Solution manual cost accounting 12e by horngren ch 16

These include: Industry Separable Products at the Splitoff Point Food Processing: Extractive: • Petroleum • Crude oil, natural gas, raw LPG 16-2 A joint cost is a cost of a production

CHAPTER 16 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS

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

Industry Separable Products at the Splitoff Point

Food Processing:

Extractive:

• Petroleum • Crude oil, natural gas, raw LPG

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 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

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

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

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

16-6 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

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 production is completed

b Sales method—delays recognition of byproducts until the time of sale

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

16-16 (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

Allocated Costs per Pound

$ 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 per pound 20 pounds = $13.50 Wings: $0.2450 per pound 10 pounds = 2.45

$15.95

b Physical measures method

Pounds

of Product

Weighting:

Physical Measures

Joint Costs Allocated

Allocated Costs per Pound

$ 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 per pound 20 pounds = $ 8 Wings: $0.40 per pound 10 pounds = 4

$12

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

$42.50 3.10

$40.00 8.00

$70.00 0.00

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 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 Chicken Little 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

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

Joint costs – Revenues of byproducts

$100 – $25 = $75

Pounds

of Product

Wholesale Selling Price per Pound

Sales Value

Allocated Costs Per Pound

$25

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

A diagram of the situation is in Solution Exhibit 16-18 (all numbers are in thousands)

Cooking Oil Soap Oil Total

Final sales value of total production,

Net realizable value at splitoff point $20,000 $ 5,000 $25,000

Joint costs allocated, 0.8; 0.2 $24,000 $19,200 $ 4,800 $24,000

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

Soap Oil:

500 drums at

$25 per drum

Cooking Oil: 1,000 drums at

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

A diagram of the situation is in Solution Exhibit 16-19

Physical measure of total production (gallons) 2,500 7,500 10,000

Joint costs allocated, 0.25; 0.75 $120,000 $ 30,000 $ 90,000 $120,000

Final sales value of total production,

2,500 $21.00; 7,500 $14.00 $ 52,500 $105,000 $157,500 Deduct separable costs,

2,500 $3.00; 7,500 $2.00 7,500 15,000 22,500 Net realizable value at splitoff point $ 45,000 $ 90,000 $135,000

Joint costs allocated, 1/3; 2/3 $120,000 $ 40,000 $ 80,000 $120,000

3 a Physical-measure (gallons) method:

Methanol Turpentine Total

b Estimated net realizable value method:

Methanol Turpentine Total

4 Alcohol Bev Turpentine Total

Final sales value of total production,

2,500 $60.00; 7,500 $14.00 $150,000 $105,000 $255,000 Deduct separable costs,

(2,500 $12.00) + (0.20 $150,000);

Net realizable value at splitoff point $ 90,000 $ 90,000 $180,000 Weighting, $90,000; $90,000 $180,000 0.50 0.50

Joint costs allocated, 0.5; 0.5 $120,000 $ 60,000 $ 60,000 $120,000

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

Incremental revenue,

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

Proof: Total sales of both products $255,000

Difference in gross margin $ 45,000

2 500 gallons

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

Total production for the year was:

Ending Total Sold Inventories Production

A diagram of the situation is in Solution Exhibit 16-20

1 a Net realizable value (NRV) method:

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:

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

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

b Constant gross-margin percentage NRV method:

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

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

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 percentage 50% 50% 50% 50%

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

Joint Costs =

$1 800

ICR8 (Non-Salable)

ING4 (Non-Salable)

XGE3 (Non-Salable)

1 Physical measure of total prodn

2 Weighting (150; 50; 800 ÷ 1,000)

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

1b NRV Method

1 Final sales value of total production

2 Deduct separable costs

$750

105

$645 0.16125 $290.25

$1,040

210

$ 830 0.20750

$373.50

$4,490

490 $4,000 $1,800

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

(a) Physical Measures Method

$ (610)

$4,490

1,800

490 2,290

$2,200 (b) NRV Method

$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

to maximization of operating income

4 A letter to the taxation authorities would 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

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

1a

PANEL A: Allocation of Joint Costs using Sales Value at

(25,000 tons $10 per ton; 50,000 $15 per ton) $250,000 $750,000 $1,000,000

PANEL B: Product-Line Income Statement for June 2006 Ricito Pancito Total

(25,000 tons $10 per ton; 50,000 $15 per ton) $250,000 $750,000 $1,000,000

1b

PANEL A: Allocation of Joint Costs using Physical Measure

PANEL B: Product-Line Income Statement for June 2006 Ricito Pancito Total

(25,000 tons $10 per ton; 50,000 $15 per ton) $250,000 $750,000 $1,000,000

1c

PANEL A: Allocation of Joint Costs using Net Realizable

(30,000 tons $18 per ton; 60,000 tons $25 per ton) $540,000 $1,500,000 $2,040,000

PANEL B: Product-Line Income Statement for June 2006 Rilaf Pilaf Total

Revenues (30,000 tons $18 per ton; 60,000 tons $25 per ton) $540,000 $1,500,000 $2,040,000

2 Shel Brown probably performed the analysis shown below to arrive at the net loss of

$5,571 from marketing the sludge:

PANEL A: Allocation of Joint Costs using

Sales Value at Splitoff Ricito Pancito Sludge Total

(25,000 tons $10 per ton; 50,000 $15 per

($250,000; $750,000; $50,000 ÷ $1,050,000) 23.8095% 71.4286% 4.7619% 100% Joint costs allocated

(0.238095; 0.714286; 0.047619 $600,000) $142,857 $428,571 $28,571 $600,000

PANEL B: Product-Line Income Statement

for June 2006 Ricito Pancito Sludge Total

of $27,000 So, Armstrong Foods should sell the sludge—this will increase its operating income

by $23,000 ($50,000 – $27,000)

16-23 (30 min.) Process further or sell

A diagram of the situation is in Solution Exhibit 16-23

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

Incremental revenues, 5,000 × $0 $ 0

Product A (5,000 units processed further)

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

Incremental processing costs

Variable, 5,000 × $0.90 4,500 10,500

Product B (15,000 units sold at splitoff point)

Incremental revenues, 15,000 × $0.50 $ 7,500

Incremental processing costs, 15,000 × $0 0

Product B (15,000 units processed further)

Incremental revenues, 15,000 × $1.50 $22,500

Incremental processing costs

Product C (10,000 units disposed of at splitoff point)

Product C (10,000 units processed further)

Incremental revenues, 10,000 × $5.40 $54,000

Incremental processing costs

Variable, 10,000 × $1.10 11,000 21,000

Summary of the alternatives is:

Preferred

Product at Splitoff Further Alternative Decision Better By

A $(1,000) $(3,000) $(1,000) Dispose at splitoff $ 2,000

B 7,500 6,500 7,500 Sell at splitoff 1,000

C (9,000) 33,000 33,000 Process further 42,000

$5,000 +

$0.50 per unit

Processing $6,000 +

$0.90 per unit

A

$1.50 per unit

Processing $1,000 +

$1.00 per unit

B

$1.50 per unit

Processing $10,000 +

$1.10 per unit

C

$5.40 per unit

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

Production Method

Sales Method

Cost of goods sold

Deduct byproduct revenue 4,000b 0

Deduct main product inventory 23,200c

000,2

Production Method

Sales Method

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

$2/ lb

L 50,000

p ou nd s

$10/ lb

X 100,000 p ou nd s

$800,000

Splitoff Point

Net realizable value (less gross margin) of X $145,000

Deduct Net Unit Final Separable Realizable Allocation of

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

Add Separable Joint Costs Processing

Unit Final Separable Realizable Allocation of

Quantity Price Value Cost Splitoff Weighting Joint Costs

16-26 (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 of total prodn at splitoff

b Physical-measures method

Select White Knotty Total

1 Physical measure of total production

c Net realizable value method

Select White Knotty Total

1 Final sales value of total production

2 Ending Inventory Values

Select White Knotty Total

a Sales value at splitoff method

Deduct incremental processing costs 60,000

Raw to White Oak

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

Deduct incremental processing costs 90,000

Raw to Knotty Oak

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

Deduct incremental processing costs 15,000

Since the processing of each raw-oak product into finished-product form increases operating income, Pacific Lumber is indeed maximizing operating income by processing all products fully