A byproduct is a product that has a relatively low total sales value compared to the total sales value of the joint (or main) products

(1)

CHAPTER 16

COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS

16-1 Exhibit 16-1 presents many examples of joint products from four different general industries. These include:

Industry Separable Products at the Splitoff Point

Food Processing:

• Lamb • Lamb cuts, tripe, hides, bones, fat

• Turkey • Breasts, wings, thighs, poultry meal Extractive:

• Petroleum • Crude oil, natural gas

16-2 A joint cost is a cost of a production process that yields multiple products simultaneously.

A separable cost is a cost incurred beyond the splitoff point that is assignable to each of the specific products identified at the splitoff point.

16-3 The distinction between a joint product and a byproduct is based on relative sales value.

A joint product is a product from a joint production process (a process that yields two or more products) that has a relatively high total sales value. A byproduct is a product that has a relatively low total sales value compared to the total sales value of the joint (or main) products. Products can change from byproducts to joint products when their total sales values increase.

16-4 A product is any output that has a positive sales value (or an output that enables a company to avoid incurring costs). In some joint-cost settings, outputs can occur that do not have a positive sales value. The offshore processing of hydrocarbons yields water that is recycled back into the ocean as well as yielding oil and gas. The processing of mineral ore to yield gold and silver also yields dirt as an output, which is recycled back into the ground.

16-5 The chapter lists the following six reasons for allocating joint costs:

1. Computation of inventoriable costs and cost of goods sold for financial accounting purposes and reports for income tax authorities.

2. Computation of inventoriable costs and cost of goods sold for internal reporting purposes and division profitability analysis.

3. Cost reimbursement under contracts when only a portion of a business's products or services is sold or delivered under cost-plus contracts.

4. Insurance settlement computations for damage claims made on the basis of cost information of joint products or byproducts. The insurance company and the insured must agree on the value of the loss.

5. Rate regulation when one or more of the jointly-produced products or services are subject to price regulation.

6. Litigation in which costs of joint products are key inputs.

(2)

16-7 This situation can occur when a production process yields separable outputs at the splitoff point that do not have selling prices available until further processing. The result is that selling prices are not available at the splitoff point to use the sales value at splitoff method. Examples include processing in integrated pulp and paper companies and in petro-chemical operations.

16-8 Both methods use market selling-price data in allocating joint costs, but they differ in which sales-price data they use. The sales value at splitoff method allocates joint costs to joint products on the basis of the relative total sales value at the splitoff point of the total production of these products during the accounting period. The net realizable value method allocates joint costs to joint products on the basis of the relative net realizable value (the final sales value minus the separable costs of production and marketing) of the total production of the joint products during the accounting period.

16-9 Limitations of the physical measure method of joint-cost allocation include:

a. The physical weights used for allocating joint costs may have no relationship to the revenue-producing power of the individual products.

b. The joint products may not have a common physical denominator––for example, one may be a liquid while another a solid with no readily available conversion factor.

16-10 The NRV method can be simplified by assuming (a) a standard set of post-splitoff point processing steps, and (b) a standard set of selling prices. The use of (a) and (b) achieves the same benefits that the use of standard costs does in costing systems.

16-11 The constant gross-margin percentage NRV method takes account of the post-splitoff point “profit” contribution earned on individual products, as well as joint costs, when making cost assignments to joint products. In contrast, the sales value at splitoff point and the NRV methods allocate only the joint costs to the individual products.

16-12 No. Any method used to allocate joint costs to individual products that is applicable to the problem of joint product-cost allocation should not be used for management decisions regarding whether a product should be sold or processed further. When a product is an inherent result of a joint process, the decision to process further should not be influenced by either the size of the total joint costs or by the portion of the joint costs assigned to particular products.

Joint costs are irrelevant for these decisions. The only relevant items for these decisions are the incremental revenue and the incremental costs beyond the splitoff point.

16-13 No. The only relevant items are incremental revenues and incremental costs when making decisions about selling products at the splitoff point or processing them further.

Separable costs are not always identical to incremental costs. Separable costs are costs incurred beyond the splitoff point that are assignable to individual products. Some separable costs may not be incremental costs in a specific setting (e.g., allocated manufacturing overhead for post- splitoff processing that includes depreciation).

16-14 Two methods to account for byproducts are:

a. Production method—recognizes byproducts in the financial statements at the time

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16-15 The sales byproduct method enables a manager to time the sale of byproducts to affect reported operating income. A manager who was below the targeted operating income could adopt a “fire-sale” approach to selling byproducts so that the reported operating income exceeds the target. This illustrates one dysfunctional aspect of the sales method for byproducts.

(4)

16-16 (20–30 min.) Joint-cost allocation, insurance settlement.

1. (a) Sales value at splitoff method:

Pounds of Product

Wholesale Selling Price

per Pound

Sales Value at Splitoff

Weighting:

Sales Value at Splitoff

Joint Costs Allocated

Allocated Costs per Pound Breasts

Wings Thighs Bones Feathers

100 20 40 80 10 250

$0.55 0.20 0.35 0.10 0.05

$55 4 14 8 0.5

$81.5

0.675 0.049 0.172 0.098 0.006 1.000

$ 33.75 2.45 8.60 4.90 0.30

$50.00

0.3375 0.1225 0.2150 0.0613 0.0300

Costs of Destroyed Product

Breasts: $0.3375 per pound × 40 pounds = $13.50 Wings: $0.1225 per pound × 15 pounds = 1.84 $15.34 (b) Physical measure method:

Pounds of Product

Weighting:

Physical Measures

Allocated Costs per Pound Breasts

Wings Thighs Bones Feathers

100 20 40 80 10 250

0.400 0.080 0.160 0.320 0.040 1.000

$ 20.00 4.00 8.00 16.00 2.00

$50.00

$0.200 0.200 0.200 0.200 0.200

Costs of Destroyed Product

Breast: $0.20 per pound × 40 pounds = $ 8 Wings: $0.20 per pound × 15 pounds = 3

$11

Note: Although not required, it is useful to highlight the individual product profitability figures:

Sales Value at Splitoff Method

Physical Measures Method Product

Sales Value

Joint Costs Allocated

Gross Income

Gross Income Breasts

Wings

$55 4

$33.75 2.45

$21.25 1.55

$20.00 4.00

$35.00 0.00

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

The physical measures method shows profits on breasts and thighs and losses on bones and feathers. Given that Quality Chicken has to jointly process all the chicken products, it is non-intuitive to single out individual products that are being processed simultaneously as making losses while the overall operations make a profit. Quality Chicken is processing chicken mainly for breasts and thighs and not for wings, bones, and feathers, while the physical measure method allocates a disproportionate amount of costs to wings, bones and feathers.

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16-17 (10 min.) Joint products and byproducts (continuation of 16-16).

1. Ending inventory:

Breasts 12 × $0.3375 = $4.0500 Wings 5 × 0.1225 = 0.6125 Thighs 7 × 0.2150 = 1.5050 Bones 6 × 0.0613 = 0.3678 Feathers 3 × 0.0300 = 0.0900

$6.6253

2.

Joint products Byproducts Breasts Wings Thighs Bones

Feathers Joint costs to be allocated:

Joint costs – Net Realizable Values of byproducts $50 – $12.5 = $37.5

Pounds of

Product

Wholesale Selling Price

per Pound

Sales Value at Splitoff

Weighting:

Sales Value at Splitoff

Allocated Costs Per Pound

Breast 100 $0.55 $55 55/69 $29.89 $0.2989

Thighs 40 0.35 14 14/69 7.61 0.1903

$69 $37.50

Ending inventory:

Breasts 12 × $0.2989 $3.5868 Thighs 7 × 0.1903 1.3321 $4.9189

3. Treating all products as joint products does not require judgments as to whether a product is a joint product or a byproduct. Joint costs are allocated in a consistent manner to all products for the purpose of costing and inventory valuation. In contrast, the approach in requirement 2 lowers the joint cost by the amount of byproduct net realizable values and results in inventory values being shown for only two of the five products, the ones (perhaps arbitrarily) designated as being joint products.

Net Realizable Values of byproducts:

Wings $ 4

Bones 8

Feathers 0.5 $12.5

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16-18 (10 min.) Net realizable value method.

A diagram of the situation is in Solution Exhibit 16-18.

Corn Syrup Corn Starch Total Final sales value of total production,

12,500 × $50; 6,250 × $25 $625,000 $156,250 $781,250

Deduct separable costs 375,000 93,750 468,750

Net realizable value at splitoff point $250,000 $ 62,500 $312,500 Weighting, $250,000; $62,500 ÷ $312,500 0.8 0.2

Joint costs allocated, 0.8; 0.2 × $325,000 $260,000 $ 65,000 $325,000

SOLUTION EXHIBIT 16-18 (all numbers are in thousands)

Corn Starch:

6,250 cases at

$25 per case Corn Syrup:

12,500 cases at

$50 per case

Processing

$325,000

Processing

$375,000

Processing

$93,750

Splitoff Point

Joint Costs Separable Costs

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16-19 (40 min.) Alternative joint-cost-allocation methods, further-process decision.

1. Methanol Turpentine Total

Physical measure of total production (gallons) 3,000 9,000 12,000 Weighting, 3,000; 9,000 ÷ 12,000 0.25 0.75

Joint costs allocated, 0.25; 0.75 × $150,000 $ 37,500 $ 112,500 $150,000

2. Methanol Turpentine Total

Final sales value of total production,

3,000 × $22.00; 9,000 × $15.00 $ 66,000 $135,000 $201,000 Deduct separable costs,

3,000 × $4.00; 9,000 × $3.00 12,000 27,000 39,000 Net realizable value at splitoff point $ 54,000 $ 108,000 $162,000 Weighting, $54,000; $108,000 ÷ $162,000 1/3 2/3

Joint costs allocated, 1/3; 2/3 × $150,000 $ 50,000 $100,000 $150,000 3. a. Physical-measure (gallons) method:

Methanol Turpentine Total

Revenues $66,000 $135,000 $201,000

Cost of goods sold:

Joint costs 37,500 112,500 150,000

Separable costs 12,000 27,000 39,000 Total cost of goods sold 49,500 139,500 189,000

Gross margin $16,500 $ (4,500) $ 12,000

b. Estimated net realizable value method:

Methanol Turpentine Total

Revenues $66,000 $135,000 $201,000

Cost of goods sold:

Joint costs 50,000 100,000 150,000

Separable costs 12,000 27,000 39,000 Total cost of goods sold 62,000 127,000 189,000

Gross margin $ 4,000 $ 8,000 $ 12,000

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4. Alcohol Bev. Turpentine Total Final sales value of total production,

3,000 × $65.00; 9,000 × $15.00 $195,000 $135,000 $330,000 Deduct separable costs,

(3,000 × $14.00) + (0.20 × $195,000);

9,000 × $3.00 81,000 27,000 108,000 Net realizable value at splitoff point $ 114,000 $ 108,000 $222,000 Weighting, $114,000; $108,000 ÷ $222,000 0.51 0.49

Joint costs allocated, 0.51; 0.49 × $150,000 $ 76,500 $ 73,500 $150,000

An incremental approach demonstrates that the company should use the new process:

Incremental revenue,

($65.00 – $22.00) × 3,000 $ 129,000

Incremental costs:

Added processing, $10.00 × 3,000 $30,000

Taxes, (0.20 × $65.00) × 3,000 39,000 (69,000) Incremental operating income from

further processing $ 60,000

Proof: Total sales of both products $330,000

Joint costs 150,000

Separable costs 108,000

Cost of goods sold 258,000

New gross margin 72,000

Old gross margin 12,000

Difference in gross margin $ 60,000

(10)

SOLUTION EXHIBIT 16-19

Joint Costs Separable Costs

Processing

$150,000 for 12,000

gallons

Processing

$3 per gallon Processing

$4 per gallon

9,000 gallons

3,000 gallons

Methanol:

3,000 gallons at $22 per gallon

Turpentine:

9,000 gallons at $15 per gallon

Splitoff Point

(11)

16-20 (40 min.) Alternative methods of joint-cost allocation, ending inventories.

Total production for the year was:

Ending Total Sold Inventories Production

X 120 180 300

Y 340 60 400

Z 475 25 500

1. a. Net realizable value (NRV) method:

X Y Z Total

Final sales value of total production,

300 × $1,500; 400 × $1,000; 500 × $700 $450,000 $400,000 $350,000 $1,200,000 Deduct separable costs –– –– 200,000 200,000 Net realizable value at splitoff point $450,000 $400,000 $150,000 $1,000,000 Weighting, $450; $400; $150 ÷ $1,000 0.45 0.40 0.15

Joint costs allocated,

0.45, 0.40, 0.15 × $400,000 $180,000 $160,000 $ 60,000 $ 400,000 Ending Inventory Percentages:

X Y Z

Ending inventory 180 60 25

Total production 300 400 500

Ending inventory percentage 60% 15% 5%

Income Statement

X Y Z Total Revenues,

120 × $1,500; 340 × $1,000; 475 × $700 $180,000 $340,000 $332,500 $852,500 Cost of goods sold:

Joint costs allocated 180,000 160,000 60,000 400,000

Separable costs –– –– 200,000 200,000

Production costs 180,000 160,000 260,000 600,000 Deduct ending inventory,

60%; 15%; 5% of production costs 108,000 24,000 13,000 145,000 Cost of goods sold 72,000 136,000 247,000 455,000

Gross margin $108,000 $204,000 $ 85,500 $397,500

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b. Constant gross-margin percentage NRV method:

Step 1:

Final sales value of prodn., (300 × $1,500) + (400 × $1,000) + (500 × $700) $1,200,000 Deduct joint and separable costs, $400,000 + $200,000 600,000

Gross margin $ 600,000

Gross-margin percentage, $600,000 ÷ $1,200,000 50%

Step 2:

X Y Z Total Final sales value of total production,

300 × $1,500; 400 × $1,000; 500 × $700 $450,000 $400,000 $350,000 $1,200,000 Deduct gross margin, using overall

gross-margin percentage of sales, 50% 225,000 200,000 175,000 600,000 Total production costs 225,000 200,000 175,000 600,000 Step 3: Deduct separable costs — — 200,000 200,000 Joint costs allocated $225,000 $200,000 $(25,000) $ 400,000 The negative joint-cost allocation to Product Z illustrates one “unusual” feature of the constant gross-margin percentage NRV method: some products may receive negative cost allocations so that all individual products have the same gross-margin percentage.

Income Statement

X Y Z Total Revenues, 120 × $1,500;

340 × $1,000; 475 × $700 $180,000 $340,000 $332,500 $852,500 Cost of goods sold:

Joint costs allocated 225,000 200,000 (25,000) 400,000

Separable costs - - 200,000 200,000

Production costs 225,000 200,000 175,000 600,000 Deduct ending inventory,

60%; 15%; 5% of production costs 135,000 30,000 8,750 173,750 Cost of goods sold 90,000 170,000 166,250 426,250

Gross margin $ 90,000 $170,000 $166,250 $426,250

Gross-margin percentage 50% 50% 50% 50%

(13)

Summary

X Y Z Total

a. NRV method:

Inventories on balance sheet $108,000 $ 24,000 $ 13,000 $145,000 Cost of goods sold on income statement 72,000 136,000 247,000 455,000

$600,000

b. Constant gross-margin percentage NRV method

Inventories on balance sheet $135,000 $ 30,000 $ 8,750 $173,750 Cost of goods sold on income statement 90,000 170,000 166,250 426,250

$600,000

2. Gross-margin percentages:

X Y Z

NRV method 60% 60% 25.71%

Constant gross-margin percentage NRV 50% 50% 50.00%

Splitoff Point

Processing

$200,000 Product Y:

400 tons at

$1,000 per ton Product X:

300 tons at

$1,500 per ton

Joint Processing

Costs

$400,000

Product Z:

500 tons at

$700 per ton Joint Costs Separable Costs

(14)

16-21 (30 min.) Joint-cost allocation, process further.

Joint Costs =

$2,100

ICR8 (Non-Saleable)

ING4 (Non-Saleable)

XGE3 (Non-Saleable)

Processing

$170

Processing

$200 Processing

$100

Crude Oil 200 bbls × $15 / bbl =

$3,000

NGL 100 bbls × $7 / bbl =

$700

Gas 700 eqvt bbls ×

$1.10 / eqvt bbl =

Splitoff $770

Point

1a. Physical Measure Method

Crude Oil NGL Gas Total 1. Physical measure of total prodn.

2. Weighting (200; 100; 700 ÷ 1,000) 3. Joint costs allocated (Weights × $2,100)

200 0.20 $420

100 0.10 $210

700 0.70 $1,470

1,000 1.00 $2,100 1b. NRV Method

Crude Oil NGL Gas Total 1. Final sales value of total production

2. Deduct separable costs 3. NRV at splitoff

4. Weighting (2,830; 600; 570 ÷ 4,000)

5. Joint costs allocated (Weights × $2,100)

$3,000 170 $2,830 0.7075 $1,485.75

$700 100 $600 0.1500 $315.00

$770 200

$ 570 0.1425 $299.25

$4,470 470 $4,000 $2,100

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2. The operating-income amounts for each product using each method is:

(a) Physical Measure Method

Crude Oil NGL Gas Total Revenues

Cost of goods sold Joint costs Separable costs

Total cost of goods sold Gross margin

$3,000 420 170 590

$2,410

$700 210 100 310

$390

$770 1,470 200 1,670

$ (900)

$4,470 2,100 470 2,570

$1,900 (b) NRV Method

Crude Oil NGL Gas Total Revenues

Cost of goods sold Joint costs Separable costs

Total cost of goods sold Gross margin

$3,000.00 1,485.75 170.00 1,655.75

$1,344.25

$700.00 315.00 100.00 415.00

$285.00

$770.00 299.25 200.00 499.25

$ 270.75

$4,470.00 2,100.00 470.00 2,570.00

$1,900.00

3. Neither method should be used for product emphasis decisions. It is inappropriate to use joint-cost-allocated data to make decisions regarding dropping individual products, or pushing individual products, as they are joint by definition. Product-emphasis decisions should be made based on relevant revenues and relevant costs. Each method can lead to product emphasis decisions that do not lead to maximization of operating income.

4. Since crude oil is the only product subject to taxation, it is clearly in Plumpton’s best interest to use the NRV method since it leads to a lower profit for crude oil and, consequently, a smaller tax burden. A letter to the taxation authorities could stress the conceptual superiority of the NRV method. Chapter 16 argues that, using a benefits- received cost allocation criterion, market-based joint cost allocation methods are preferable to physical-measure methods. A meaningful common denominator (revenues) is available when the sales value at splitoff point method or NRV method is used. The physical-measures method requires nonhomogeneous products (liquids and gases) to be converted to a common denominator.

(16)

16-22 (30 min.) Joint-cost allocation, sales value, physical measure, NRV methods.

1a.

PANEL A: Allocation of Joint Costs using Sales Value at Splitoff Method

Special B/

Beef Ramen

Special S/

Shrimp

Ramen Total Sales value of total production at splitoff point

(10,000 tons × $10 per ton; 20,000 × $15 per ton) $100,000 $300,000 $400,000 Weighting ($100,000; $300,000 ÷ $400,000) 0.25 0.75

Joint costs allocated (0.25; 0.75 × $240,000) $60,000 $180,000 $240,000

PANEL B: Product-Line Income Statement for June 2009 Special B Special S Total

Revenues

(12,000 tons ×$18 per ton; 24,000 ×$25 per ton) $216,000 $600,000 $816,000 Deduct joint costs allocated (from Panel A) 60,000 180,000 240,000

Gross margin $108,000 $252,000 $360,000

Gross margin percentage 50% 42% 44%

1b.

PANEL A: Allocation of Joint Costs using Physical-Measure Method

Special B/

Beef Ramen

Special S/

Shrimp

Ramen Total Physical measure of total production (tons) 10,000 20,000 30,000 Weighting (10,000 tons; 20,000 tons ÷ 30,000 tons) 33% 67%

Joint costs allocated (0.33; 0.67 × $240,000) $80,000 $160,000 $240,000

PANEL B: Product-Line Income Statement for June 2009 Special B Special S Total

Revenues

(12,000 tons ×$18 per ton; 24,000 ×$25 per ton) $216,000 $600,000 $816,000 Deduct joint costs allocated (from Panel A) 80,000 160,000 240,000

Gross margin $ 88,000 $272,000 $360,000

Gross margin percentage 41% 45% 44%

1c.

PANEL A: Allocation of Joint Costs using Net Realizable

Value Method Special B Special S Total Final sales value of total production during accounting period

(12,000 tons × $18 per ton; 24,000 tons × $25 per ton) $216,000 $600,000 $816,000 Deduct separable costs 48,000 168,000 216,000 Net realizable value at splitoff point $168,000 $432,000 $600,000 Weighting ($168,000; $432,000 ÷ $600,000) 28% 72%

Joint costs allocated (0.28; 0.72 × $240,000) $67,200 $172,800 $240,000 PANEL B: Product-Line Income Statement for June 2009 Special B Special S Total Revenues (12,000 tons × $18 per ton; 24,000 tons × $25 per ton) $216,000 $600,000 $816,000

(17)

2. Sherrie Dong probably performed the analysis shown below to arrive at the net loss of

$2,228 from marketing the stock:

PANEL A: Allocation of Joint Costs using Sales Value at Splitoff

Special B/

Beef Ramen

Special S/

Shrimp

Ramen Stock Total

Sales value of total production at splitoff point (10,000 tons × $10 per ton; 20,000 × $15 per

ton; 4,000 × $5 per ton) $100,000 $300,000 $20,000 $420,000

Weighting ($100,000; $300,000; $20,000 ÷ $420,000) 23.8095% 71.4286% 4.7619% 100%

Joint costs allocated

(0.238095; 0.714286; 0.047619 × $240,000) $57,143 $171,429 $11,428 $240,000

PANEL B: Product-Line Income Statement

for June 2009 Special B Special S Stock Total

Revenues

(12,000 tons ×$18 per ton; 24,000 × $25 per ton;

4,000 ×$5 per ton) $216,000 $600,000 $20,000 $836,000 Separable processing costs 48,000 168,000 0 216,000 Joint costs allocated (from Panel A) 57,143 171,429 11,428 240,000

Gross margin 110,857 260,571 8,572 380,000

Deduct marketing costs 10,800 10,800

Operating income ($2,228) $ 369,200

In this (misleading) analysis, the $240,000 of joint costs are re-allocated between Special B, Special S, and the stock. Irrespective of the method of allocation, this analysis is wrong. Joint costs are always irrelevant in a process-further decision. Only incremental costs and revenues past the splitoff point are relevant. In this case, the correct analysis is much simpler: the incremental revenues from selling the stock are $20,000, and the incremental costs are the marketing costs of $10,800. So, Instant Foods should sell the stock—this will increase its operating income by $9,200 ($20,000 – $10,800).

(18)

16-23 (20 min.) Joint cost allocation: sell immediately or process further.

1.

a. Sales value at splitoff method:

Cookies/

Soymeal

Soyola/

Soy Oil

Total Sales value of total production at splitoff, $720 $576 $1,296 600lbs × $1.20; 120 gallons × $4.80

Weighting, $720; $576 ÷ $1,296 0.556 0.444 Joint costs allocated,

0.556; 0.444 × $600 $334 $266 $600

b. Net realizable value method:

Cookies Soyola Total Final sales value of total production,

720lbs × $2.40; 480qts × $1.50 $1,728 $720 $2,448 Deduct separable costs 360 240 600 Net realizable value $1,368 $480 $1,848

Weighting, $1,368; $480÷$1,848 0.74 0.26

0.74; 0.26 × $600 $444 $156 $600

2.

Cookies/Soy Meal Soyola/Soy Oil

Sell at Splitoff – Revenue $720^a $576^b

Process Further - NRV $1,368^c $480^d

Profit (Loss) from Processing Further $648 ($96)

a 600 lbs × $1.20 = $720

b 120 gal × $4.80 = $576

c 720 lbs × $2.40 – $360 = $1,368

d 480 qts × $1.50 – $240 = $480

ISP should process the soy meal into cookies because it increases profit by $648 (1,368-720). However, they should sell the soy oil as is, without processing it into the form of Soyola, because profit will be $96 (576-480) higher if they do. Since the total joint cost is the same under both allocation methods, it is not a relevant cost to the decision to sell at splitoff or process further.

(19)

16-24 (30 min.) Accounting for a main product and a byproduct.

Production

Method

Sales Method 1. Revenues

Main product $640,000^a $640,000

Byproduct — 28,000^d

Total revenues 640,000 668,000

Cost of goods sold

Total manufacturing costs 480,000 480,000 Deduct value of byproduct production 40,000^b 0

Net manufacturing costs 440,000 480,000

Deduct main product inventory 88,000^c 96,000^e Cost of goods sold 352,000 384,000

Gross margin $ 288,000 $ 284,000

a 32,000 × $20.00

b 8,000 × $5.00

c (8,000/40,000) × $440,000 = $88,000

d 5,600 × $5.00

e (8,000/40,000) × $480,000 = $96,000

Production Method

Sales Method 2. Main Product $88,000 $96,000 Byproduct 12,000^a 0

a Ending inventory shown at unrealized selling price.

BI + Production – Sales = EI 0 + 8,000 – 5,600 = 2,400 pounds

Ending inventory = 2,400 pounds × $5 per pound = $12,000

(20)

16-25 (35–45 min.) Joint costs and byproducts.

1. Computing byproduct deduction to joint costs:

Revenues from C, 40,000 × $3 $120,000

Deduct:

Gross margin, 10% of revenues 12,000

Marketing costs, 25% of revenues 30,000 Peanut Butter Department separable costs 20,000 Net realizable value (less gross margin) of C $58,000

Joint costs $320,000

Deduct byproduct contribution 58,000

Net joint costs to be allocated $262,000

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Deduct Net

Unit Final Separable Realizable Allocation of Sales Sales Processing Value at $262,000

Quantity Price Value Cost Splitoff Weighting Joint Costs A 20,000 $10 $ 200,000 $40,000 $ 160,000 40% $104,800 B 120,000 2 240,000 –– 240,000 60% 157,200

Totals $440,000 $40,000 $400,000 $262,000

Add Separable

Joint Costs Processing

Allocation Costs Total Costs Units Unit Cost

A $104,800 $40,000 $144,800 20,000 $7.24

B 157,200 –– 157,200 120,000 1.31

Totals $262,000 $40,000 $302,000 140,000

Unit cost for C: $1.45 ($58,000 ÷ 40,000) + $0.50 ($20,000 ÷ 40,000) = $1.95, or $3.00 – $0.30 (10% × $3) – $0.75 (25% × $3) = $1.95.

2. If all three products are treated as joint products:

Deduct Net

Unit Final Separable Realizable Allocation of Sales Sales Processing Value at $320,000

Quantity Price Value Cost Splitoff Weighting Joint Costs A 20,000 $10 $ 200,000 $40,000 $ 160,000 160/470 $108,936 B 120,000 2 240,000 - 240,000 240/470 163,404 C 40,000 3 120,000 50,000 70,000 70/470 47,660

Totals $560,000 $90,000 $470,000 $320,000

Add Separable

Joint Costs Processing

Allocation Costs Total Costs Units Unit Cost

A $108,936 $40,000 $148,936 20,000 $7.45

B 163,404 –– 163,404 120,000 1.36

C 47,660 20,000 67,660 40,000 1.69

Totals $320,000 $60,000 $380,000 180,000

Call the attention of students to the different unit “costs” resulting from the two assumptions about the relative importance of Product C. The point is that costs of individual products depend heavily on which assumptions are made and which accounting methods and techniques are used.

(22)

16-26 (25 min.) Accounting for a byproduct.

1. Byproduct recognized at time of production:

Joint Cost = $1,500

Joint cost to be charged to main product = Joint Cost – NRV of Byproduct = $1,500 – (50 lbs. × $1.20)

= $1,440

Inventoriable cost of main product = $1440

400 containers = $3.60 per container Inventoriable cost of byproduct = NRV = $1.20 per pound

Gross Margin Calculation under Production Method Revenues

Main product: Water (600/2 containers × $8) $2,400

Byproduct: Sea Salt 0

$2,400

Cost of goods sold _____

Main product: Water (300 containers × $3.60) $1,080

Gross margin $1,320

Gross-margin percentage ($1,320 ÷ $2,400) 55.00%

Inventoriable costs (end of period):

Main product: Water (100 containers × $3.60) = $360

Byproduct: Sea Salt (10 pounds × $1.20) = $12

2. Byproduct recognized at time of sale:

Joint cost to be charged to main product = Total Joint Cost = $1,500

Inventoriable cost of main product = $1500

400 containers = $3.75 per container

(23)

Gross Margin Calculation under Sales Method Revenues

Main product: Water (600/2 containers × $8) $2,400 Byproduct: Sea Salt (40 pounds × $1.20) 48 $2,448

Cost of goods sold _____

Main product: Water (300 containers × $3.75) $1,125

Gross margin $1,323

Main product: Water (100 containers × $3.75) = $375

Byproduct: Sea Salt (10 pounds × $0) = $0

3. The production method recognizes the byproduct cost as inventory in the period it is produced. This method sets the cost of the byproduct inventory equal to its net realizable value. When the byproduct is sold, inventory is reduced without being expensed through the income statement. The sales method associates all of the production cost with the main product. Under this method, the byproduct has no inventoriable cost and is recognized only when it is sold.

(24)

16-27 (40 min.) Alternative methods of joint-cost allocation, product-mix decisions.

1. Computation of joint-cost allocation proportions:

a. Sales Value of

Total Production Allocation of $125,000 at Splitoff Weighting Joint Costs

A $ 62,500 625/2500 = 0.25 $ 31,250

B 37,500 375/2500 = 0.15 18,750

C 62,500 625/2500 = 0.25 31,250

D 87,500 875/2500 = 0.35 43,750

$250,000 1.00 $125,000

b.

Physical Measure Allocation of $125,000 of Total Production Weighting Joint Costs A 375,000 gallons 3750/6250 = 0.60 $ 75,000

B 125,000 gallons 1250/6250 = 0.20 25,000 C 62,500 gallons 625/6250 = 0.10 12,500 D 62,500 gallons 625/6250 = 0.10 12,500

625,000 gallons 1.00 $125,000

c.

Final Sales Value of

Total Production

Separable Costs

Net Realizable

Value at

Splitoff Weighting

Allocation of

$125,000 Joint Costs Super A $375,000 $250,000 $125,000 1250/2500 = 0.50 $ 62,500 Super B 125,000 100,000 25,000 250/2500 = 0.10 12,500 C 52,500 – 62,500 625/2500 = 0.25 31,250 Super D 150,000 112,500 37,500 375/2500 = 0.15 18,750

$250,000 1.00 $125,000

(25)

Computation of gross-margin percentages:

a. Sales value at splitoff method:

Super A Super B C Super D Total Revenues $375,000 $125,000 $62,500 $150,000 $712,500 Joint costs 31,250 18,750 31,250 43,750 125,000 Separable costs 250,000 100,000 0 112,500 462,500 Total cost of goods sold 281,250 118,750 31,250 156,250 587,500 Gross margin $ 93,750 $ 6,250 $31,250 $ (6,250) $125,000 Gross-margin percentage 25% 5% 50% (4.17%) 17.54%

b. Physical-measure method:

Super A Super B C Super D Total Revenues $375,000 $125,000 $62,500 $150,000 $712,500 Joint costs 75,000 25,000 12,500 12,500 125,000 Separable costs 250,000 100,000 0 112,500 462,500 Total cost of goods sold 325,000 125,000 12,500 125,000 587,500 Gross margin $ 50,000 $ 0 $50,000 $ 25,000 $125,000 Gross-margin percentage 13.33% 0% 80% 16.67% 17.54%

c. Net realizable value method:

Super A Super B C Super D Total Revenues $375,000 $125,000 $62,500 $150,000 $712,500 Joint costs 62,500 12,500 31,250 18,750 125,000 Separable costs 250,000 100,000 0 112,500 462,500 Total cost of goods sold 312,500 112,500 31,250 131,250 587,500 Gross margin $ 62,500 $ 12,500 $31,250 $ 18,750 $125,000 Gross-margin percentage 16.67% 10% 50% 12.5% 17.54%

Summary of gross-margin percentages:

Joint-Cost

Allocation Method Super A Super B C Super D Sales value at splitoff 25.00% 5% 50% (4.17)%

(26)

2. Further Processing of A into Super A:

Incremental revenue, $375,000 – $62,500 $312,500

Incremental costs 250,000

Incremental operating income from further processing $ 62,500 Further processing of B into Super B:

Incremental revenue, $125,000 – $37,500 $ 87,500

Incremental operating loss from further processing $ (12,500) Further Processing of D into Super D:

Incremental operating loss from further processing $ (50,000)

Operating income can be increased by $62,500 if both B and D are sold at their splitoff point rather than processed further into Super B and Super D.

Processing

$125,000

A, 375,000 gallons Revenue = $62,500

B, 125,000 gallons Revenue = $37,500

D, 62,500 gallons Revenue = $87,500

C, 62,500 gallons Revenue = $62,500 Joint Costs Revenues at Splitoff

and Separable Costs

Processing

$250,000

Processing

$100,000

Processing

$112,500

Super A

$375,000

Super B

$125,000

Super D

$150,000 Splitoff

(27)

16-28 (40–60 min.) Comparison of alternative joint-cost allocation methods, further- processing decision, chocolate products.

Chocolate- Powder Liquor

Base

Milk-Chocolate Liquor Base Processing

Processing

$26,250 Joint Costs

$30,000

Separable Costs

Processing

$12,750

Chocolate Powder

SPLITOFF POINT Cocoa

Beans

Milk Chocolate

1a. Sales value at splitoff method:

Chocolate- Powder/

Liquor Base

Milk- Chocolate/

Liquor Base

Total Sales value of total production at splitoff,

600 × $21; 900 × $26 $12,600 $23,400 $36,000 Weighting, $12,600; $23,400 ÷ $36,000 0.35 0.65

0.35; 0.65 × $30,000 $10,500 $19,500 $30,000 1b.

Physical-measure method:

Physical measure of total production

(15,000÷1,500) × 60; 90 600 gallons 900 gallons 1,500 gallons

÷

(28)

1c. Net realizable value method:

Chocolate- Powder

Milk-

Chocolate Total Final sales value of total production,

6,000 × $4; 10,200 × $5 $24,000 $51,000 $75,000

Net realizable value at splitoff point $11,250 $ 24,750 $36,000 Weighting, $11,250; $24,750÷$36,000 0.3125 0.6875

0.3125; 0.6875 × $30,000 $9,375 $20,625 $30,000

d. Constant gross-margin percentage NRV method:

Step 1:

Final sales value of total production, (6,000 × $4) + (10,200 × $5) $75,000 Deduct joint and separable costs, ($30,000 + $12,750 + $26,250) 69,000

Gross-margin percentage ($6,000 ÷ $75,000) 8%

Step 2:

Chocolate- Milk-

Powder Chocolate Total Final sales value of total production,

6,000 × $4; 10,200 ×$5 $24,000 $51,000 $75,000 Deduct gross margin, using overall

gross-margin percentage of sales (8%) 1,920 4,080 6,000

Total production costs 22,080 46,920 69,000

Step 3:

Joint costs allocated $9,330 $ 20,670 $30,000

(29)

2. Chocolate- Milk-

Powder Chocolate Total

a. Revenues $24,000 $51,000 $75,000

Joint costs 10,500 19,500 30,000

Separable costs 12,750 26,250 39,000

Total cost of goods sold 23,250 45,750 69,000

Gross margin $ 750 $ 5,250 $ 6,000

Gross-margin percentage 3.125% 10.294% 8%

b. Revenues $24,000 $51,000 $75,000

Joint costs 12,000 18,000 30,000

Separable costs 12,750 26,250 39,000

Gross margin $ (750) $ 6,750 $ 6,000

Gross-margin percentage (3.125)% 13.235% 8%

c. Revenues $24,000 $51,000 $75,000

Joint costs 9,375 20,625 30,000

Separable costs 12,750 26,250 39,000

Gross margin $ 1,875 $ 4,125 $ 6,000

Gross-margin percentage 7.812% 8.088% 8%

d. Revenues $24,000 $51,000 $75,000

Joint costs 9,330 20,670 30,000

Separable costs 12,750 26,250 39,000

Gross margin $ 1,920 $ 4,080 $ 6,000

Gross-margin percentage 8% 8% 8%

(30)

3. Further processing of chocolate-powder liquor base into chocolate powder:

Incremental operating income from further processing $ (1,350) Further processing of milk-chocolate liquor base into milk chocolate:

Incremental operating income from further processing $ 1,350

Chocolate Factorycould increase operating income by $1,350 (to $7,350) if chocolate-powder liquor base is sold at the splitoff point and if milk-chocolate liquor base is further processed into milk chocolate.

(31)

16-29 (30 min.) Joint-cost allocation, process further or sell.

1.

a. Sales value at splitoff method.

Monthly

Unit Output

Selling Price Per Unit

Sales Value of Total

Prodn.

at Splitoff

Weighting

Joint Costs Allocated Studs

(Building) 90,000 $ 8 $ 720,000 46.1539% $ 553,847 Decorative

Pieces 6,000 60 360,000 23.0769 276,923 Posts 24,000 20 480,000 30.7692 369,230

Totals $1,560,000 100.0000% $1,200,000

b. Physical measure at splitoff method.

Physical Measure of

Total Prodn. Weighting

Studs (Building) 90,000 75.00% $ 900,000

Decorative Pieces 6,000 5.00 60,000

Posts 24,000 20.00 240,000

Totals 120,000 100.00% $1,200,000

c. Net realizable value method.

Monthly Units of Total Prodn.

Fully Processed

Selling Price per Unit

Net Realizable

Value at

Splitoff Weighting

Joint Costs

Allocated Studs

(Building) 90,000 $ 8 $ 720,000 44.1718% $ 530,061 Decorative

Pieces 5,400^a 100 430,000^b 26.3804 316,565 Posts 24,000 20 480,000 29.4478 353,374

Totals $1,630,000 100.0000% $1,200,000

a 6,000 monthly units of output – 10% normal spoilage = 5,400 good units.

b 5,400 good units × $100 = $540,000 – Further processing costs of $110,000 = $430,000

(32)

2. Presented below is an analysis for Sundown Sawmill, Inc., comparing the processing of decorative pieces further versus selling the rough-cut product immediately at splitoff:

Units Dollars

Monthly unit output 6,000

Less: Normal further processing shrinkage 600

Units available for sale 5,400

Final sales value (5,400 units × $100 per unit) $540,000

Less: Sales value at splitoff 360,000

Incremental revenue 180,000

Less: Further processing costs 110,000

Additional contribution from further processing $ 70,000

3. Assuming Sundown Sawmill, Inc., announces that in six months it will sell the rough-cut product at splitoff due to increasing competitive pressure, behavior that may be demonstrated by the skilled labor in the planing and sizing process include the following:

• lower quality,

• reduced motivation and morale, and

• job insecurity, leading to nonproductive employee time looking for jobs elsewhere.

Management actions that could improve this behavior include the following:

• Improve communication by giving the workers a more comprehensive explanation as to the reason for the change so they can better understand the situation and bring out a plan for future operation of the rest of the plant.

• The company can offer incentive bonuses to maintain quality and production and align rewards with goals.

• The company could provide job relocation and internal job transfers.

(33)

Joint Costs

$1,200,000

Separable Costs

Processing

$110,000 Processing

Studs

$8 per unit

Raw Decorative Pieces

$60 per unit

Posts

$20 per unit

Decorative Pieces

$100 per unit

Splitoff Point

(34)

16-30 (40 min.) Joint-cost allocation.

1.

Butter

Buttermilk Processing

For P. 16-31 Processing

$.25 per pint Joint Costs

$20,000

Separable Costs

Buttermilk Processing

$.5 per pound

Spreadable Butter

SPLITOFF POINT Milk

a.

Physical-measure method:

Butter Buttermilk Total

Physical measure of total production (10,000 lbs × 2; 20,000 qts × 4)

20,000 cups 80,000 cups 100,000 cups Weighting, 20,000; 80,000 ÷ 100,000 0.20 0.80

0.20; 0.80 × $20,000 $4,000 $16,000 $20,000

b. Sales value at splitoff method:

Butter Buttermilk Total

Sales value of total production at splitoff, $20,000 $30,000 $50,000 10,000 × $2; 20,000 × $1.5

Weighting, $20,000; $30,000 ÷ $50,000 0.40 0.60 Joint costs allocated,

0.40; 0.60 × $20,000 $8,000 $12,000 $20,000

(35)

c. Net realizable value method:

Butter Buttermilk Total Final sales value of total production,

20,000 × $2.5; 20,000 × $1.5 $50,000 $30,000 $80,000 Deduct separable costs 5,000 -0- . 5,000

Net realizable value $45,000 $ 30,000 $75,000

Weighting, $45,000; $30,000÷$75,000 0.60 0.40

0.60; 0.40 × $20,000 $12,000 $8,000 $20,000

d. Constant gross-margin percentage NRV method:

Step 1:

Final sales value of total production, $80,000

Deduct joint and separable costs, ($20,000 + $5,000) 25,000

Step 2:

Butter Buttermilk Total Final sales value of total

production (see 1c.) $50,000 $30,000 $80,000 Deduct gross margin, using overall

gross-margin percentage of sales (68.75%) 34,375 20,625 55,000

Total production costs 15,625 9,375 25,000

Step 3:

Deduct separable costs 5,000 -0- . 5,000

Joint costs allocated $10,625 $ 9,375 $20,000

2. Advantages and disadvantages:

- Physical-Measure

Advantage: Low information needs. Only knowledge of joint cost and physical distribution is needed.

(36)

- Sales Value at Splitoff

Advantage: Considers market value of products as basis for allocating joint cost.

Relative sales value serves as a proxy for relative benefit received by each product from the joint cost.

Disadvantage: Uses selling price at the time of splitoff even if product is not sold by the firm in that form. Selling price may not exist for product at splitoff.

- Net Realizable Value

Advantages: Allocates joint costs using ultimate net value of each product; applicable when the option to process further exists

Disadvantages: High information needs; Makes assumptions about expected outcomes of future processing decisions

- Constant Gross-Margin percentage method

Advantage: Since it is necessary to produce all joint products, they all look equally profitable.

Disadvantages: High information needs. All products are not necessarily equally profitable; method may lead to negative cost allocations so that unprofitable products are subsidized by profitable ones.

3. When selling prices for all products exist at splitoff, the sales value at split off method is the preferred technique. It is a relatively simple technique that depends on a common basis for cost allocation – revenues. It is better than the physical method because it considers the relative market values of the products generated by the joint cost when seeking to allocate it (which is a surrogate for the benefits received by each product from the joint cost). Further, the sales value at splitoff method has advantages over the NRV method and the constant gross margin percentage method because it does not penalize managers by charging more for developing profitable products using the output at splitoff, and it requires no assumptions about future processing activities and selling prices.

(37)

16-31 (10 min.) Further processing decision (continuation of 16-30).

1.and 2.

The decision about which combination of products to produce is not affected by the method of joint cost allocation. For both the sales value at splitoff and physical measure methods, the relevant comparisons are as shown below:

Butter Buttermilk Sell at Splitoff – Revenue $20,000 ^a $30,000^b

Process Further - NRV $45,000^c $32,000^d

Profit (Loss) from Processing Further $25,000 $2,000

a 10,000 lbs × $2 = $20,000

b 20,000 qts × $1.5 = $30,000

c 20,000 tubs × $2.5 – 10,000lbs × $.5 = $45,000

d 40,000 pints × $1 – 40,000 pints × $.2 = $32,000

To maximize profits, Elsie should process butter further into spreadable butter. However, Elsie should also sell the buttermilk in the pint containers. The extra cost to convert to pint containers ($0.2 per pint × 2 pints per quart = $0.40 per quart) does not exceed the increase in selling price ($1 per pint × 2 pints per quart = $2 per quart - $1.50 original price = $0.50 per quart) and leads to a gain of $2,000.

3. The decision to sell a product at split off or to process it further should have nothing to do with the allocation method chosen. For each product, you need to compare the revenue from selling the product at split off to the NRV from processing the product further.

Other things being equal, management should choose the higher alternative. The total joint cost is the same regardless of the alternative chosen and is therefore irrelevant to the decision.

(38)

16-32 (20 min.) Joint-cost allocation with a byproduct.

1. Sales value at splitoff method: Byproduct recognized at time of production method Joint cost to be charged to joint products = Joint Cost – NRV of Byproduct

= $10,000 – 1000 tons × 20% × 0.25 vats × $60 = $10,000 – 50 vats × $60

= $ 7,000

Grade A

Coal

Grade B Coal

Total Sales value of coal at splitoff, $40,000 $24,000 $64,000 1,000 tons × .4 × $100; 1,000 tons × .4 × $60

0.625; 0.375 × $7,000 $4,375 $2,625 $ 7,000 Gross Margin (Sales Revenue-Allocated Cost) $35,625 $21,375 $57,000

2. Sales value at splitoff method: Byproduct recognized at time of sale method Joint cost to be charged to joint products = Total Joint Cost = $10,000

Grade A

Coal

Grade B Coal

Total Sales value of coal splitoff, $40,000 $24,000 $64,000 1,000 tons × .4 × $100; 1,000 tons × .4 × $60

0.625; 0.375 × $10,000 $6,250 $3,750 $10,000 Gross Margin (Sales Revenue-Allocated Cost) $33,750 $20,250 $54,000 Since the entire production is sold during the period, the overall gross margin is the same under the production and sales methods. In particular, under the sales method, the $3,000 received from the sale of the coal tar is added to the overall revenues, so that

Cumberland’s overall gross margin is $57,000, as in the production method.

3. The production method of accounting for the byproduct is only appropriate if Cumberland is positive they can sell the byproduct and positive of the selling price.

Moreover, Cumberland should view the byproduct’s contribution to the firm as material enough to find it worthwhile to record and track any inventory that may arise. The sales

(39)

16-33 (15 min.) Byproduct journal entries (continuation of 16-32).

1. Byproduct – production method journal entries i) At time of production:

Work in process inventory 10,000

Accounts Payable, etc. 10,000

For byproduct:

Finished Goods Inv – Coal tar 3,000

Work in process inventory 3,000 For Joint Products

Finished Goods Inv – Grade A 4,375 Finished Goods Inv – Grade B 2,625

Work in process inventory 7,000 ii) At time of sale:

For byproduct

Cash or A/R 3,000

Finished Goods Inv – Coal Tar 3,000 For Joint Products

Cash or A/R 64,000

Sales Revenue – Grade A 40,000

Sales Revenue – Grade B 24,000

Cost of goods sold - Grade A 4,375 Cost of goods sold - Grade B 2,625

2. Byproduct – sales method journal entries i) At time of production:

Accounts Payable, etc. 10,000

For byproduct:

No entry

(40)

ii) At time of sale

For byproduct

Cash or A/R 3,000

Sales Revenue – Coal Tar 3,000 For Joint Products

Cash or A/R 64,000

Sales Revenue – Grade A 40,000

Sales Revenue – Grade B 24,000

Cost of goods sold - Grade A 6,250 Cost of goods sold - Grade B 3,750

(41)

16-34 (40 min.) Process further or sell, byproduct.

1. The analysis shown below indicates that it would be more profitable for Newcastle Mining Company to continue to sell bulk raw coal without further processing. This analysis ignores any value related to coal fines. It also assumes that the costs of loading and shipping the bulk raw coal on river barges will be the same whether Newcastle sells the bulk raw coal directly or processes it further.

Incremental sales revenues:

Sales revenue after further processing (9,400,000^a tons × $36) $338,400,000 Sales revenue from bulk raw coal (10,000,000 tons × $27) 270,000,000

Incremental sales revenue 68,400,000

Incremental costs:

Direct labor 800,000

Supervisory personnel 200,000

Heavy equipment costs ($25,000 × 12 months) 300,000

Sizing and cleaning (10,000,000 tons × $3.50) 35,000,000 Outbound rail freight (9,400,000 tons ÷ 60 tons) × $240 per car 37,600,000

Incremental costs 73,900,000

Incremental gain (loss) $(5,500,000)

a10,000,000 tons × (1– 0.06)

2. The cost of producing the raw coal is irrelevant to the decision to process further or not.

As we see from requirement 1, the cost of producing raw coal does not enter any of the calculations related to either the incremental revenues or the incremental costs of further processing. The answer would the same as in requirement 1: do not process further.

3. The analysis shown below indicates that the potential revenue from the coal fines byproduct would result in additional revenue, ranging between $4,950,000 and

$9,900,000, depending on the market price of the fines.

Coal fines = 75% of 6% of raw bulk tonnage

= 0.75 × (10,000,000 × .06)

= 450,000 tons

Potential incremental income from preparing and selling the coal fines:

Minimum Maximum Incremental income per ton

(Market price – Incremental costs)

$11 ($15 – $4) $22 ($24 – $2)

(42)

The incremental loss from sizing and cleaning the raw coal is $5,500,000, as calculated in requirement 1. Analysis indicates that relative to selling bulk raw coal, the effect of further processing and selling coal fines is only slightly negative at the minimum incremental gain ($4,950,000 – $5,500,000 = – $550,000) and very beneficial at the maximum incremental gain ($9,900,000 – $5,500,000 = $4,400,000). NMC will benefit from further processing and selling the coal fines as long as its incremental income per ton of coal fines is at least $12.22 ($5,500,000÷450,000 tons). Hence, further processing is preferred.

Note that other than the financial implications, some factors that should be considered in evaluating a sell-or-process-further decision include:

• Stability of the current customer market for raw coal and how it compares to the market for sized and cleaned coal.

• Storage space needed for the coal fines until they are sold and the handling costs of coal fines.

• Reliability of cost (e.g., rail freight rates) and revenue estimates, and the risk of depending on these estimates.

• Timing of the revenue stream from coal fines and impact on the need for liquidity.

• Possible environmental problems, i.e., dumping of waste and smoke from unprocessed coal.

(43)

16-35 (30 min.) Accounting for a byproduct.

Note: This solution is based off of the problem update listed on the errata sheet in the front matter of this solution manual.

1. Byproduct recognized at time of production:

Joint Cost = ($240 × 40) + $8,000 = $17,600

Joint cost charged to main product = Joint Cost – NRV of Byproduct = $17,600 – (4 × 40 scarves × $20) = $17,600 – (160 scarves × $20)

= $14,400

Inventoriable cost of main product = $14,400 / 720 = $20.00 per blouse Inventoriable cost of byproduct = NRV = $20 per scarf

Gross Margin Calculation under Production Method Revenues

Main product: Blouses (600 blouses × $72) $43,200

Byproduct: Scarves 0

$43,200

Cost of goods sold _______

Main product: Blouses (600 blouses × $20.00) $12,000

Gross margin $31,200

Main product: Blouses (120 blouses × $20.00) = $2,400

Byproduct: Scarves (30 scarves × $20) = $600

2. Byproduct recognized at time of sale:

Joint cost to be charged to main product = Total Joint Cost = $17,600

(44)

Gross Margin Calculation under Sales Method Revenues

Main product: Blouses (600 blouses × $72) $43,200 Byproduct: Scarves (130 scarves × $20) 2,600

$45,800

Cost of goods sold _______

Main product: Blouses (600 blouses × $24.44) $14,667

Gross margin $31,133

Main product: Blouses (120 blouses × $24.44) = $2,933

Byproduct: Scarves (30 scarves × $0) = $0

3. (a) Byproduct – production method journal entries i) At time of production:

Accounts payable, etc. 17,600 For byproduct:

Finished Goods Inv – Scarves 3,200

Work in process inventory 3,200 For main product

Finished Goods Inv – Blouses 14,400

Work in process inventory 14,400 ii) At time of sale:

For byproduct

Cash or A/R 2,600

Finished Goods Inv – Scarves 2,600

For main product

Cash or A/R 43,200

Sales Revenue – Blouses 43,200

Cost of goods sold - Blouses 12,000

Finished Goods Inv – Blouses 12,000