Ch08SM

(1)

CHAPTER 8

DISCUSSION QUESTIONS DISCUSSION QUESTIONS 8-1 8-1 Q8-1.

Q8-1. Joint prJoint products roducts represeepresent two ont two or more prr more prod- od-ucts separated in the course of the same ucts separated in the course of the same pro-cessing operation, with each product having cessing operation, with each product having such relative value that no one product can such relative value that no one product can bebe designated as a major product.

designated as a major product.

A by-product is relatively minor in terms of A by-product is relatively minor in terms of total value and is derived incidentally

total value and is derived incidentally from thefrom the production or manufacture of one or more production or manufacture of one or more major products.

major products. Q8-2.

Q8-2. RevRevenue frenue from the sale of byom the sale of by-prod-products maucts may bey be listed as other income, additional sales listed as other income, additional sales rev-enue, a deduction from the cost of goods sold enue, a deduction from the cost of goods sold of the main product, or as a deduction from of the main product, or as a deduction from the cost of production of the main product. the cost of production of the main product. Q8-3.

Q8-3. YYes, when byes, when by-prod-product revuct revenue is deductenue is deducteded from the total production cost of the main from the total production cost of the main product, the unit cost of the main product is product, the unit cost of the main product is reduced;

reduced;consequentlyconsequently, the cost of th, the cost of the endinge ending inventory changes also.

inventory changes also. Q8-4.

Q8-4. The repThe replacemlacement cosent cost metht method can bod can be used ine used in such cases

such cases.. In this In this method, tmethod, the by-phe by-productsroducts that go into making other units are valued at that go into making other units are valued at the cost the company would have to pay if it the cost the company would have to pay if it were to go out on the market and purchase were to go out on the market and purchase such materials.

such materials. Q8

Q8-5-5.. (a(a)) ThThe tre treaeatmtmenent det descscribribed fed for bor by-y-prprododucuctsts may be justified when, relative to main may be justified when, relative to main value products, the revenue generated by value products, the revenue generated by the

by-the by-produproduct is insigct is insignificanificant;nt; when nowhen no clearly defined basis of identifying clearly defined basis of identifying by-produc

product costs et costs exist;xist; or when thor when the cost ofe cost of more refined accounting would be more refined accounting would be dispro-portionate to the benefits received.

portionate to the benefits received. (b)

(b) The treThe treatment atment describedescribed has sed has severaverall shortcom

shortcomings.ings.All gross profiAll gross profit is ascribedt is ascribed to major products and is incorrect as a to major products and is incorrect as a measure of total gross profit, since the measure of total gross profit, since the inventories of by-products that may be inventories of by-products that may be unsold at the end of the period will have a unsold at the end of the period will have a zero value.

zero value.Failure to assign vFailure to assign values to by-alues to by-products may well mean they are not products may well mean they are not rec-ognized as inv

ognized as inventories at all.entories at all.This, in turn,This, in turn, could lead to their waste, theft, or other could lead to their waste, theft, or other mishandling.

mishandling.If by-If by-products are products are sold irreg-sold irreg-ularly and inventories are allowed to ularly and inventories are allowed to

accumulate, both a material accumulate, both a material understate-ment of inventories and a distortion of ment of inventories and a distortion of reported net income of successive reported net income of successive peri-ods may result.

ods may result. Q8-6

Q8-6.. YYes, some of the inites, some of the initial manufial manufacturinacturing costs,g costs, additional manufacturing costs (when additional manufacturing costs (when by-products are further processed after products are further processed after separa-tion), and perhaps even marketing and tion), and perhaps even marketing and administrative expenses may be charged to administrative expenses may be charged to the by-products.

the by-products. Q8-7

Q8-7.. MethoMethods fods for allocatr allocating the toting the total joint pral joint produc- oduc-tion cost to joint products are:

tion cost to joint products are: (a)

(a) AllocaAllocate the jte the joint cooint cost on tst on the basihe basis of ths of thee relative market value of the joint products. relative market value of the joint products. (b)

(b) AllocaAllocate the jote the joint cosint cost by ust by using an aing an aver- ver-age unit cost obtained by dividing the age unit cost obtained by dividing the total joint manufacturing cost by the total total joint manufacturing cost by the total number of units produced.

number of units produced. (c)

(c) AllocAllocate tate the joihe joint cont cost on st on the bthe basis oasis off weight factors such as size, difficulty of weight factors such as size, difficulty of manufacture, or amount of materials used. manufacture, or amount of materials used. (d)

(d) AllocaAllocate thte the joint e joint cost ocost on the n the basis basis ofof some unit of measurement such as some unit of measurement such as pounds, tons

pounds, tons, or gallons., or gallons.If the joint If the joint prod- prod-ucts are not measured in the same way, ucts are not measured in the same way, they must be converted to a denominator they must be converted to a denominator that is common to all the units produced. that is common to all the units produced. Q8-8

Q8-8.. The markThe market valuet value methoe method consided considers the rers the rev- v-enue-producing ability of the joint

enue-producing ability of the joint products byproducts by assuming that each should be

assuming that each should be valued accord-valued accord-ing to its co

ing to its cost absorptst absorption abilition abilityy.. ResulResultingting inventory costs are in harmony with revenue inventory costs are in harmony with revenue producing ability and, if the combined joint producing ability and, if the combined joint products are profitable, the market value products are profitable, the market value method avoids allocating more cost to a method avoids allocating more cost to a prod-uct than its r

uct than its revenue;evenue;thus achieving a thus achieving a neutralneutral effect.

effect. HoweHoweverver, this method ma, this method may be difficulty be difficult to apply if the market value at the split-off to apply if the market value at the split-off point is not known.

point is not known.

The average unit cost method, while The average unit cost method, while sim-ple to apply when units are measured in like ple to apply when units are measured in like terms, fails to consider the heterogeneous terms, fails to consider the heterogeneous nature of the individual products.

nature of the individual products. Q8-9

Q8-9.. Joint coJoint costs mussts must be allocat be allocated to jointed to joint product productsts when there is inventory to be costed.

(2)

Q8-10

Q8-10.. Not Not exacexactlytly.. A neA new mw manufanufacturacturer wer would ould dodo well to consult the Internal Revenue Service well to consult the Internal Revenue Service about the methods to be used, so that an about the methods to be used, so that an IRSIRS agent can make a decision before the tax agent can make a decision before the tax return is prepa

return is prepared.red.In other caseIn other cases, whers, where ane an allocation method has been applied allocation method has been applied consis-tently from year to year, to apply for a ruling tently from year to year, to apply for a ruling would not be

would not be good strategygood strategy.. Q8-11

Q8-11.. The metThe method usehod used in calcud in calculating ulating unit cosnit costs pro-ts pro-duces the same unit cost for all grades of duces the same unit cost for all grades of lum-ber sold.

ber sold.The owner is then The owner is then led to believe thatled to believe that the same costs in the same ratio are the same costs in the same ratio are attributa-ble to the low as well as the

ble to the low as well as the high grade lumber.high grade lumber. It must also be recognized that because of It must also be recognized that because of the inherent nature of the materials and the the inherent nature of the materials and the

milling process, it is not possible to eliminate milling process, it is not possible to eliminate low grade lumber

low grade lumber..Thus, the profitability of theThus, the profitability of the operation can be viewed best by considering operation can be viewed best by considering the aggregate of revenue and costs of both the aggregate of revenue and costs of both the high and low grades of lumber, coupled the high and low grades of lumber, coupled with controls to assure that all practical steps with controls to assure that all practical steps are taken to obtain high quality logs and to are taken to obtain high quality logs and to mill them properly

mill them properly..A higher price for logs mayA higher price for logs may be justified in terms of a greater amount of be justified in terms of a greater amount of high grade l

high grade lumber.umber. Q8-12

Q8-12.. For decFor decision makiision making, joint costng, joint costs are irreles are irrelevantvant unless they are expected to change as a unless they are expected to change as a result o

result of the decf the decision.ision. UsuallUsuallyy, only co, only costssts beyond the split-off are

beyond the split-off are relevant.relevant.

8-2 8-2

(3)

EXERCISES

E E88--11 ((11)) NNeet t rreevveennuue e mmeetthhoodd:: G Grroosss s rreevveennuue e ffrroom m ssaalle e oof f bbyy--pprroodduucct t ... $$2200,,000000 P Prroodduuccttiioon n ccoosst t aafftteer r sseeppaarraattiioonn... 66,,000000 N Neet t rreevveennuue e ffrroom m ssaalle e oof f bbyy--pprroodduucctt... $$1144,,000000 (2)

(2) MaMarkrket et vavalulue e (re(reveversrsal al cocost) st) memethothod:d: F Fiinnaal ml maarrkkeet vt vaalluue .e ... $$2200,,000000 Le Lessss:: PrProfofit it ($20($20,0,000 00 × × 1010%)%)... $2$2,0,00000 M Maarrkkeettiinng ag annd ad addmmiinniissttrraattiivve ee exxppeennssees .s ... 11,,000000 P Prroodduuccttiioon n ccoosst t aafftteer r sseeppaarraattiioonn... 66,,000000 99,,000000 J Jooiinnt t ccoosst t aallllooccaatteed d tto o tthhe e bbyy--pprroodduucct .t ... $$1111,,000000 E8-2 E8-2 (1

(1)) CaCalclcululatiation on of of mamanunufafactucturiring ng cocost st bebefofore re sepsepararatiation on fofor br by-y-prprododucucts.ts.

By-Product By-Product A A BB S Saalleess... $$66,,000000 $3$3,,550000 M Maannuuffaaccttuurriinng g ccoosst t aafftteer r sseeppaarraattiioonn... $$11,,110000 $$ 990000 M Maarrkkeettiinng g aannd d aaddmmiinniissttrraattiivve e eexxppeennssees .s ... 775500 555500 P Prrooffiit t aalllloowwaanncce e (A(A,, 1155%%;; B,B, 1122%%) .) ... 990000 442200 $ $22,,775500 $$11,,887700 M Maannuuffaaccttuurriinng g ccoosst t bbeeffoorre e sseeppaarraattiioon n ... $$33,,225500 $$11,,663300 C Chhaapptteerr88 88--33

(4)

E8-2 (Concluded) E8-2 (Concluded) ( (22)) LLOOGGAANN CCOOMMPPAANNYY Income Statement Income Statement For Month Ended April 30 For Month Ended April 30

Main

Main By-ProductBy-Product

P

Prroodduucctt AA BB TToottaall S

Saalles..es... $$7575,,000000 $$66,,000000 $$3,3,550000 $$8484,,550000 Cost of goods sold:

Cost of goods sold: B Beeffoorre e sseeppaarraattiioon n ((rreeqquuiirreemmeennt t ((11))).)... $$3322,,662200 $$33,,225500 $$11,,66330 0 $$3377,,550000 A Afftteer r sseeppaarraattiioonn... 1111,,550000 11,,110000 990000 1133,,550000 $44,120 $44,120 $4,350 $4,350 $2,530 $2,530 $51,000$51,000 G Grroosss s pprroofifit..t... $$3030,,888080 $$11,,665500 $$99770 0 $$3333,,550000 Less marketing and administrative

Less marketing and administrative e exxppeennssees .s ... 6,6,000000 775500 555500 77,,330000 P Prrooffiit ft frroom om oppeerraattiioonnss... $$2244,,888800 $$ 990000 $$ 442200 $$2266,,220000 E8-3 E8-3 Apportionment of Apportionment of Ma

Markrket Vet Valalueue JoJoinint t PrPrododucuctitionon P Prroodduucctt aat t SSpplliitt--OOffff CCoosstt** W W ... $$ 8800,,000000 $$ 6600,,000000 X X ... 6600,,000000 4455,,000000 Y Y ... 4400,,000000 3300,,000000 Z Z ... 2200,,000000 1155,,000000 T Toottaall ... $$220000,,000000 $$115500,,000000 E E88--44 ZZ:: MMaarrkkeet t vvaalluue e ppeer r uunniit .t ... $$ 99..0000 Gross p

Gross profitrofit,, consisconsisting of:ting of: O Oppeerraatitinng g pprrooffiitt ... $$2.2.0000 M Maarrkkeettiinng g aannd d aaddmmiinniissttrraattiivve e eexxppeennssees .s ... 11..0000 33..0000 $ $ 66..0000 F Fuurrtthheer pr prroocceessssiinng cg coosst .t ... 22..0000 V Vaalluue e ppeer r uunniit t oof f bbyy--pprroodduucct t aat t sspplliitt--ooffff... $ $ 44..0000 Value of by-product to be credited to joint cost

Value of by-product to be credited to joint cost ( (22,,00000 0 uunniitts × s × $$44) .) ... $$88,,000000 *$ *$ ,, $ $ ,, %% 1 15500 000000 2 20000 000000 ==7575

(5)

8-4 (Concluded) 8-4 (Concluded) X X and Yand Y:: U Ullttiimmaattee ApApppoorrttiioonn- -M Maarrkkeett PPrroocceessssiinngg HHyyppoo-- mmeennt t ooff V Vaalluuee UUllttiimmaattee CCoosstt tthheettiiccaall JJooiinntt p peerr UUnniittss MaMarrkkeett AAfftteerr MMaarrkkeett PrProodduuccttiioonn P Prroodduucctt UUnniitt PPrroodduucceedd VVaalluuee SSpplliitt--OOffff VVaalluuee CCoosstt** X X $$2200 88,,000000 $$116600,,000000 $ 4$ 400,,000000 $$112200,,000000 $ 8$ 800,,000000 Y Y 2255 1100,,000000 225500,,000000 7700,,000000 118800,,000000 112200,,000000 $ $441100,,000000 $$111100,,000000 $3$30000,,000000 $2$20000,,000000**** * Ratio to allocate cost prior to separation

* Ratio to allocate cost prior to separation

**$208,000 cumulative joint cost less $8,000 value of credit for by-product. **$208,000 cumulative joint cost less $8,000 value of credit for by-product.

E8-5 E8-5 ( (11)) UUllttiimmaattee AAppppoorrttiioonn- -M Maarrkkeett PPrroocceessssiinngg HHyyppoo-- mmeennt t ooff V Vaalluuee UUllttiimmaattee CCoosstt tthheettiiccaall JJooiinntt p peerr UUnniittss MaMarrkkeett AAfftteerr MMaarrkkeett PrProodduuccttiioonn P Prroodduucctt UUnniitt PPrroodduucceedd VVaalluuee SSpplliitt--OOffff VVaalluuee CCoosstt E E $$44..3300 3300,,000000 $$112299,,000000 $$3300,,000000 $ 9$ 999,,000000 $ 6$ 666,,000000** S S 66..6600 1155,,000000 9999,,000000 2244,,000000 7755,,000000 5500,,000000 C C 66..0000 1133,,000000 7788,,000000 2277,,000000 5511,,000000 3344,,000000 T Toottaall... $$330066,,000000 $$8811,,000000 $$222255,,000000 $$115500,,000000 * $150,000 ÷ $225,000 = * $150,000 ÷ $225,000 = 2/3;2/3;$99,000 × 2/3 = $66,$99,000 × 2/3 = $66,000000 ( (22)) DDiiffffeerreennttiiaal l rreevveennuue e ((1155,,00000 0 × × (($$66..660 0 – – $$55..5500)))).... $$1166,,550000 Di

Diffffererenentitial al cocostst... 2424,0,00000 Ne

Net eft effefect ct of sof sepepararabable le prprococesessising.ng... $$(7(7,5,50000))

Conc

Conclusionlusion:: Based on the infBased on the informatiormation given,on given,S should be sold at the splS should be sold at the split- it-off point.

off point.

CGA-Ca

CGA-Canada (adapted).nada (adapted).ReprinReprint with t with permispermission.sion. $ $ ,, $ $ ,, 2 20000 000000 3 30000 000000 2 2 3 3 = = C Chhaapptteerr88 88--55

(6)

E E 8 8 - - 6 6 ( ( 1 1 ) ) A A p p p p o o r r t t i i o o n n

- U U l l t t i i m m a a t t e e P P r r o o c c e e s s s s i i n n g g H H y y p p o o - m m e e n n t t o o f f T T o o t t a a l l T T o o t t a a l l C C o o s s t t M M a a r r k k e e t t U U l l t t i i m m a a t t e e C C o o s s t t t t h h e e t t i i c c a a l l J J o o i i n n t t P P r r o o d d u u c c - P P r r o o d d u u c c t t i i o o n n E E n n d d i i n n g g A A s s s s i i g g n n e e d d V V a a l l u u e e U U n n i i t t s s M M a a r r k k e e t t A A f f t t e e r r M M a a r r k k e e t t P P r r o o d d u u c c t t i i o o n n t t i i o o n n C C o o s s t t I I n n v v e e

n n t t o o r r y y t t o o E E n n d d i i n n g g P P r r o o d d u u c c t t p p e e r r U U n n i i t t P P r r o o d d u u c c e e d d V V a a l l u u e e S S p p l l i i t t - - O O f f f f V V a a l l u u e e * * C C o o s s t t * * * * C C o o s s t t p p e e r r U U n n i i t t U U n n i i t t s s I I n n v v e e n n t t o o r r y y

A A $ $ 1 1 0 0 0 0 1 1 , , 0 0 0 0 0 0 $ $ 1 1 0 0 0 0 , , 0 0 0 0 0 0 $ $ 2 2 5 5 , , 0 0 0 0 0 0 $ $ 7 7 5 5 , , 0 0 0 0 0 0 $ $ 5 5 4 4 , , 0 0 0 0 0 0 $ $ 7 7 9 9 , , 0 0 0 0 0 0 $ $ 7 7 9 9 . . 0 0 0 0 2 2 0 0 0 0 $ $ 1 1 5 5 , , 8 8 0 0 0 0 B B 8 8 0 0 3 3 , , 0 0 0 0 0 0 2 2 4 4 0 0 , , 0 0 0 0 0 0 6 6 0 0 , , 0 0 0 0 0 0 1 1 8 8 0 0 , , 0 0 0 0 0 0 1 1 2 2 9 9 , , 6 6 0 0 0 0 1 1 8 8 9 9 , , 6 6 0 0 0 0 6 6 3 3 . . 2 2 0 0 5 5 0 0 0 0 3 3 1 1 , , 6 6 0 0 0 0 C C 5 5 0 0 5 5 , , 0 0 0 0 0 0 2 2 5 5 0 0 . . 0 0 0 0 0 0 1 1 0 0 5 5 , , 0 0 0 0 0 0 1 1 4 4 5 5 , , 0 0 0 0 0 0 1 1 0 0 4 4 , , 4 4 0 0 0 0 2 2 0 0 9 9 , , 4 4 0 0 0 0 4 4 1 1 . . 8 8 8 8 7 7 0 0 0 0 2 2 9 9 . . 3 3 1 1 6 6 T T o o t t a a l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 5 5 9 9 0 0 , , 0 0 0 0 0 0 $ $ 1 1 9 9 0 0 , , 0 0 0 0 0 0 $ $ 4 4 0 0 0 0 , , 0 0 0 0 0 0 $ $ 2 2 8 8 8 8 , , 0 0 0 0 0 0 $ $ 4 4 7 7 8 8 , , 0 0 0 0 0 0 $ $ 7 7 6 6 , , 7 7 1 1 6 6 * * A A t t t t h h e e s s p p l l i i t t - - o o f f f f p p o o i i n n t t * * * * P P e e r r c c e e n n t t a a g g e e t t o o a a l l l l o o c c a a t t e e j j o o i i n n t t p p r r o o d d u u c c t t i i o o n n

c c o o s s t t : : $ $ 2 2 8 8 8 8 , , 0 0 0 0 0 0 ÷ ÷ $ $ 4 4 0 0 0 0 , , 0 0 0 0 0 0 = = 7 7 2 2 % %

(7)

E8-6 (Concluded) E8-6 (Concluded) ( (22)) PPrroodduucctt A A BB CC D Diiffffeerreennttiiaal l rreevveennuue e ppeer r uunniit .t ... $$4400 $$1155 $$2255 Differential cost per unit:

Differential cost per unit: $ $225,5,00000 0 ÷ ÷ 11,,00000.0... 2255 $ $6600,,00000 ÷ 30 ÷ 3,,000000... 2200 $ $110055,,00000 0 ÷ ÷ 55,,000000... 2211 $ $1155 $ $ ((55)) $$ 44 Conclusion:

Conclusion: Only product B’Only product B’s differential cost exceeds its differential res differential cost exceeds its differential revenue.venue. Therefore,

Therefore, only product only product B should be B should be sold at the splsold at the split-off point.it-off point.

(3

(3)) YYeses,, becabecaususe the the se shohort-rt-rurun in impmpacact ot of fuf furthrther er prprococesessising ng of B of B is is ththenen::

B B Di

Diffffererenentitial al rerevevenunuee... $1$155 D

Diiffffeerreennttiiaal cl coosstt:: (($$6600,,00000 - 0 - $$1188,,000000) ÷ ) ÷ 33,,000000... 1144 B

Beenneeffiit to ft to fuurtrthheer prr proocceessssiinng..g... $$ 11

(In the long-ru

(In the long-runn decisidecision to inveson to invest in the capacity [facilit in the capacity [facilities] needed to furtherties] needed to further proce

process Bss B,,the fthe fixed ixed cost cost shouldshould,, of cof course,ourse,be cbe consideonsidered.)red.) (4

(4)) NoNo.. FrFrom om papart (rt (3),3), the the benbenefefit it of of furfurthther er prprococessessining ig is $s $1 f1 for or eaeach ch of of ththe 3e 3,0,00000 units of B,

units of B,or $3,00or $3,000.0. But that mBut that must be compust be compared with tared with the benefihe benefit of the altert of the alterna- na-tive use of fac

tive use of facilitiilities,es, $6,000 – $1,$6,000 – $1,000 = $5,00000 = $5,000 of short-run ben0 of short-run benefit.efit.So it is bettSo it is betterer in the short run

in the short run to sell B at split-off and devote the facilities (the to sell B at split-off and devote the facilities (the ones that wouldones that would have been used to do B’s further processing) to their alternative use.

have been used to do B’s further processing) to their alternative use. CGA-Ca

CGA-Canada (adapted).nada (adapted).ReprinReprint t with permisswith permission.ion.

E

E8-8-77 (1(1)) AAvveerarage ge ununiit t ccoosst mt meetthhoodd:: A Appppoorrttiioonnmmeenntt PPrroocceessssiinngg TToottaall U Unniittss oof f JoJoiinntt CCoosst t AAfftteerr PPrroodduuccttiioonn P Prroodduucctt PPrroodduucceedd PPrroodduuccttiioon n CCoosstt SSpplliitt--OOffff CCoosstt A A 33,,000000 $$ 3300,,000000 $$ 2200,,000000 $$ 5500,,000000 B B 44,,000000 4400,,000000 3300,,000000 7700,,000000 C C 33,,000000 3300,,000000 5500,,000000 8800,,000000 T Toottaall... $$110000,,000000 $$110000,,000000 $$220000,,000000 C Chhaapptteerr88 88--77

(8)

E8-7 (Concluded) E8-7 (Concluded) (2

(2)) MaMarkrket vet valalue mue metethohod:d:

Apportion Apportion P Prroocceessssiinngg HHyyppoo-- mmeennt t ooff U Ullttiimmaattee CCoosstt tthheettiiccaall JJooiinntt TToottaall M Maarrkkeett AAfftteerr MMaarrkkeet t PrProodduuccttiioonn PPrroodduuccttiioonn P Prroodduucctt VValaluuee SSpplliitt--OOffff VVaalluuee CCoosstt CCoosstt A A $$ 6600,,000000 $$ 2200,,000000 $$ 4400,,000000 $$ 1166,,000000** $$ 3366,,000000 B B 111100,,000000 3300,,000000 8800,,000000 3322,,000000 6622,,000000 C C 118800,,000000 5500,,000000 113300,,000000 5522,,000000 110022,,000000 T Toottaall... $3$35500,,000000 $$110000,,000000 $$225500,,000000 $$110000,,000000 $$220000,,000000 * $100,000 ÷ $25 * $100,000 ÷ $250,000 = .4;0,000 = .4;$40,00$40,000 × .4 = $16,0000 × .4 = $16,000 E8-8 E8-8 (1)

(1) AAveraverage unge unit coit cost mst methethod:od:

U Unniittss JJooiinnt t CCoosstt JJooiinntt P Prroodduucctt PPrroodduucceedd PPeer r UUnniitt CCoosstt K K 55,,000000 $$11..4400 $$ 77,,000000 L L 2200,,000000 11..4400 2288,,000000 M M 1155,,000000 11..4400 2211,,000000 N N 1100,,000000 11..4400 1144,,000000 5 500,,000000 $$7700,,000000 (2)

(2) The wThe weigeightehted aved average mrage methethod:od:

Joint Joint Cost Cost Per Per U Unniittss WWeeiigghhtteedd WWeeiigghhtteedd JJooiinntt P Prroodduucctt PPrroodduucceedd ×× PPooiinnttss == UUnniittss ×× UUnniitt** CCoosstt K K 55,,000000 33..00 1155,,000000 $$..5500 $$ 77,,550000 L L 2200,,000000 22..00 4400,,000000 ..5500 2200,,000000 M M 1155,,000000 44..00 6600,,000000 ..5500 3300,,000000 N N 1100,,000000 22..55 2255,,000000 ..5500 1122,,550000 1 14400,,000000 $$7700,,000000 ** $$ ,, ,, $.$. Jo

Joinintt CoCostst To

Totaltal nunumbmberer ofof weiweighghtedted ununititss= = == 7

700 000000 1

14040 000000 5050 peperrrr weweigighthteded ununitit

** $$ ,,

,, $$ ..

Jo

Joinintt CoCostst To

Totaltal nunumbmberer ofof ununititss proproduducedced= = == 7

700 000000 5

(9)

E8-8 (Concluded) E8-8 (Concluded) (3)

(3) The The marmarket ket vavalue lue metmethodhod:: Ultimate Ultimate M Maarrkkeett PPrroocceessssiinngg HHyyppoo- -V Vaalluuee UUllttiimmaattee CCoosstt tthheettiiccaall JJooiinntt p peerr UUnniittss MMaarrkkeett AfAftteerr MMaarrkkeett CCoosstt P Prroodduucctt UUnniitt PPrroodduucceedd VVaalluuee SSpplliitt--OOffff VVaalluuee AAllllooccaattiioonn K K $$55..5500 55,,000000 $ 2$ 277,,550000 $ 1$ 1,,550000 $ 2$ 266,,000000 $$1188,,220000 L L 11..6600 2200,,000000 3322,,000000 33,,000000 2299,,000000 2200,,330000 M M 11..5500 1155,,000000 2222,,550000 22,,550000 2200,,000000 1144,,000000 N N 33..0000 1100,,000000 3300,,000000 55,,000000 2255,,000000 1177,,550000 $ $111122,,000000 $$1122,,000000 $$110000,,000000 $$7700,,000000 E8

E8-9-9 MaMaterteriaials cls cosost:t:

M Maatteerriiaallss MMaatteerriiaallss C Coosst t ppeerr TToottaall CCoosst t ppeerr W Weeiigghhtteedd WWeeiigghhtteedd MMaatteerriiaallss PPrroodduucctt PPrroodduucctt P Prroodduucctt UUnniitt ×× PPooiinnttss == UUnniittss ×× UUnniitt == CCoosstt ÷÷ UUnniittss == UUnniitt X X 1100,,000000 33 3300,,000000 $$22 $$6600,,000000 1010,,000000 $$66 Y Y 88,,000000 22 1166,,000000 22 3322,,000000 88,,000000 44 4 466,,000000 $$9922,,000000 Conversion cost: Conversion cost: C Coonnvveerrssiioonn CCoonnvveerrssiioonn C Coosst t ppeerr TToottaall CCoosst t ppeerr W Weeiigghhtteedd WWeeiigghhtteedd CCoonnvveerrssiioonn PPrroodduucctt PPrroodduucctt P Prroodduucctt UUnniitt ×× PPooiinnttss == UUnniittss ×× UUnniitt == CCoosstt ÷÷ UUnniittss == UUnniitt X X 1100,,000000 66 6060,,000000 $$11..5500 $$9900,,000000 1100,,000000 $$99..0000 Y Y 88,,000000 55 4400,,000000 11..5500 6600,,000000 8,8,000000 77..5500 1 10000,,000000 $$115500,,000000 ** $$ ,, $ $ ,, .. %% Joi Jointnt CoCostst Hyp

Hypothotheticeticalal markmarketet valuvaluee= = = = == 7 700 000000 1 10000 000000 7700 7700 C Chhaapptteerr88 88--99

(10)

PROBLEMS

P8-1 P8-1 (1)

(1) AAveraverage unge unit coit cost mst methethod:od:

A Appppoorrttiioonnmmeenntt PPrroocceessssiinngg TToottaall U Unniitts s ((kkgg)) oof f JJooiinntt CoCosst t AAfftteerr PPrroodduuccttiioonn P Prroodduucctt PPrroodduucceedd PPrroodduuccttiioon n CCoosstt SSpplliitt--OOffff CCoosstt B B 110 0 000000 $2$26655,,000000** $$ 558800,,000000 $$ 884455,,000000 C C 110 0 000000 226655,,000000 772200,,000000 998855,,000000 T Toottaal .l ... 220 0 000000 $$553300,,000000 $$11,,330000,,000000 $$11,,883300,,000000 *Joint co

*Joint cost of $590,st of $590,000 less $6000 less $60,000 b0,000 by-proy-product credduct credit ($15 × 4it ($15 × 4 000 kg) =000 kg) = $530

$530,00,000;0;$53$530,00,000 ÷ 20 0000 ÷ 20 000 kg = $26.0 kg = $26.50 per un50 per unit;it;$26.$26.50 × 1050 × 10 000 kg = $2000 kg = $265,65,000000.. T Toottaal Pl Prroodduuccttiioonn UUnniits ts iin Fn Fiinniisshheedd FFiinniisshheed Gd Gooooddss P Prroodduucctt CCoosst t ppeer r UUnniitt GGoooodds s IInnvveennttoorryy IInnvveennttoorryy B B $$8844..5500 1 1 00000 0 kkgg $$ 8844,,550000 C C 9988..5500 550000 4499,,225500 $133,750 $133,750 (2)

(2) MarMarket ket vavalue lue metmethodhod::

Apportion-P Prroocceessssiinngg HHyyppoo-- mmeennt t ooff U Ullttiimmaattee CCoosstt tthheettiiccaall JJooiinntt TToottaall M Maarrkkeett AAfftteerr MMaarrkkeet t PrProodduuccttiioonn PPrroodduuccttiioonn P Prroodduucctt VValaluuee SSpplliitt--OOffff VVaalluuee CCoosstt CCoosstt B B $$11,,330000,,000000 $$ 558800,,000000 $$ 727200,,000000 $$331188,,000000 $$ 889988,,000000 C C 11,,220000,,000000 772200,,000000 448800,,000000 221122,,000000 993322,,000000 T Toottaal .l ... $$22,,550000,,000000 $$11,,330000,,000000 $$11,,220000,,000000 $$553300,,000000** $$11,,883300,,000000 *

* Joint cJoint cost less ost less by-prby-product croduct credit $53edit $530,000 ÷ $1,2000,000 ÷ $1,200,000 = ,000 = .4417;.4417;.4417 × .4417 × $720,0$720,00000 = $318,024 =

= $318,024 = approximatelapproximately $318,000;y $318,000; .4417 × $480,000 .4417 × $480,000 = $212,016 = $212,016 = appro= approxi- xi-mately $212,000. mately $212,000. T Toottaal l PPrroodduuccttiioonn CCoosst t ooff P Prroodduucctt CCoosst t ppeer r UUnniitt UUnniitts s SSoolldd GGoooodds s SSoolldd B B $$8899..8800 99 00000 0 kkgg $$ 880088,,220000 C C 9933..2200 99 505000 888855,,440000 $1,693,600 $1,693,600

(11)

P8-1 (Concluded) P8-1 (Concluded) (3

(3)) NeNeititheher tr the he markmarket et vavalulue me methethod od nonor ar aveverarage ge ununit it cocost st methmethod od of of alallolocacatitingng joint cost is a m

joint cost is a more accurate way of determining ore accurate way of determining joint product costs.joint product costs.Joint cost,Joint cost, because of its nature,

because of its nature,cannot be accuracannot be accurately splitely split up among joint prodt up among joint products,ucts,sincesince joint co

joint cost is incurrst is incurred to proded to produce one or all ouce one or all of the joint prf the joint productsoducts..That is,That is, jointjoint cost canno

cost cannot be reduced by drt be reduced by dropping onopping one of the producte of the products.s.Thus,Thus, to make deci-to make deci-sions about joint pr

sions about joint production,oduction, one must look one must look at the revenue and at the revenue and separable costseparable cost of each produ

of each product to determine whect to determine whether it is profitther it is profitable on the margiable on the margin.n. In suchIn such decisi

decisions,ons,joint cost is not relevanjoint cost is not relevant.t.The only purpose for alloThe only purpose for allocating joicating joint costsnt costs is to determine a cost for inventories on the balance sheet and for cost of goods is to determine a cost for inventories on the balance sheet and for cost of goods sold on the income statement.

sold on the income statement. For finan

For financial statecial statement purpment purposes,oses, in most sitin most situationsuations,, better arbetter arguments caguments cann be made for a value-based allocation basis rather than a physically-based one. be made for a value-based allocation basis rather than a physically-based one. At times,

At times, the physithe physical base can resulcal base can result in absurd allot in absurd allocationcations of costs amongs of costs among products because of the disproportionate relationship between the relative products because of the disproportionate relationship between the relative value of

value of the joint product the joint product and the units prand the units produced,oduced, relative to other joint relative to other joint prod- prod-ucts.

ucts. C

(12)

P P 8 8 - - 2 2 ( ( 1 1 ) ) A A p p p p o o r r t t i i o o n n

- U U l l t t i i m m a a t t e e H H y y p p o o - m m e e n n t t o o f f M M a a y y

M M a a r r k k e e t t U U l l t t i i m m a a t t e e S S e e p p a a r r a a b b l l e e t t h h e e t t i i c c a a l l J J o o i i n n t t C C o o s s t t o o f f M M a a y y V V a a l l u u e e U U n n i i t t s s M M a a r r k k e e t t P P r r o o c c e e s s s s i i n n g g M M a a r r k k e e t t P P r r o o d d u u c c t t i i o o n n T T o o t t a a l l M M a a y y G G o o o o d d s s G G r r o o s s s s P P r r o o d d u u c c t t p p e e r r U U n n i i t t P P r r o o d d u u c c e e d d V V a a l l u u e e C C o o s s t t V V a a l l u u e e * * C C o o s s t t 1 1 C C o o s s t t S S a a l l e e s s S S o o l l d d P P r r o o f f i i t t C C $ $ 2 2 0 0 . . 0 0 0 0 1 1 5 5 , , 0 0 0 0 0 0 $ $ 3 3 0 0 0 0 , , 0 0 0 0 0 0 $ $ 7 7 5 5 , , 0 0 0 0 0 0 $ $ 2 2 2 2 5 5 , , 0 0 0 0 0 0 $ $ 9 9 0 0 , , 0 0 0 0 0 0 $ $ 1 1 6 6 5 5 , , 0 0 0 0 0 0 $ $ 2 2 6 6 0 0 , , 0 0 0 0 0 0 2 2 $ $ 1 1 4 4 3 3 , , 0 0 0 0 0 0 3 3 $ $ 1 1 1 1 7 7 , , 0 0 0 0 0 0 L L 1 1 5 5 . . 0 0 0 0 1 1 0 0 , , 0 0 0 0 0 0 1 1 5 5 0 0 , , 0 0 0 0 0 0 2 2 5 5 , , 0 0 0 0 0 0 1 1 2 2 5 5 , , 0 0 0 0 0 0 5 5 0 0 , , 0 0 0 0 0 0 7 7 5 5 , , 0 0 0 0 0 0 1 1 3 3 5 5 , , 0 0 0 0 0 0 6 6 7 7 , , 5 5 0 0 0 0 6 6 7 7 , , 5 5 0 0 0 0 T T 9 9 . . 5 5 0 0 2 2 0 0 , , 0 0 0 0 0 0 1 1 9 9 0 0 , , 0 0 0 0 0 0 4 4 0 0 , , 0 0 0 0 0 0 1 1 5 5 0 0 , , 0 0 0 0 0 0 6 6 0 0 , , 0 0 0 0 0 0 1 1 0 0 0 0 , , 0 0 0 0 0 0 9 9 5 5 , , 0 0 0 0 0 0 5 5 0 0 , , 0 0 0 0 0 0 4 4 5 5 , , 0 0 0 0 0 0 T T o o t t a a l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 6 6 4 4 0 0 , , 0 0 0 0 0 0 $ $ 1 1 4 4 0 0 , , 0 0 0 0 0 0 $ $ 5 5 0 0 0 0 , , 0 0 0 0 0 0 $ $ 2 2 0 0 0 0 , , 0 0 0 0 0 0 $ $ 3 3 4 4 0 0 , , 0 0 0 0 0 0 $ $ 4 4 9 9 0 0 , , 0 0 0 0 0 0 $ $ 2 2 6 6 0 0 , , 5 5 0 0 0 0 $ $ 2 2 2 2 9 9 , , 5 5 0 0 0 0 1 1 $ $ 2 2 0 0 0 0 , , 0 0 0 0 0 0 ÷ ÷ $ $ 5 5 0 0 0 0 , , 0 0 0 0 0 0 = = 4 4 0 0 % % 2 2 1 1 3 3 , , 0 0 0 0 0 0 × × $ $ 2 2 0 0 = = $ $ 2 2 6 6 0 0 , , 0 0 0 0 0 0 3 3 $ $ 1 1 6 6 5 5 , , 0 0 0 0 0 0 ÷ ÷ 1 1 5 5 , , 0 0 0 0 0 0 = = $ $ 1 1 1 1 ; ; $ $ 1 1 1 1 × × 1 1 3 3 , , 0 0 0 0 0 0 = = $ $ 1 1 4 4 3 3 , , 0 0 0 0 0 0 ( ( 2 2 ) ) R R e e v v e e n n u u e e f f o o r r g g o o n n e e ( ( 2 2 0 0 , , 0 0 0 0 0 0 × × ( ( $ $ 9 9 . . 5 5 0 0 – – $ $ 7 7 ) ) ) ) . . . . . . . . . . . . . . . . . . $ $ 5 5 0 0 , , 0 0 0 0 0 0 C C o o s s t t s s a a v v i i n n g g ( ( s s e e p p a a r r a a b b l l e e c c o o s s t t ) ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 4 4 0 0 , , 0 0 0 0 0 0 L L o o s s s s i i f f o o f f f f e e r r i i s s a a

c c c c e e p p t t e e d d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1 1 0 0 , , 0 0 0 0 0 0 T T h h e e o o f f f f e e r r s s h h o o u u l l d d n n o o t t b b e e a a c c c c e e p p t t e e d d . .

(13)

P8-3 P8-3 (1) (1) Ultimate Ultimate M Maarrkkeett PPrroocceessssiinngg HHyyppoo- -V Vaalluuee CCoosstt tthheettiiccaall JJooiinntt p peerr UUnniittss MMaarrkkeett AfAftteerr MMaarrkkeett CCoosstt P Prroodduucctt UUnniitt PPrroodduucceedd11 _V_V_a_al_lu_ue_e _S_Sp_pl_li_it_t-_-O_Of_ff_f _V_V_a_al_lu_ue_e _A_Al_ll_lo_oc_ca_at_ti_io_on_n33 A Allpphhaa... $$ 55 4466,,220000 $$223311,,000000 $$ 3388,,000000 $$118855,,000000 $$ 4444,,440000 15,660 15,66022 _23,660_23,660 G Gaammmmaa... 1122 4400,,000000 448800,,000000 116655,,000000 313155,,000000 7755,,660000 T Toottaall ... $$772266,,666600 $$222266,,666600 $$550000,,000000 $$112200,,000000 1 1_D_Di_ia_ag_gr_ra_am_m_o_of_f_F_Fl_lo_ow_w_o_of_f_P_Po_ou_un_nd_ds_s₍_(n_no_ot_t_r_re_eq_qu_ui_ir_re_ed_d)₎ _$_$2₂₃_3,_,6₆₆₆₀₀ $ $3388,,000000 ((44)) 4466,,22000 0 ppoouunnddss AlphaAlpha (2 (2)) 6666,0,000 00 popounundsds Beta Beta 19,800 pounds 19,800 pounds $120,000 $120,000 (1) 110,000 pounds (1) 110,000 pounds $165,000 $165,000 Gamma Gamma (3 (3))4444,0,00000 popounundsds –4

–4,0,00000 popoununds lds losostt 40

40,0,00000 popounundsds**

*Computation of pounds of good output of Gamma: *Computation of pounds of good output of Gamma: Let X = good output

Let X = good output 44,

44,000 – 000 – .1X.1X= X= X 4

400,,000000 = = XX

2

2_Ma_Mark_rk_et_{et va}_valu_{lue o}_{e o}_{f B}_{f Bet}_{eta (}_{a (}₁₉_19,8_,800_{00 po}_poun_unds_{ds ×}_{× $1}_$1.2_.20).._0)...._...._...._...._...._...._...._...._...._...._.. _$2_$23,_3,76₇₆₀₀

Le

Less ss mamarkrketetining eg expxpenense se of of BeBeta...ta... 8,8,101000 Ne

Net t rerealalizizabable valle value of ue of BeBetata... $15$15,6,66060

3

3_{The joint cost is 24% of the hypothetical market value.}_{The joint cost is 24% of the hypothetical market value.}

C

Chhaapptteerr88 88--1133

{

(14)

P8-3 (Concluded) P8-3 (Concluded) (

(22)) SSHHAAFFFFNNEER R CCOORRPPOORRAATTIIOONN Statement of Gross Profit for Alpha Statement of Gross Profit for Alpha S

Saallees s ((3388,,44000 0 ppoouunndds s × × $$55).)... $$119922,,000000 Production costs:

Production costs: Al

Allolocatcated ed jojoinint t cocostst... $1$10202,0,00000 De

Depapartmrtmenent t 2.2... 3838,0,00000 De

Depapartmrtmenent t 4.4... 2323,6,66060 Gr

Gross oss coscost t of of prproducoductiotionn... $16$163,63,66060 Le

Less ss nenet rt reaealilizazablble ve valalue ue of of BeBetata... 1515,9,90000** Net

Net cost cost of of proproducductiotion....n... $14$147,77,76060 Le

Less ss enendiding ng ininveventontoryry... 2929,5,55252**** C

Coosst t oof f ggoooodds s ssoolldd ... 111188,,220088 G

Grroosss s pprrooffiit.t... $$ 7733,,779922

*

* Net realiNet realizable vzable value of Beta equalue of Beta equals the revals the revenue froenue from Beta ($24,m Beta ($24,000) less its re000) less its relatedlated marketing expense ($8,100).

marketing expense ($8,100). **

**Ending inEnding inventory equals the net cost ventory equals the net cost of production ($147,760) times of production ($147,760) times 20%.20%. P8-4 P8-4 ( (11)) JJaannaa ReRettaa TToottaall Sa Saleless ... $250,$250,000000 $3$300,00,000000 $55$550,0,000000 Cost of goods sold:

Cost of goods sold:

Joint cost ($236,000 – Bynd net revenue Joint cost ($236,000 – Bynd net revenue

(

($$1111,,00000 0 – – $$55,,00000 0 sseeppaarraabblle e ccoosstt))))... $$223300,,000000 Separable cost ($215,000 – $5,000 for

Separable cost ($215,000 – $5,000 for B Byynndd) .) ... 221100,,000000 221100,,000000 T Toottaal l ccoosst .t ... $$444400,,000000 G Grroosss s pprrooffiit t ((2200% % oof f ssaalleess) .) ... $$111100,,000000 ( (22)) TToottaall JJaannaa RReettaa Ul

Ultitimamate te sasaleles s vavaluluee... $5$550,50,000000 $2$250,50,000000 $3$30000,0,00000 L

Leesss 2s 200% g% grroosss ps prrooffiitt ... 111100,,000000 5500,,000000 6600,,000000 T

Totaotal cosl costt ... $4$440,40,000000 $20$200,0,000000 $2$24040,0,00000 S

Seeppaarraabblle e cocosstt... 221100,,000000 221100,,000000 Jo

Joinint t cocost st alallolocacatition..on... $2$23030,0,00000 $2$20000,0,00000 $$ 3030,0,00000

(3)

(15)

P8-5 P8-5 (1) (1) U Ullttiimmaattee ApApppoorrttiioonn- -M Maarrkkeett PPrroocceessssiinngg HHyyppoo-- mmeennt t ooff V Vaalluuee UUllttiimmaattee CCoosstt tthheettiiccaall JJooiinntt p peerr UUnniittss MaMarrkkeett AAfftteerr MMaarrkkeett PrProodduuccttiioonn P Prroodduucctt UUnniitt PPrroodduucceedd VVaalluuee SSpplliitt--OOffff VVaalluuee CCoosstt** S SPPLL--33 $$44..0000 770000,,000000 $$22,,880000,,000000 $$ 887744,,000000 $$11,,992266,,000000 $$ 996600,,00000 0 **** P PSSTT--44 66..0000 335500,,000000 22,,110000,,000000 881166,,000000 11,,228844,,000000 664400,,000000 $ $44,,990000,,000000 $$11,,669900,,000000 $$33,,221100,,000000 $$11,,660000,,000000 * Joi

* Joint prnt productioduction coon costst... $1,702$1,702,000,000 Less cost assigned to by-product

Less cost assigned to by-product RJ

RJ-5 (-5 (17170,0,00000 ga0 gallllonons × (s × ($.$.70 – 70 – $.$.1010))..))... 10102,2,000000 $1,600,000 $1,600,000 * ***(($$11,,992266,,00000 0 ÷ ÷ $$33,,221100,,000000) ) × × $$11,,660000,,00000 0 == $$996600,,000000 (2) (2) S SPPLL--33 PPSSTT--44 RRJJ--55 Jo

Joiint nt cocost st alallolocacatitionon... $$ 96960,0,000000 $$ 64640,0,000000 $1$10202,,000000 A

Addddiititioonnaal l pprroocceessssiinng g ccoosstt... 878744,,000000 88116,6,000000 T

Totaotal l cocostst... $1$1,8,83434,0,00000 $1$1,4,45656,0,00000 $1$102,02,000000 D Diivviiddeed bd by gy gaalllloonns ps prroodduucceed.d... 770000,,000000 335500,,000000 117700,,000000 C Coosst t ppeer r ggaalllloonn ... $$22..6622 $4$4..1166 $$..6600 Inventory costing: Inventory costing: N Noovveemmbbeer 1 r 1 iinnvveennttoorry (y (ggaalllloonnss)) ... 1188,,000000 5522,,000000 33,,000000 N Noovveemmbbeer prr proodduuccttiioon..n... 770000,,000000 335500,,000000 117700,,000000 7 71188,,000000 440022,,000000 117733,,000000 N Noovveemmbbeer r ssaallees.s... 665500,,000000 332255,,000000 115500,,000000 N Noovveemmbbeer 3r 30 i0 innvveennttoorryy ... 6688,,000000 7777,,000000 2233,,000000 C Coosst t ppeer r ggaalllloon .n ... $$22..6622 $4$4..1166 $$..6600 Cost assigned to November 30

Cost assigned to November 30 f

fiinniisshheed d ggoooodds s iinnvveennttooryry... $$ 117788,,116600 $$ 332200,,332200 $$ 1133,,880000

(

(33)) PPeer gr gaalllloon sn saallees vs vaalluue be beeyyoonnd td thhe se spplliit-t-ooff ff ppooiinnt.t... $$66..0000 P

Peer gr gaalllloon n ssalalees s vvaalluue e aat t ththe e sspplliit-t-ooff ff popoiinnt t ... 33..8800 Di

Diffffererenentitial salal sales vales valueue... $2$2.2.200 Additional processing cost per gallon

Additional processing cost per gallon ($

($81816,6,00000 0 ÷ ÷ 35350,0,00000 0 gagalllolonsns)..)... 2.2.3333 P

Per er gagallllon on gagain in (l(lososs) s) of of fufurtrtheher r prprococesessisingng... $($(..1313))

Meritt Industries should sell PST

Meritt Industries should sell PST-4 at the split-off point,-4 at the split-off point, as the differential revenue of theas the differential revenue of the sales beyond the split-off point is less than the additional cost of further processing. sales beyond the split-off point is less than the additional cost of further processing. C