Chapter 15 - Joint & Byproducts.

(1)

15-1

CHAPTER 15 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS

15-1

Exhibit 15-1 presents nine examples from four different general industries. These include:

Industry Separable Products at the Splitoff Point

Agriculture:

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

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

• Petroleum • Crude oil, gas, raw LPG

15-2

A joint cost is a cost of a single production process that yields multiple products simultaneously. Separable costs are costs incurred beyond the splitoff point that are assignable to one or more individual products.

15-3

The distinction between a joint product and a byproduct is based on relative sales value. A joint product is a product that has a relatively high sales value. A byproduct is a product that has a relatively low sales value compared to the sales value of the joint (or main) products.

15-4

A product is any output that has a positive sales value (or an output that enables an organization 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.

15-5

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

1. Inventory cost and cost-of-goods-sold computations for financial accounting purposes and reports for income tax authorities.

2. Inventory costing and cost-of-goods-sold computations for internal reporting purposes. 3. Cost reimbursement under contracts when only a portion of a business' products or

services is sold or delivered to a single customer. 4. Insurance settlement computations.

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

6. Litigation in which product cost numbers are key inputs.

15-6

The joint production process yields individual products that are either sold this period or held as inventory to be sold in subsequent periods. Hence, the joint costs need to be allocated between total production rather than just those sold this period.

(2)

15-7

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

15-8

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 on the basis of each product's relative sales value at the splitoff point. The estimated net realizable value method allocates joint costs on the basis of the relative estimated net realizable value (expected final sales value in the ordinary course of business minus the expected separable costs of production and marketing).

15-9

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.

15-10

The estimated 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.

15-11

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 estimated NRV methods allocate only the joint costs to the individual products.

15-12

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.

15-13

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

(3)

15-3

b. Sales method - delays recognition of byproducts until the time of sale.

15-15

The sales byproduct method enables a manager to time the sale of byproducts to affect reported operating income. A manager who was the below 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 sale byproduct method.

15-16

(20-30 min.)

Joint cost allocation, insurance settlement.

1. (a) Sales value at splitoff-point 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 $1.10 0.40 0.70 0.20 0.10 $110 8 28 16 1 163 0.675 0.049 0.172 0.098 0.006 1.000 $67.50 4.90 17.20 9.80 0.60 $100.00 0.6750 0.2450 0.4300 0.1225 0.0600 Costs of Destroyed Product

Breasts: $0.6750 × 20 = $13.50 Wings: $0.2450 × 10 = 2.45 $15.95 b. Physical measures method

Pounds of Product Weighting: Physical Measures Joint Costs Allocated 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 $ 40.00 8.00 16.00 32.00 4.00 $100.00 $0.400 0.400 0.400 0.400 0.400 Costs of Destroyed Product

Breast: $0.40 × 20 = $8

Wings: $0.40 × 10 = 4 $12

(4)

15−−16 (Cont’d.)

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 Joint Costs Allocated Gross Income Breasts Wings Thighs Bones Feathers $110 8 28 16 1 $67.50 4.90 17.20 9.80 0.60 $42.50 3.10 10.80 6.20 0.40 $40.00 8.00 16.00 32.00 4.00 $70.00 0.00 12.00 (16.00) (3.00) 2. The sales-value at splitoff method captures the benefits-received criterion of cost allocation. The costs of processing a chicken are allocated to products in proportion to the ability to contribute revenue. Chicken Little's decision to process chicken is heavily influenced by the revenues from breasts and thighs. The bones provide relatively few benefits to Chicken Little despite their high physical volume.

The physical measures method shows profits on breasts and thighs and losses on bones and feathers. Given that Chicken Little 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.

15-17

(10 min.)

Joint products and byproducts (continuation of 15-16).

1. Ending inventory: Breasts, 10 × $0.6750 $6.7500 Wings, 4 × 0.2450 0.9800 Thighs, 3 × 0.4300 1.2900 Bones, 5 × 0.1225 0.6125 Feathers, 2 × 0.0600 0.1200 $9.7525 2.

Joint products Byproducts

Breasts Wings

Thigh Bones Feathers

(5)

15-5 $25

15−−17 (Cont’d.)

Joint costs to be allocated:

Joint costs - Revenues of byproducts $100 - $25 = $75 Pounds of Product Wholesale Selling Price per Pound Sales Value at Splitoff Weighting: Sales Value at Splitoff Joint Costs Allocated Allocated Costs Per Pound Breast 100 $1.10 $110 110/138 $59.78 $0.5978 Thighs 40 0.70 28 28/138 15.22 0.3805 138 $75.00 Ending inventory: Breasts, 10 × $0.5978 $5.9780 Thighs, 3 × 0.3805 1.1415 $7.1195

3. Treating all products as joint products does not require judgments as between joint and byproducts. In contrast, the approach in requirement 2 results in inventory values being shown for only two of the five products.

15-18

(10 min.)

Estimated net realizable value method.

A diagram of the situation is in Solution Exhibit 15-18 (all numbers are in thousands).

Cooking Oil Soap Oil Total

Expected final sales value of production,

CO, 1,000 × $50; SO, 500 × $25 $50,000 $12,500 $62,500 Deduct expected separable costs

to complete and sell 30,000 7,500 37,500

Estimated net realizable value

at splitoff point $20,000 $ 5,000 $25,000 Weighting $20,000 $25,000 = 0.8 $5,000 $25,000 = 0.2 Joint costs allocated,

CO, 0.8 × $24,000; SO, 0.2 × $24,000

(6)

SOLUTION EXHIBIT 15-18 Soap Oil: 500units at $25perunit CookingOil: 1,000units at $50perunit Processing $24,000 Processing $30,000 Processing $7,000 Splitoff Point

(7)

15-7

15-19

(40 min.)

Alternative joint-cost-allocation methods, further

process decision.

A diagram of the situation is in Solution Exhibit 15-19.

1. Methanol Turpentine Total

Physical measure of production (gallons) 2,500 7,500 10,000 Weighting 2,500 10,000 = 0.25 7,500 10,000 = 0.75 Joint costs allocated,

M, 0.25 × $120,000;

T, 0.75 × $120,000 $ 30,000 $ 90,000 $120,000

2. Methanol Turpentine Total

Expected final sales value of production, M, 2,500 × $21.00;

T, 7,500 × $14.00 $ 52,500 $105,000 $157,500

Deduct expected separable costs to complete and sell, M, 2,500 × $3.00;

T, 7,500 × $2.00 7,500 15,000 22,500

at splitoff point $ 45,000 $ 90,000 $135,000 Weighting $ 45,000 $135,000 = 1 3 $ 90,000 $135,000 = 2 3 3 3 Joint costs allocated,

M, 1/3 × $120,000;

(8)

15-19 (Cont'd.)

3. a. Physical-measure (gallons) method:

Methanol Turpentine Total

Sales $52,500 $105,000 $157,500

Cost of goods sold:

Joint costs 30,000 90,000 120,000

Separable costs 7,500 15,000 22,500

Total costs 37,500 105,000 142,500

Gross margin $15,000 $ 0 $ 15,000

b. Estimated net realizable value method:

Methanol Turpentine Total

Sales $52,500 $105,000 $157,500

Cost of goods sold:

Joint costs 40,000 80,000 120,000

Separable costs 7,500 15,000 22,500

Total costs 47,500 95,000 142,500

Gross margin $ 5,000 $ 10,000 $ 15,000

4. Wood Alcohol Turpentine Total

Expected final sales value of production, WA, 2,500 × $60.00;

T, 7,500 × $14.00 $150,000 $105,000 $255,000

Deduct expected separable costs to complete and sell,

WA, 2,500 × $12.00 + 0.20 × $150,000;

T, 7,500 × $2.00 60,000 15,000 75,000

at splitoff point $ 90,000 $ 90,000 $180,000

Weighting $90,000

$180,000 = 0.5

$90,000

$180,000 = 0.5 1.0 Joint costs allocated,

(9)

15-9 15-19 (Cont'd.)

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

($60.00 – $21.00) × 2,500 $ 97,500 Incremental costs:

Added processing, $9.00 × 2,500 $22,500

Taxes, (0.20 × $60.00) × 2,500 30,000 52,500 Incremental operating income from

further processing $ 45,000

Proof: Total sales of both products $255,000

Joint costs 120,000

Separable costs 75,000

Cost of goods sold 195,000

New gross margin 60,000

Old gross margin 15,000

Difference in gross margin $ 45,000

SOLUTION EXHIBIT 15-19

Joint Costs Separable Costs

Processing $120,000 for 10,000 gallons Processing $2 per gallon Processing $3 per gallon 7,500 gallons 2,500 gallons Methanol: 2,500 gallons at $21 per gallon Turpentine: 7,500 gallons at $14 per gallon Splitoff Point

(10)

15-20

(30 min.)

Joint-cost allocation, process further.

1. Joint Costs Purchase Costs + Joint Processing $1,800 Crude Oil (Non-Salable) NGL (Non-Salable) Gas (Non-Salable) Processing $175 Processing $210 Processing $105 Cruse Oil $2,700 NGL $750 Gas $1,040 Splitoff Point

2. a. Physical Measure Method

Crude Oil NGL Gas Total

1. Physical measures 2. Weighting

3. Joint costs allocated (Weights × $1,800) 150 0.15 $270 50 0.05 $90 800 0.80 $1,440 1,000 1.00 $1,800 b. Estimated NRV Method

1. Expected final sales value of production

2. Deduct expected separable costs

3. Estimated NRV at splitoff 4. Weighting

5. Joint costs allocated (Weights × $1,800) $2,700 175 $2,525 0.63125 $1,136.25 $750 105 $645 0.16125 $290.25 $1,040 210 $ 830 0.20750 $373.50 $4,490 490 $4,000 1.000 $1,800

(11)

15-11 15-20 (Cont'd.)

3. The operating-income amounts for each product using each method is: (a) Physical Measures Method

Sales

Operating Costs Joint costs Separable costs Total operating costs Operating margin $2,700 270 175 445 $2,255 $750 90 105 195 $555 $1,040 1,440 210 1,650 $ (610) $4,490 1,800 490 2,290 $2,200 (b) Estimated NRV Method

Sales

Operating Costs Joint costs Separable costs Total operating costs Operating margin $2,700.00 1,136.25 175.00 1,311.25 $1,388.75 $750.00 290.25 105.00 395.25 $354.75 $1,040.00 373.50 210.00 583.50 $ 456.50 $4,490.00 1,800.00 490.00 2,290.00 $2,200.00 4. Neither method should be used for product emphasis decisions. It is inappropriate to use joint-cost-allocated data to decide 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. The con of each method is that either can lead to product emphasis decisions not leading to maximization of operating income.

5. A letter to the taxation authorities would stress the conceptual superiority of the estimated NRV method. Chapter 15 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 is used. The physical-measures method requires non-homogeneous products (liquids and gases) to be converted to a common denominator.

(12)

15-21

(20 min.)

Joint-cost allocation, physical measures method.

(continuation of 15-20)

Crude Oil NGL Total

2. Deduct expected separable costs

3. Estimated NRV at splitoff 4. Weighting

5. Joint costs allocated (Weights × $1,800) $2,700.00 175.00 $2,525.00 0.796500 $1,433.70 $ 750.00 105.00 $ 645.00 0.203500 $366.30 $ 3,450 280 $3,170 1.000 $1,800

Crude Oil NGL Total

Sales

Operating Costs Joint costs Separable costs Total operating costs Operating margin $2,700.00 1,433.70 175.00 1,608.70 $1,091.30 $750.00 366.30 105.00 471.30 $278.70 $3,450 1,800 280 2,080 $1,370

2. The State's proposed method results in large profits on crude oil and large losses on gas:

Sales

Operating Costs Joint costs Separable costs Total operating costs Operating margin $2,700 270 175 445 $2,255 $750 90 105 195 $555 $ 0 1,440 0 1,440 $(1,440) $3,450 1,800 280 2,080 $1,370 The main points to note are:

a. Gas is not a salable product. It is simply a recycled output that adds no revenues. Indeed, costs are incurred to recycle the gas.

b. The physical measure method has all the problems alluded to in the literature––e.g., it ignores the revenue earning potential of products, and it may not have a consistent denominator.

(13)

15-13

15-22

(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

A diagram of the situation is in Solution Exhibit 15-22. 1. a. Estimated net realizable value (NRV) method:

X Y Z Total

Expected final sales value of production, X, 300 × $1,500; Y, 400 × $1,000;

Z, 500 × $700 $450,000 $400,000 $350,000 $1,200,000

Deduct separable costs - - 200,000 200,000

at splitoff point $450,000 $400,000 $150,000 $1,000,000 Weighting: $450 $1,000 = 0.45 $400 $1,000 = 0.40 $150 $1,000 = 0.15 1.0 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

(14)

15-22 (Cont'd.) Income Statement X Y Z Total Sales, X, 120 × $1,500; Y, 340 × $1,000; Z, 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 Cost of goods available for sale 180,000 160,000 260,000 600,000 Deduct ending inventory,

X, 60%; Y, 15%; Z, 5% 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

Gross-margin percentage 60% 60% 25.71% b. Constant gross-margin percentage NRV method:

Step 1:

Total final sales value, (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%

X Y Z Total Expected final sales value of production,

X, 300 × $1,500; Y, 400 × $1,000;

Z, 500 × $700 $450,000 $400,000 $350,000 $1,200,000

Step 2: Deduct gross margin, using overall gross-margin percentage

of sales, 50% 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

(15)

15-15 15-22 (Cont'd.)

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 in order that all individual products have the same gross-margin percentage.

Income Statement

X Y Z Total Sales X, 120 × $1,500;

Y, 340 × $1,000; Z, 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 Cost of goods available for sale 225,000 200,000 175,000 600,000 Deduct ending inventory,

X, 60%; Y, 15%; Z, 5% 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% Summary

X Y Z Total a. Estimated 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

Estimated NRV method 60% 60% 25.71%

(16)

15-22 (Cont'd.) SOLUTION EXHIBIT 15-22 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

(17)

15-17

15-23

(30 min.)

Process further or sell, joint-cost allocation.

1. Product A (5,000 units disposed at splitoff point)*

Incremental revenues, 5,000 × $0 $ 0 Incremental costs, 5,000 × $0.20 1,000 Incremental operating income $(1,000) Product A (5,000 units processed further)

Incremental revenues, 5,000 × $1.50 $7,500 Incremental processing costs

Fixed $6,000

Variable, 5,000 × $0.90 4,500 10,500 Incremental operating income $(3,000) Product B (15,000 units sold at splitoff point)

Incremental revenues, 15,000 × $0.50 $7,500 Incremental processing costs, 15,000 × $0 0 Incremental operating income $7,500 Product B (15,000 units processed further)

Fixed $1,000

Variable, 15,000 × $1 15,000 16,000 Incremental operating income $ 6,500 Product C (10,000 units disposed of at splitoff)

Incremental revenues, 10,000 × $0 $ 0 Incremental costs, 10,000 × $0.90 9,000 Incremental operating income $9,000 Product C (10,000 units processed further)

Fixed $10,000

Variable, 10,000 × $1.10 11,000 21,000 Incremental operating income $33,000

(18)

15-23

(Cont'd.)

Summary of the alternatives is: Product Dispose at Splitoff Process Further Preferred Alternative A $(1,000) $(3,000) $(1,000) B 7,500 6,500 7,500 C (9,000) 33,000 33,000 $(2,500) $36,500 $39,500 2. Revenues Product B, 15,000 × $0.50 $ 7,500 Product C, 10,000 × $5.40 54,000 $61,500 Costs Joint costs, $5,000 + (5,000 × $2) $15,000 Disposal costs, A: 5,000 × $0.20 1,500 Processing costs C: $10,000 + $11,000 21,000

Selling and administrative costs 14,000 51,000

Gross margin $10,500

Solution Exhibit 15-23

Dispose at splitoff Sell at splittoff Process further

Processing $6,000 + $0.90 per unit Processing $1,000 + $1.00 per unit Processing $10,000 + $1.10 per unit $5,000 + $2.00 per unit B $0.50 per unit A $0.50 per unit B $0.50 per unit C $0.50 per unit Splitoff Point

(19)

15-19

15-24

(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 raw bulk coal without further processing. (This analysis ignores any value related to coal fines.)

Incremental sales revenues:

Sales revenue after further processing (9,500,000 tons × $36) $342,000,000 Sales revenue from bulk raw coal (10,000,000 tons × $27) 270,000,000

Incremental sales revenue 72,000,000

Incremental costs:

Direct labor 600,000

Supervisory personnel 100,000

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

Sizing and cleaning (10,000,000 tons × $3.50) 35,000,000 Outbound rail freight (9,500,000 tons ÷ 60 tons) × $240 per car 38,000,000

Incremental costs 74,000,000

Incremental gain (loss) $(2,000,000)

2. The analysis shown below indicates that the potential revenue from the coal fines byproduct would result in additional revenue, ranging between $5,250,000 and $9,000,000, depending on the market price of the fines.

1. Coal fines = 75% of 5% of raw bulk tonnage = .75 × (10,000,000 × .05)

= 375,000 tons Potential additional revenue:

Market price

Minimum Maximum $14 per ton $24 per ton

Additional revenue $5,250,000 $9,000,000

Since the incremental loss is $2 million, as calculated in requirement 1, including the coal fines in the analysis indicates that further processing provides a positive result and is, therefore, favorable.

(20)

15−−24 (Cont’d.)

3. Other factors that should be considered in evaluating a sell-or-process-further decision include:

• Stability of the current customer market 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 of 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.

(21)

15-21

15-25

(30 min.)

Accounting for a main product and a byproduct.

Method A, Recognized at Production Method B, Recognized at Sale 1. Revenues Main product $160,000a $160,000 Byproduct ---__ 2,800d Total revenues 160,000 162,800

Cost of goods sold

Total manufacturing costs 120,000 120,000

Deduct byproduct revenue

4,000b 0

Net manufacturing costs 116,000 120,000

Deduct main product inventory

23,200c 24,000 e

Cost of goods sold 92,800 96,000

Gross margin $ 67,200 $ 66,800 a. 8,000 × $20.00 b. 2,000 × $2.00 c. $116,000 $23,200 000 , 10 000 , 2 ₌   ×    d. 1,400 × $2.00 e. 000 , 24 $ 000 , 120 $ 000 , 10 000 , 2 ₌   ×    Method A, Recognized at Production Method B, Recognized at Sale 2. Rainbow Dew $23,200 $24,000 Resi-Dew 1,200a 0 a.

Ending inventory shown at unrealized selling price. BI + Production - Sales = EI

0 + 2,000 - 1,400 = 600

(22)

15-26

(35-45 min.)

Joint costs and byproducts.

1. Computing byproduct deduction to joint costs:

Marketing price of X, 100,000 × $3 $300,000

Deduct: Gross margin, 10% of sales 30,000

Marketing costs, 25% of sales 75,000

Department 3 separable costs 50,000

Estimated net realizable value of X $145,000

Joint costs $800,000

Deduct byproduct contribution 145,000

Net joint costs to be allocated $655,000

Deduct Est. Net

Unit Final Separable Realizable Allocation of

Sales Sales Processing Value at $655,000

Quantity Price Value Cost Splitoff Weighting Joint Costs

L 50,000 $10 $ 500,000 $100,000 $ 400,000 40% $262,000

W 300,000 2 600,000 - 600,000 60% 393,000

Totals $1,100,000 $100,000 $1,000,000 $655,000

Add Separable Joint Costs Processing

Allocation Costs Total Costs Units Unit Cost

L $262,000 $100,000 $362,000 50,000 $7.24

W 393,000 - 393,000 300,000 1.31

Totals $655,000 $100,000 $755,000 350,000

Unit cost for X: $1.45 + $0.50 = $1.95, or $3.00 – $0.30 – $0.75 = $1.95.

(23)

15-23 15-26 (Cont'd.)

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

Deduct Est. Net

Unit Final Separable Realizable Allocation of

Sales Sales Processing Value at $800,000

Quantity Price Value Cost Splitoff Weighting Joint Costs L 50,000 $10 $ 500,000 $100,000 $ 400,000 40/125 $256,000 W 300,000 2 600,000 - 600,000 60/125 384,000 X 100,000 3 300,000 50,000 250,000 25/125 160,000

Totals $1,400,000 $150,000 $1,250,000 $800,000

Add Separable Joint Costs Processing

Allocation Costs Total Costs Units Unit Cost

L $256,000 $100,000 $356,000 50,000 $7.12

W 384,000 - 384,000 300,000 1.28

X 160,000 50,000 210,000 100,000 2.10

Totals $800,000 $150,000 $950,000 450,000

Call the attention of students to the differing unit "costs" between the two assumptions regarding the relative importance of Product X. The point is that costs of individual products depend heavily on which assumptions are made and which accounting methods and techniques are used.

(24)

SOLUTION EXHIBIT 15-26 Processing of 600,000 lbs: Processing $50,000 W 300,000 pounds L X 50,000 pounds 100,000 pounds Processing $100,000 Separable Costs Joint Costs Splitoff Point

(25)

15-25

15-27

(40 min.)

Alternative methods of joint-cost allocation,

product-mix decision.

1. Joint costs = $300,000

a. Sales value at splitoff method

Select White Knotty Total

1. Sales value at splitoff

(30,000 × $8, 50,000 × $4, 20,000 × $3) $240,000 $200,000 $60,000 $500,000 2. Weighting

(240/500, 200/500, 60/500) 0.48 0.40 0.12 1.00

3. Joint cost allocated

(0.48, 0.40, 0.12 × $300,000) $144,000 $120,000 $36,000 $300,000

4. Total cost computation

Joint costs $144,000 $120,000 $36,000 $300,000 Separable processing 60,000 90,000 15,000 165,000 Total costs $204,000 $210,000 $51,000 $465,000 Total units 25,000 40,000 15,000 Unit cost $5.76 $5.25 $3.40 b. Physical-measures method

1. Physical measure of production

(board feet) 30,000 50,000 20,000 100,000

2. Weighting

(30/100, 50/100, 20/100) 0.30 0.50 0.20 1.00

3. Joint costs allocated

(0.30, 0.50, 0.20 × $300,000) $90,000 $150,000 $60,000 $300,000

4. Total cost computation

Joint costs $90,000 $150,000 $60,000 $300,000

Separable processing 60,000 90,000 15,000 165,000

Total costs $150,000 $240,000 $75,000 $465,000

Total units 25,000 40,000 15,000

(26)

15−−27 (Cont’d.)

c. Estimated net realizable value method

(25,000 × $16, 40,000 × $9, 15,000 × $7) $400,000 $360,000 $105,000 $865,000

2. Deduct expected separable costs 60,000 90,000 15,000 165,000

3. Estimated NRV at splitoff $340,000 $270,000 $90,000 $700,000

4. Weighting (340/700, 270/700, 90/700) 0.4857 0.3857 0.1286 5. Joint costs allocated

(0.4857, 0.3857, 0.1286 × $300,000) $145,710 $115,710 $38,580 $300,000 Total cost computation

Joint costs $145,710 $115,710 $38,580 $300,000

Separable processing 60,000 90,000 15,000 165,000

Total costs $205,710 $205,710 $53,580 $465,000

Total units 25,000 40,000 15,000

Unit cost $8.23 $5.14 $3.57

2. Select White Knotty Total

a. Sales value at splitoff

($5.76 × 1,000, $5.25 × 1,000, $3.40 × 500)

b. Physical measures $5,760 $5,250 $1,700

($6.00 × 1,000, $6.00 × 2,000, $5.00 × 500)

c. Estimated NRV 6,000 12,000 2,500

($8.23 × 1,000, $5.14 × 2,000, $3.57 × 500) 8,230 10,280 1,785

3. Raw to Select Oak

Incremental revenues: $400,000 - $240,000 $160,000

Deduct incremental processing costs 60,000

Increase in operating income $100,000

Raw to White Oak

Incremental revenues: $360,000 - $200,000 $160,000

Deduct incremental processing costs 90,000

Increase in operating income $ 70,000

Raw to Knotty Oak

Incremental revenues: $105,000 - $60,000 $ 45,000

(27)

15-27

15-28

(40 min.)

Alternative methods of joint-cost allocation,

product-mix decisions.

A diagram of the situation is in Solution Exhibit 15-28. 1. Computation of joint-cost allocation proportions:

a. Sales Value Allocation of $100,000

at Splitoff Proportions Joint Costs

A $ 50,000 50/200 = 0.25 $ 25,000 B 30,000 30/200 = 0.15 15,000 C 50,000 50/200 = 0.25 25,000 D 70,000 70/200 = 0.35 35,000 $200,000 1.00 $100,000 b. Allocation of $100,000

Physical Measure Proportions Joint Costs

A 300,000 gallons 300/500 = 0.60 $ 60,000 B 100,000 gallons 100/500 = 0.20 20,000 C 50,000 gallons 50/500 = 0.10 10,000 D 50,000 gallons 50/500 = 0.10 10,000 500,000 gallons 1.00 $100,000 c. Final Sales Value Separable Costs Estimated Net Realizable Value Proportions Allocation of $100,000 Joint Costs A $300,000 $200,000 $100,000 100/200 =0.50 $ 50,000 B 100,000 80,000 20,000 20/200 = 0.10 10,000 C 50,000 – 50,000 50/200 = 0.25 25,000 D 120,000 90,000 30,000 30/200 = 0.15 15,000 $200,000 1.00 $100,000

Computation of gross-margin percentages: a. Sales value at splitoff method:

Super A Super B C Super D Total

Sales $300,000 $100,000 $50,000 $120,000 $570,000 Joint costs 25,000 15,000 25,000 35,000 100,000 Separable costs 200,000 80,000 0 90,000 370,000 Total costs 225,000 95,000 25,000 125,000 470,000 Gross margin $ 75,000 $ 5,000 $25,000 $ (5,000) $100,000 Gross-margin percentage 25% 5% 50% (4.17%) 17.54%

(28)

15-28 (Cont'd)

b. Physical-measure method:

Sales $300,000 $100,000 $50,000 $120,000 $570,000 Joint costs 60,000 20,000 10,000 10,000 100,000 Separable costs 200,000 80,000 0 90,000 370,000 Total costs 260,000 100,000 10,000 100,000 470,000 Gross margin $ 40,000 $ 0 $40,000 $ 20,000 $100,000 Gross-margin percentage 13.33% 0% 80% 16.67% 17.54%

c. Estimated net realizable value method:

Sales $300,000 $100,000 $50,000 $120,000 $570,000 Joint costs 50,000 10,000 25,000 15,000 100,000 Separable costs 200,000 80,000 0 90,000 370,000 Total costs 250,000 90,000 25,000 105,000 470,000 Gross margin $ 50,000 $ 10,000 $25,000 $ 15,000 $100,000 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%)

Physical measure 13.33% 0% 80% 16.67%

Estimated net

(29)

15-29 15-28 (Cont'd.)

2. Further Processing of A into Super A:

Incremental revenue, $300,000 – $50,000 $250,000

Incremental costs 200,000

Incremental operating income from further processing $ 50,000 Further processing of B into Super B:

Incremental revenue, $100,000 – $30,000 $ 70,000

Incremental operating income from further processing ($ 10,000) Further Processing of D into Super D:

Incremental operating income from further processing $ (40,000) Operating income can be increased by $50,000 if both B and D are sold at their splitoff point.

SOLUTION EXHIBIT 15-28 Processing $100,000 A, 300,000 gallons $50,000 B, 100,000 gallons $30,000 D, 50,000 gallons $70,000 C, 50,000 gallons $50,000

Processing $200,000 Processing $80,000 Processing $90,000 Super D $120,000 Super D $120,000 Super D $120,000 Splitoff Point

(30)

15-29

(40-60 min.)

Comparison of alternative joint-cost allocation

methods, further process decision, chocolate products.

1. a. Sales value at splitoff method:

Chocolate-Powder

Milk-Chocolate

Liquor Base Liquor Base Total Sales value at splitoff,

200a_×_{$21; 300}b_×_$26 _$4,200 _$7,800 _$12,000 Weighting $4,200 $12,000 = 0.35 $7,800 $12,000 = 0.65 Allocation of joint costs,

0.35 × $10,000; 0.65 × $10,000 $3,500 $6,500 $10,000

a(2,000/200) × 20 b(3,400/340) × 30

b. Physical-measure method: 200 (10 × 20) gallons;

300 (10 × 30) gallons 200 gallons 300 gallons 500 gallons

Weighting 200

500 = 0.40

300

500 = 0.60 Allocation of joint costs,

0.40 × $10,000; 0.60 × $10,000 $4,000 $6,000 $10,000 c. Estimated net realizable value method:

Chocolate-

Milk-Powder Chocolate

Liquor Base Liquor Base Total Expected sales value of production,

2,000 × $4; 3,400 × $5 $8,000 $17,000 $25,000

Deduct expected separable cost

of further processing 4,250 8,750 13,000

at splitoff point $3,750 $ 8,250 $12,000 Weighting $3,750 $12,000 = 0.3125 $8,250 $12,000 = 0.6875

(31)

15-31 15-29 (Cont'd.)

d. Constant gross-margin percentage NRV method:

Step 1:

Total final sales value of production,

(2,000 × $4) + (3,400 × $5) $25,000

Deduct joint and separable costs,

($10,000 + $4,250 + $8,750) 23,000 Gross margin $ 2,000 Gross-margin percentage ($2,000 ÷ $25,000) 8% Step 2: Chocolate- Milk-Powder Chocolate

Liquor Base Liquor Base Total Expected final sales value of

production (2000 × $4); (3,400 × $5) $8,000 $17,000 $25,000 Deduct gross margin, using overall

gross-margin percentage of sales (8%) 640 1,360 2,000

Cost of goods sold 7,360 15,640 23,000

Step 3:

Deduct separable cost of further processing 4,250 8,750 13,000

Joint costs allocated $3,110 $ 6,890 $10,000

2. Chocolate-

Milk-Powder Chocolate

Liquor Base Liquor Base Total

a. Sales $8,000 $17,000 $25,000 Joint costs 3,500 6,500 10,000 Separable costs 4,250 8,750 13,000 Total costs 7,750 15,250 23,000 Gross margin $ 250 $ 1,750 $ 2,000 Gross-margin percentage 3.125% 10.294% 8%

(32)

15-29 (Cont'd.) b. Sales $8,000 $17,000 $25,000 Joint costs 4,000 6,000 10,000 Separable costs 4,250 8,750 13,000 Total costs 8,250 14,750 23,000 Gross margin $ (250) $ 2,250 $ 2,000 Gross-margin percentage (3.125)% 13.235% 8% c. Sales $8,000 $17,000 $25,000 Joint costs 3,125 6,875 10,000 Separable costs 4,250 8,750 13,000 Total costs 7,375 15,625 23,000 Gross margin $ 625 $ 1,375 $ 2,000 Gross-margin percentage 7.812% 8.088% 8% d. Sales $8,000 $17,000 $25,000 Joint costs 3,110 6,890 10,000 Separable costs 4,250 8,750 13,000 Total costs 7,360 15,640 23,000 Gross margin $ 640 $ 1,360 $ 2,000 Gross-margin percentage 8% 8% 8%

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

Incremental operating income from further processing $ (450) Further processing of milk-chocolate liquor base into milk chocolate:

Incremental operating income from further processing $ 450

Roundtree Chocolates could increase operating income by $450 (to $2,450) if chocolate-powder liquor base is sold at the splitoff point and if milk-chocolate liquor base is further processed into milk chocolate.

(33)

15-33

15-30

(30 min.)

Joint-cost allocation, process further or sell.

1.

a. Relative sales value method at splitoff. Monthly Unit Output Selling Price Per Unit Relative Sales Value at Splitoff % of Sales Allocated Joint Costs Studs (Building) 75,000 $8 $600,000 46.15% $461,539 Decorative Pieces 5,000 60 300,000 23.08 230,769 Posts 20,000 20 400,000 30.77 307,692 Totals $1,300,000 100.00% $1,000,000

b. Physical output (volume) method at splitoff.

Physical Unit Volume % of Total Unit Volume Allocated Joint Costs Studs (Building) 75,000 75.00% $750,000 Decorative Pieces 5,000 5.00 50,000 Posts 20,000 20.00 200,000 Totals 100,000 100.00% $1,000,000

c. Estimated net realizable value method.

Monthly Unit Output Fully Processed Selling Price per Unit Estimated Net Realizable Value % of Sales Allocated Joint Costs Studs (Building) 75,000 $8 $600,000 44.44% $444,445 Decorative Pieces _4,500a 100 _350,000b 25.93 259,259 Posts 20,000 20 400,000 29.63 296,296 Totals $1,350,000 100.00% $1,000,000 Notes:

a. 5,000 monthly units of output - 10% normal spoilage = 4,500 good units.

b. 4,500 good units X $100 = $450,000 - Further processing costs of $100,000 = $350,000

2. Presented below is an analysis for Sonimad Sawmill Inc. comparing the processing of decorative pieces further versus selling the rough-cut product immediately at split-off.

Units Dollars

Monthly unit output 5,000

Less: Normal further processing shrinkage 500

Units available for sale 4,500

Final sales value (4,500 units @ $100 per unit) $450,000

Less: Sales value at splitoff 300,000

Differential revenue 150,000

Less: Further processing costs 100,000

(34)

15−−30 (Cont’d.)

3. Assuming Sonimad Sawmill Inc. announces that in six months it will sell the rough-cut product at split-off, due to increasing competitive pressure, at least three types of likely behavior that will be demonstrated by the skilled labor in the planing and sizing process include the following.

• Poorer quality.

• Reduced motivation and morale.

• 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 in order to 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. SOLUTION EXHIBIT 15-30

Processing $1,000 Processing $1,000,000 Studs $8 per unit Raw Decorative Pieces $60 per unit Posts $20 per unit Decorative Pieces $100 per unit Splitoff

(35)

15-35

15-31

(30 min.)

Joint and byproducts, estimated net realizable

value method.

A diagram of the situation is in Solution Exhibit 15-31. 1. Allocate joint costs between Alpha and Gamma Alpha:

Sales value, 46,200 pounds of Alpha × $5 $231,000

(19,800 pounds of Beta × $1.20) $23,760 Deduct marketing costs (Beta) 8,100

Estimated net realizable value (Beta) 15,660

Total final sales value 246,660

Deduct additional costs:

Processing (Department Two) 38,000

Processing (Department Four) 23,660 61,660 Estimated net realizable value at

splitoff point $185,000

Gamma:

Sales value, 40,000 pounds × $12 $480,000

Deduct processing (Department Three) 165,000

Estimated net realizable value at

splitoff point $315,000

Estimated Net Allocation of

Realizable Value Weighting $120,000 Joint Costs

Alpha $185,000 37% $ 44,400

Gamma 315,000 63 75,600

(36)

15-31 (Cont'd.)

2. Income Statement through Gross Margin for Alpha:

Sales (38,400 pounds × $5) $192,000

Production costs:

Allocated joint costs $102,000

Department Two 38,000

Department Four 23,660

Total costs of production 163,660 Deduct estimated net realizable

value of Beta 15,900

Net cost of production 147,760

Deduct ending inventory 29,552

Cost of goods sold 118,208

Gross margin $ 73,792

Estimated net realizable value of Beta equals the revenue from Beta ($24,000) minus its related marketing costs ($8,100). Ending inventory equals the net cost of production ($147,760) times 20%.

(37)

15-37 15-31 (Cont'd.) SOLUTION EXHIBIT 15-31 Joint Costs Dept. 2 Processing $38,000 66,000 pounds Dept. 1 Processing of 110,000 lbs: $120,000 44,000 pounds Gamma: 40,000 poundsa at $12 a pound Beta: 19,800 pounds at $1.20 a pound Alpha: 46,200 pounds at $5 a pound Separable Costs Dept. 3 Processing $165,000 Separable Marketing $8,100 Dept. 4 Processing $23,660 Splitoff Point

a. Computation of pounds of Gamma: Let X = Good output

44,000 – 0.1X = X X = 40,000

(38)

15-32

(30 min.)

Joint-cost allocation, relevant costs.

1. The "six-day progressive product trimming" ignores the fundamental point that the $300 cost to buy the pig is a joint cost. A pig is purchased as a whole. The butcher's challenge is to maximize the total revenues minus incremental costs (assumed zero) from the sale of all products.

At each stage, the decision taken ignores the general rule that product emphasis decisions should consider relevant relevants and relevant costs. Allocated joint costs are not part of the relevant cost numbers. For example, the Day I decision to drop pig's feet ignores the fact that the $300 point cost has been paid to acquire the who pig. The $15 of revenues are relevant inflows. This same position also holds for the Day 2 to Day 6 decisions.

2. The revenue amounts are the figures to use in the sales value at splitoff method:

Revenue Weighting Joint Costs Allocated Pork chops $120 0.2425 $72.75 Ham 150 0.3030 90.90 Bacon 160 0.3232 96.96 Pig's feet 15 0.0303 9.09 Hide 50 0.1010 30.30 $495 1.0000 $300.00

3. No. The decision to sell or not sell individual products should consider relevant revenues and relevant costs. In the butcher's context, the relevant costs would be the additional time and other incidentals to take each pig part and make it a salable product. The relevant revenues would be the difference between selling price at the consumer level and what the butcher may receive for pig parts in unprocessed form.

(39)

15-39

15-33

(30 min.)

Estimated net realizable value method, byproducts.

1. a. For the month of November, 2000, Princess Corporation's output was:

• apple slices 89,100

• applesauce 81,000

• apple juice 67,500

• animal feed 27,000

These amounts were calculated as follows:

Product Input Proportion

Total Pounds Pounds Lost Net Pounds Slices Sauce Juice Feed 270,000 lbs. 270,000 270,000 270,000 0.33 0.30 0.27 0.10 1.00 89,100 81,000 72,900 27,000 270,000 – – 5,400 – 5,400 89,100 81,000 67,500a 27,000 264,600 a

Net pounds: = 72,900 – (0.08 × net pounds) 1.08 net pounds = 72,900

Net pounds = 67,500

b. The estimated net realizable value for each of the three main products is calculated below:

Product

Net

Pounds Price Revenue

Separable Costs Estimated Net Realizable Value Slices Sauce Juice 89,100 81,000 67,500 $0.80 0.55 0.40 $ 71,280 44,550 27,000 $142,830 $11,280 8,550 3,000 $22,830 $ 60,000 36,000 24,000 $120,000

(40)

15-33 (Cont'd.) c. and d.

The estimated net realizable value of the byproduct is deducted from the production costs prior to allocation to the joint products, as presented below:

Allocation of Cutting Department Costs to Joint Products and Byproducts Net realizable value

(NRV) of byproduct = Byproduct revenue – Separable costs = $0.10 (270,000 × 10%) – $700 = $2,700 – $700

= $2,000

Costs to be allocated = Joint costs – NRV of byproduct = $60,000 – $2,000 = $58,000 Product Revenue Separable Costs Joint Costsa Gross Margin Slices Sauce Juice $ 71,280 44,550 27,000 $142,830 $11,280 8,550 3,000 $22,830 $29,000 17,400 11,600 $58,000 $31,000 18,600 12,400 $62,000

a. Allocated using estimated NRV of the three joint products from requirement 1(b): Slices ($60,000 ÷ $120,000) x $58,000 = $29,000

Sauce ($36,000 ÷ $120,000) x $58,000 = 17,400 Juice ($24,000 ÷ $120,000) x $58,000 = 11,600

2. The gross-margin dollar information by main product is determined by the arbitrary allocation of joint production costs. As a result, these cost figures and the resulting gross-margin information are of little significance for planning and control purposes. The allocation is made only for purposes of inventory costing and income determination.

(41)

15-41

15-34

(20–30 min.)

Joint product/byproduct distinctions, ethics.

(continuation of 15-33)

1. The 2000 method gives Princess managers relatively little discretion vis-a-vis the pre-2000 method. The pre-2000 method recognizes all four products in the accounting system at the time of production.

The pre-2000 method recognizes only two products (apple slices and applesauce) at the time of production. Consider the data in the question. The $60,000 of joint costs would be allocated as follows (using the $60,000 and $36,000 estimated NRV amounts):

Apple Slices: $60,000

$96,000 × $60,000 = $37,500 Applesauce: $36,000

$96,000 × $60,000 = $22,500 The gross margin on each product is:

Apple Slices = ($71,280 – $37,500 – $11,280)

$71,280 = 31.57%

Applesauce = ($44,550 – $22,500 – $8,550)

$44,550 = 30.30%

The gross margins on the two "byproducts" are: Apple juice = $27,000 – $3,000

$27,000 = 88.89%

Animal feed = $2,700 – $700

$2,700 = 74.07%

With the pre-2000 method, managers have flexibility as to when to sell the apple juice and the animal feed. Both are frozen and can be kept in cold storage until needed. If there is a need for a large "dose" of gross margin at year-end to meet the target ratio, high gross margins from apple juice or animal feed can be drawn on to help achieve the target.

2. The controller could examine the sales patterns of apple juice and animal feed at year -end. Do managers who have ratios from existing sales below the target sell apple juice and animal feed inventories to achieve the target ratio? Do managers who have ratios above the target put apple juice and animal feed production into inventory so as to provide a "cushion" for subsequent years?

One piece of evidence here would be physical inventory-holding patterns on a monthly basis. If there were a different pattern of inventory holding for the two byproducts than the two joint products, there would be grounds for further investigating whether managers are abusing the bonus system.

(42)

15-35

( 60 min.)

Joint-cost allocation, process further or sell byproducts.

1. Altox Hycol Lorex $1,400,000 Processing $1,800,000

Altox Lorex Hycol Total

Expected final sales value of

productiona _$595,000 _$2,500,000 _$660,000 _$3,755,000

Deduct expected separable costs to

complete and sell – 1,400,000 – 1,400,000 Estimated net realizable value at

splitoff point $595,000 $1,100,000 $660,000 $2,355,000

Weightingb _0.253 _0.467 _0.280 _1.000

Joint costs allocatedc $455,400 $840,600 $504,000 $1,800,000

a($3.50 × 170,000); ($5.00 × 500,000); ($2 × 330,000)

b($595,000 ÷ 2,355,000); ($1,100,000 ÷ $2,355,000); ($660,000 ÷ $2,355,000) c$1,800,000 × 0.253; 0.467; 0.280

(43)

15-43 15-35 (Cont'd.)

2. Further processing Altox Incremental revenue

($5.50 × 150,000) – ($3.50 × 170,000)

$825,000 – $595,000 $230,000 Incremental processing cost 250,000 Incremental operating income $ (20,000) Further processing Lorex

Incremental revenue

($5.00 × 500,000) – ($2.25 × 500,000)

$2,500,000 – $1,125,000 $1,375,000 Incremental processing cost 1,400,000 Incremental operating income $ (25,000) Further processing Hycol

Incremental revenue

($1.80 × (330,000 × 1.25)) – ($2 × 330,000)

$742,500 – $660,000 $82,500 Incremental processing cost 75,000 Incremental operating income $ 7,500 Current Policy

Sell Altox at splitoff $ 595,000

Process Lorex further 1,100,000

Sell Hycol at splitoff 660,000

2,355,000

Joint costs 1,800,000

Operating income $ 555,000

Preferred Options

Sell Altox at splitoff $ 595,000

Sell Lorex at splitoff 1,125,000

Process Hycol further 667,500

2,387,500

Joint costs 1,800,000

Operating income $ 587,500

Goodson is $32,500 better off by changing two of its current policies––it should sell Lorex at splitoff ($25,000 improvement) and process Hycol further ($7,500 improvement).

(44)

15-35 (Cont'd.)

3. a. Goodson would be better off by $12,000 by selling Dorzine to Dietriech Mills. Further processing Dorzine

Incremental revenue

($0.75 × 50,000) + $17,500a $55,000 $37,500 + $17,500

Incremental processing cost 43,000 Incremental operating income $12,000

aDisposal costs avoided by processing further $0.35 × 50,000 = $17,500

b. The decision to treat Dorzine should not affect decisions as to whether to process further or sell at the splitoff point. Accounting decisions about joint product/byproduct distinctions do not affect total revenues or total costs.