production: Smoothies ($10,000/20,000 *2,000) $1,000 Compost ($2,000/8,000 * 2,000) 500 Ending Inventories if by-product value is recognized at the time of sale: Smoothies ($12,000/20,000 *2,000) $1,200 Compost 0 © 2012 John Wiley and Sons Canada, Ltd. 151 Cost Management PROBLEMS 9.34 Identifying Joint Costs, Choice of Allocation Method - Roses to Go A. Roses to Go must pay someone to water and tend to the roses. The company must pay for labour to cut the roses. It pays for fertilizer and water and depreciation on any buildings used in the production and cutting process. If the roses are cooled after cutting, the cost of cooling must be paid. All of these are joint costs. B. Use the physical volume method because it is the most simple and will not distort costs if there is little difference in the packaging and pricing of the products. C. If there are different prices, the sales value at split-off point method would work best here because the separable costs would be very similar. This method is most simple and would be the best choice because it does not distort the costs. 9.35 NRV, Processing Further Decision – Deepa Company A. First calculate the NRV for Products 1 and 2: Product 1 ($4 × 10,000 kg) $40,000 Product 2 [($3 – $2) × 30,000 kg] 30,000 Total NRV $70,000 Notice that the joint costs ($55,000 + $65,000 = $120,000) are greater than the total NRV, and so the products are unprofitable. Next, allocate joint costs based on NRV: Product 1 [($40,000/$70,000) × $120,000)] $ 68,571 Product 2 [($30,000/$70,000) × $120,000)] 51,429 Total Allocated $120,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 152 Finally, calculate the gross profit for pounds sold by product line and total: Product 1 Product 2 Sales Revenue: Product 1 (7,000 kgs× $4 per kg) $ 28,000 Product 2 (26,000 kgs× $3 per kg) $ 78,000 Separable Costs: Product 2 (26,000 kgs× $2 per kg) 0 52,000 Joint Costs: Product 1 [(7,000/10,000) × $68,571] 48,000 Product 2 [(26,000/30,000) × $51,429] _______ 44,572 Gross Margin (Loss) ($20,000) ($18,572) B. Under the new assumptions the calculation of gross profit is as follows: First calculate the NRV for Products 1 and 2: Product 1 ($5× 10,000 kg)-$20,000 $30,000 Product 2 [($3 – $2) × 30,000 kgs] 30,000 Total NRV $60,000 Notice that the joint costs ($55,000 + $65,000 = $120,000) are greater than the total NRV, and so the products are unprofitable. Next, allocate joint costs based on NRV: Product 1 [($30,000/$60,000) × $120,000)] $ 60,000 Product 2 [($30,000/$60,000) × $120,000)] 60,000 Total Allocated $120,000 Product 1 Product 2 Sales Revenue: Product 1 (10,000 kg× $5 per kg) $ 50,000 Product 2 (30,000 kg× $3 per kg) $ 90,000 Separable Costs: Product 1 ($20,000 per 10,000 kg) 20,000 Product 2 (30,000 kg× $2 per kg) 60,000 Joint Costs (per 10,000 kgand 30,000 kg) 60,000 60,000 Gross Margin (Loss) ($30,000) ($30,000) © 2012 John Wiley and Sons Canada, Ltd. 153 Cost Management C. Compare the contribution when Product1 is sold “as is” and when it is processed further: When sold “as is” ($4 per kg × 10,000 kg) $40,000 When processed further [($5 per kg× 10,000 kg) – $20,000] $30,000 Based solely on quantitative factors, Product 1 should be sold “as is” after its joint production with Product 2. 9.36 NRV – Ali Chemical Company A. The joint costs are incurred prior to either product’s individual processing: The cost to purchase the mixture $5,000 The cost to process the mixture into the products 1,500 Total Joint Costs $6,500 B. The separable costs for each product are calculated as follows: SLX-241 ($2 per litre× 400 litres) $800 QY-58 ($0.50 per kg × 200 kg of inert substance) $100 C. Determine the NRV of each product: SLX-241 [($8 per litre× 400 litres) – $800] $2,400 QY-58 [($6 per kg × 1,000 kg) – $100] 5,900 Total NRV $8,300 Note: The total volume of QY-58 is equal to the original volume at the split-off point of 800 kg plus the additional inert substance of 200 kg, or a total of 1,000 kg. Based on the relative NRV values, the joint costs are allocated as follows: SLX-241 [($2,400/$8,300) × $6,500] $1,880 QY-58 [($5,900/$8,300) × $6,500] 4,620 Total Allocation $6,500 © 2012 John Wiley and Sons Canada, Ltd. Chapter 9: Joint Product and By-Product Costing 154 The cost per unit of each product is then calculated as follows: SLX-241 QY-58 Joint Costs $1,880 $4,620 Separable Costs (from Part A) 800 100 Total Costs per Product $2,680 $4,720 Number of units produced 400 litres 1,000 kg Cost per Unit $6.70 per litre $4.72 per kg 9.37 Separable and Joint Costs, NRV, Operating Income, By-product - Doe Corporation The following chart traces the physical flow of the products and summarizes cost and sales information. Weight After Total Weight Evaporation Loss Costs Total Revenue Slicing 94,500 kg $ 4,700 $ 56,700 (35%*270,000) ($0.60*94,500) Crushing 75,600 kg 10,580 41,580 (28%*270,000) ($0.55*75,600) Juicing 72,900 kg 67,500 kg 3,250 20,250 (27%*270,000) (72,900/1.08) ($0.30*67,500) Animal Feed 27,000 kg 700 2,700 (10%*270,000) ($0.10*27,000) Total 270,000 kg $19,230 $121,230 A. The total weights are obtained by multiplying the i
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