Chapter 11 Cost Allocation For Joint Products and By-Product/Scrap

Chapter 11
59
CHAPTER 11
COST ALLOCATION FOR JOINT PRODUCTS AND
BY-PRODUCT/SCRAP
QUESTIONS
1.
Jointprocessingoutputisclassifiedbasedontherelativesalesvalueofeachtypeof
output.Jointproductsarethoseoutputsthathavethelargestsalesvalue.Byproductsare
those outputs that have some sales value, but not a sufficient amount to justify
undertakingthejointprocesssimplytoobtainthoseoutputs.Scrapisoutputthathasnoor
verylittlesalesvalue.
Usually,theoutputclassificationisdeterminedbeforeproduction.Managementdecides
whetherajointprocessoutputisajointproduct,abyproduct,orscrapbasedonthe
judgmentoftherelativesalesvalueofeachtypeofoutput.However,inunusualcases,the
actualoutputsofthejointprocessmaynotresultasplanned.Insuchcases,management
mayclassifytheoutputdifferentlythanwasoriginallyintended.
2.
Processingoftheoutputsofajointproductionprocessdoesnotalwaysstopatthe
splitoffpoint.Someproductsmaynotbeabletobesoldatthatpointand,assuch,must
beprocessedfurtherbeforetheycanbesold.Otherproductsmayhaveasalesvalueat
splitoffbutfurtherprocessingmightresultinsufficientlygreaterprofitabilitytojustify
theadditionalcosts.
3.
Threeofthedecisionpointsare(1)beforethejointprocessisundertaken,(2)atthe
splitoffpoint,and(3)afterthesplitoffpoint.Thecriterionforproceedingatanyofthese
threepointsiswhethertheanticipatedincrementalrevenueswillexceedtheanticipated
incremental costs. A fourth decision point, occurring between (1) and (2), assesses
whetherthisparticularprocessisthebestuseofthefacilities;thecriteriaforthisdecision
iswhethertheincrementalbenefitfromthisprocessexceedstheincrementalbenefitof
thebestalternativefacilityusage.
4.
Costallocationreferstotheassignmentofanindirectcosttoacostobjectusingsome
reasonable method. Accountants allocate fixed production costs to products produced
within aperiod, andallocate certain plant and equipment costs (throughdepreciation
charges)tothetimeperiodsduringwhichthoseassetsareusedand,inamanufacturing
company,tothegoodsproducedduringaperiod.
Sincetheproductioncostsincurredinajointprocessproduceseveraloutputs,thosecosts
areindirecttotheindividualoutputproducedandmust,becauseofthecostprinciple,be
assignedtothevariousoutputs.Allocationisnecessarytohaveappropriateinventory
(andcostofgoodssold)valuationsforthejointproductsproducedinthejointprocess.
5.
The two primary approaches to allocating joint process costs are those using (1)
physicalmeasuresand(2)monetarymeasures.Physicalmeasures(suchastons,barrels,
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
60
Chapter 11
linearfeet,etc.)areunchangingyardsticks;monetarymeasureschangeovertimebecause
ofgeneralandspecificpricelevelchanges.Physicalmeasurestreateachphysicalunitof
outputasequallydesirablebyassigningauniformamountofjointprocesscosttoevery
unitofoutputproduced.Incontrast,monetarymeasuresassignjointprocesscoststojoint
products proportionately to relative sales value. In most instances, because physical
measuresignoretherelativesalesvalueofproducts,amonetarymeasureisdeemedmore
appropriate.
6.
Useofapproximatednetrealizablevaluesarenecessarywhensomeorallofthejoint
productscannotbesoldatthesplitoffpoint.Anapproximatednetrealizablevalueis
calculatedbysubtractingtheincrementalseparatecostsincurredbetweensplitoffand
point of sale from the expected final sales price of the product. Thus, to use the
approximated NRV method, managers must make estimates of final sales prices and
incrementalseparatecosts.
7.
Oneapproachistoignorebyproduct/scrapinventorycompletelyuntilitissold.At
that point, the revenue generated by the sale of that inventory acknowledges the
existenceofthebyproduct/scrap.Thisrevenueisshownontheincomestatementasan
increasetonetincome.Thismethodistherealizedvaluemethod.
Thesecondapproachistorecordthefinalnetrealizablevalueofthebyproduct/scrap
recoveredatthesplitoffpoint.TheNRViscreditedasareductionofthejointprocess
costs that gave rise to the byproduct. On one hand, this approach is theoretically
preferablebecauseitmatchesthebenefit(NRVofbyproduct/scrap)withthesourceof
thebenefit(thejointprocesscoststhatwereincurredtoproducethebyproduct/scrap).
However,ontheotherhand,itispossiblethatuseofthismethodwilloverstatethevalue
ofthebyproductinventory(especiallyifitisneversold)andunderstatethecostofthe
jointproducts.Thus,therealizablevaluemethodismorelikelytoraisethepotentialfor
misleadingearningsmanagement.
8.
Ifacompanyusingjobordercostingproducesbyproduct/scrapcontinuouslyfrom
normalproduction,thenetrealizablevalueofthatbyproduct/scrapshouldbeconsidered
insettingthepredeterminedoverheadrate.TheestimatedNRVofthebyproduct/scrap
shouldbedeductedfromtotalestimatedoverheadcostsinsettingtherate.Thatdeduction
causestheoveralloverheadallocationrateforallproductstobereduced.Whentheby
productorscrapisactuallysold,itsnetrealizablevalueiscreditedtoManufacturing
Overhead.
If a company using job order costing only produces byproduct/scrap items during a
particularjob,thentheNRVofthebyproduct/scrapshouldnotbeconsideredinsetting
thepredeterminedoverheadrate.TheNRVshouldbecreditedtotheparticularjobthat
gaverisetothebyproduct/scrap.
9.
Foranotforprofitorganizationtoappropriatelyevaluatetheusesofitsresources,the
AICPA requires that multipurpose costs be allocated between program and support
categories.Programexpensesarethosethataredirectlyaimedattheaccomplishmentof
theorganizationscharitableobjectivesandareconsideredamorevaliduseofresources.
Comparison of support expenses to total expenses may suggest a measure of
Chapter 11
61
organizationalefficiency.TheAICPAisconcernedwithdonorshavingknowledgeofthe
relativeandabsolutemagnitudeoffundsspentonfundraising.
62
Chapter 11
EXERCISES
10.
Eachstudentwillhaveadifferentanswer.Nosolutionisprovided.
11. a. Inapoultryprocessingplant,thejointinputwouldbechickensand/orturkeys.The
primaryquestionstobeaskedfollow.
(1) Whatspecificpoultrywillbeused;whatcustomerswillbeserved;andwhatisthe
estimated profitability of the business? The answer to these questions will
determinewhatinputswillbepurchasedand,tosomeextent,whatproduction
processes will be performed. It also will help determine whether the process
shouldbeundertakenatall.
(2) Whatspecificcutsofpoultryshouldbeselectedfromthepoultryinputs?The
answertothisquestionwilldeterminehowtheinputsarecutintosalableparts.
(3) Howwillthejointprocessoutputbeclassified:jointproduct,byproduct,scrap,or
waste?Theanswertothisquestiondetermineswhichoutputisallocatedpartof
thejointcost.
(4) Howmuchprocessingshouldbedonetotheindividualcuts?Theanswertothis
question will determine what specific processes will be necessary beyond the
splitoffpointandwhattypesofequipmentthepoultryprocessingplantmusthave
to execute the required conversion operations. To answer this question, the
incremental costs and benefits must be compared before undertaking any
additionalprocessing.
b.
Inapoultryprocessingplant,thewayjointcostisallocatedcanaffectmany
decisions.Forexample,allocatingjointcosttobyproduct/scrapwouldlikelycauseit
tobeseenasamoneyloser,andassuch,itmightsimplybedisposedofaswaste.
Joint cost allocation is also important forreporting requirements, such as income
determinationandinventoryvaluationforIRSreportingpurposes.Jointcostisalso
relevant indetermining whetherproduction shouldoccur. However, oncesplitoff
pointisreached,jointcostisirrelevantindecidingwhetheradditionalconversion
shouldbeperformed.
c.
Four categories of output may be obtained from joint production. Joint

productsaretheprimaryproductsandaredistinguishedfromotheroutputsbytheir
relatively greater sales value. At the opposite end of the continuum, waste is
incidentaloutputofajointproductionprocessandhasnovalue.Byproductandscrap
have some value, but the value is substantially below that of joint products. By
producthasasomewhatgreatermarketvaluethanscrap.
Chapter 11
12.
Products
Boco
Loco
Roco
Soco
Moco
Coco
Doco
Joco
Voco
63
#of
Units
1,200
1,000
5,000
3,800
4,100
200
300
1,000
6,000
SVat
SplitOff
$6.000
$1.750
$2.500
$4.200
$1.900
$0.250
$1.800
$0.020
$0.001
TotalSV
$7,200
$1,750
$12,500
$15,960
$7,790
$50
$540
$20
$6
Classification
Jointproduct
Byproduct
Jointproduct
Jointproduct
Jointproduct
Scrap
Scrap
Scrap
Waste
Allclassificationsarebasedontherespectiveproportionalsalesvalues.Itisevenpossible
thatCocoandJocowouldbeconsideredwaste.Afurtherconsiderationwouldbeany
sellingordisposalcoststhatwouldaffectthenetinflowstoTriscuitCo.
13. a. Allocationrate=$16,200,00036,000,000feet=$0.45perfoot
GradeA:$0.4527,000,000=$12,150,000
GradeB:$0.459,000,000=$4,050,000
b. Incrementalrevenue(27,000,000$0.80)
Incrementalcosts(27,000,000$0.75)
Increaseinincome(27,000,000$0.05)
$21,600,000
(20,250,000)
$1,350,000
Basedontheincrementalchangeinnetincome,thecompanyshouldprocessGradeA
lumberfurther.
14. a.
JP4539
JP4587
JP4591
b. JP4539
JP4587
JP4591
JP4539
JP4587
JP4591
4,500
18,000
13,500
36,000
0.125$558,000=
0.500$558,000=
0.375$558,000=
1.000
4,500$14=$63,000
18,000$8=144,000
13,500$18=243,000
$450,000
$69,750
279,000
209,250
$558,000
0.14$558,000=$78,120
0.32$558,000=178,560
0.54$558,000=301,320
1.00$558,000
4,500($24$4)=$90,000
0.17$558,000=$94,860
18,000($15$5)=180,000 0.33$558,000=184,140
13,500($22$2)=270,000 0.50$558,000=279,000
$540,000 1.00$558,000
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Chapter 11
15.a.Final
Product
Butter
Jam
Syrup
Sales
Value
$6.00
14.00
3.60
SplitOff
SalesValue
$4.00
6.40
3.00
Increm.
Revenue
$2.00
7.60
0.60
Increm.
Cost
$3.00
4.00
0.40
Increm.
Profit
$(1.00)
3.60
0.20
Onlyjamandsyrupshouldbeprocessedbeyondthesplitoffpoint.
b. Jointcost
LessNRVofsyrup($3.60$0.40)1,000
Jointcosttobeallocated
$123,200
3,200
$120,000
Unitbasedallocation:
Butter(10,00030,000)$120,000
Jam(20,00030,000)$120,000
Total
$40,000
80,000
$120,000
Weightbasedallocation:
Butter(10,00016ounces)
Jam(20,0008ounces)
Totalproductweight
160,000
160,000
320,000
Butter(0.50$120,000)
Jam(0.50$120,000)
Total
$60,000
60,000
$120,000
Salesvalueatsplitoffallocation[from(a)]
Butter(10,000$4.00)
Jam(20,000$6.40)
NRV
$40,000
128,000
$168,000
Butter(0.24$120,000)
Jam(0.76$120,000)
Total
$28,800
91,200
$120,000
16.a.
Product
Steaks
Roasts
GroundBeef
Total
#of
Pounds Proportion
3,312
24%
6,210
45
4,278
31
13,800 100%
Joint
Cost
$26,400
26,400
26,400
50%
50%
100%
24%
76%
100%
Allocated
JointCost
$6,336
11,880
8,184
$26,400
Chapter 11
65
The problem with this method is that the joint cost assigned to each product is
approximately$1.91perpound,whichmakeseverypoundofgroundbeefsoldappear
tolose$1.01.
b.
#of
SVat
Total
Allocated
Product
Pounds
SplitOff
SV
Percent
JointCost
Steaks
3,312 $4.25perlb.
$14,076
34%
$8,976
Roasts
6,210 $3.80perlb.
23,598
57
15,048
GroundBeef
4,278 $0.90perlb.
3,850
9
2,376
Total
$41,524
$26,400
Theproblemmentionedin(a)iscorrectedwiththismethodbecausethejointcost
assignedtoeachpoundofgroundbeefsoldisnowonly$0.56.
c. Sellingprice
Allocatedjointcost
Speciallabel
Profitdesired
Allowableseparatecost
$2.10
(0.56)
(0.15)
(0.40)
$0.99
The$0.40perpoundshouldnotbeconsideredareal profitamountbecausethe
allocated joint cost would change simply based on the allocation method chosen.
However,thesausagesalewouldbeprofitablebecausetheincrementalrevenueof
$1.20($2.10$0.90)isgreaterthantheincrementalcostof$1.14($0.15+$0.99).
17.a.
Revenues
Separatecosts
NRV
Games
News
$34,040,000 $30,720,000
(31,040,000) (16,320,000)
$3,000,000 $14,400,000
%of$96,000,000total
3%
15%
Jointcostallocation:
Games($24,000,0000.03)
News($24,000,0000.15)
Documentary($24,000,0000.82)
Total
Revenues
Separatecosts
Allocatedcosts
Netprofit
b.
82%
$720,000
3,600,000
19,680,000
$24,000,000
Games
News
$34,040,000 $30,720,000
(31,040,000) (16,320,000)
(720,000) (3,600,000)
$2,280,000 $10,800,000
Games
Revenues
$34,040,000
%of$254,080,000total
13%
Documentaries
$189,320,000
(110,720,000)
$78,600,000
News
$30,720,000
12%
Documentaries
$189,320,000
(110,720,000)
(19,680,000)
$58,920,000
Documentaries
$189,320,000
75%
66
Chapter 11
Games($24,000,0000.13)
News($24,000,0000.12)
Documentaries($24,000,0000.75)
Total
Revenues
Separatecosts
Allocatedcosts
Netprofit
Games
$34,040,000
(31,040,000)
(3,120,000)
$(120,000)
$3,120,000
2,880,000
18,000,000
$24,000,000
News
Documentaries
$30,720,000
$189,320,000
(16,320,000) (110,720,000)
(2,880,000)
(18,000,000)
$11,520,000
$60,600,000
c. AsthemanageroftheGamesGroup,Iwouldbeveryconcernedabouttheeffectsof
allocatingjointcostusingthemethodin(b).Theresultoftheallocationistomakethe
GamesGroupappeartobeunprofitable.
Points(someofwhichcouldberebutted)studentsmightmakeintheirpresentations
include:
(1) The allocation of joint cost is totally arbitrary; there is no cause and effect
relationshiprepresentedintheallocationsin(b).
(2) TheGamesGroupappearstohaveadifferentdegreeoffacilitiesutilizationthanthe
NewsandDocumentaries,giventhehighrelationshipofitsseparatecoststothe
separatecostsoftheothertwogroups.Theallocationsin(b)failtoconsiderthisfact.
(3) TheGamesGroupcouldbeastartupdivisionand,assuch,maybeincurring
substantiallyhighercostsandmaynothavebeguntoreachitsrevenuepotential.
18. a. Unitsofoutputallocation:
Totalbottles=20,000+32,000+28,000=80,000
Perfume[(20,00080,000)$1,080,000]
EaudeToilette[(32,00080,000)$1,080,000]
BodySplash[(28,00080,000)$1,080,000]
Total
$270,000
432,000
378,000
$1,080,000
Weightbasedallocation:
Totalweight=(20,0001)+(32,0002)+(28,0003)=168,000
Perfume=20,000168,000=12%
EaudeToilette=64,000168,000=38%
BodySplash=84,000168,000=50%
Perfume($1,080,0000.12)
EaudeToilette($1,080,0000.38)
BodySplash($1,080,0000.50)
Total
ApproximatedNRVcomputation:
Perfume[20,000($16.50$2.50)]
EaudeToilette[32,000($13.00$1.50)]
BodySplash[28,000($12.00$2.00)]
$129,600
410,400
540,000
$1,080,000
$280,000
368,000
280,000
30%
40%
30%
Chapter 11
67
Total
ApproximatedNRVallocation:
Perfume($1,080,0000.3)
EaudeToilette($1,080,0000.4)
BodySplash($1,080,0000.3)
Total
b.
$928,000
100%
$324,000
432,000
324,000
$1,080,000
Costassignedtoinventory=Allocatedjointcost+Separatecosts
Unitsofoutputallocation:
Perfume[$270,000+($2.5020,000)]
$320,000
EaudeToilette[$432,000+($1.5032,000)]
480,000
BodySplash[$378,000+($2.0028,000)]
434,000
Total
$1,234,000
Endinginventoryvaluationbasedonunitsofoutput:
Perfume[$320,000(60020,000)]
EaudeToilette[$480,000(1,60032,000)]
BodySplash[$434,000(1,68028,000)]
Total
Endinginventoryvaluationbasedonweight:
Perfume
($129,600+$50,000)=$179,600totalcost
$179,60020,000ounces=$8.98perounce
600bottles1ounce$8.98=
EaudeToilette
($410,400+$48,000)=$458,400totalcost
1,600bottles2ounces$7.16=
BodySplash
($540,000+$56,000)=$596,000totalcost
1,6803ounces$7.10=
Total
Ending inventory valuation based on approximated NRV:
Perfume
($324,000+$50,000)=$374,000totalcost
600bottles1ounce$18.70=
EaudeToilette
($432,000+$48,000)=$480,000totalcost
1,600bottles2ounces$7.50=
BodySplash
($324,000+$56,000)=$380,000totalcost
$9,600
24,000
26,040
$59,640
$5,388
22,912
35,784
$64,084
$11,220
24,000
68
Chapter 11
$380,00084,000=$4.52perounce
1,6803ounces$4.52=
Total
c.
22,781
$58,001
Relativetoalloftheproducts,oncethejointcostisassignedandacostper
ounceiscomputed,ScentofMoneydoesnotappeartobesellingitsproductsathigh
enoughprices.Perunitproductlossesof$2.20arebeinggeneratedonthesaleofeach
bottleofperfume,$2.00perbottleofeaudetoilette,and$1.56perbottleofbody
splash.
21.a.
Fabric
$540,000
(360,000)
$180,000
(120,000)
$60,000
Finalrevenues
Revenuesatsplitoff
Incrementalrevenues
Incrementalcosts
Netbenefit(cost)offurtherprocessing
Yarn
$420,000
(300,000)
$120,000
(102,000)
$18,000
Bothproductsshouldbeprocessedfurther.
b. Theirrelevantitemisthe$120,000jointcost.
22.
Product
JP#1
JP#2
JP#3
Increm.
Revenues
$50
$40
$65
Increm.
Costs
$55
$25
$45
Benefit/(Loss)
$(5)
$15
$20
Process
Further?
No
Yes
Yes
22. Twoouncesofeach16ounces(or12.5percent)arelosttowaste,leaving87.5percentof
totallbs.available.
a.
b.
Joint
Products
Fish
Oil
Meal
Unit
Weight
0.500
0.250
0.125
0.875
TotalPounds
75,000
75,000
75,000
Joint
Products
Fish
Oil
Meal
Lbs.of
Product
37,500
18,750
9,375
SellingPrice
perLb.
$4.50
6.50
2.00
Lbs.of
Product
37,500
18,750
9,375
65,625
Total
$168,750
121,875
18,750
$309,375
Percent
57
29
14
100
Percent
55
39
6
100
Allocated
JointCost
$81,396
41,412
19,992
$142,800
Allocated
JointCost
$78,540
55,692
8,568
$142,800
Chapter 11
69
Yh6nc.Althoughanunchangingmeasure,thephysicalmeasureofpoundstreatsall
productsasequallyvaluable.Becauseofinflationandmarketpricevariability,salesvalueis
achangingmeasure; however,thismethod isabetter wayofmatching jointcosttothe
benefits fromthe production process because of the substantial differences in per pound
pricesamongthethreeproducts.
23.a. Salesvalueofmilk
Salesvalueofsourcream
Totalsalesvalue
$377,400(68%)
177,600(32%)
$555,000
Sincethemilkrepresents68percentofthetotalsalesvalueatsplitoff,$125,800
represents68percentofthetotaljointcost.TotaljointcostforJuneis($125,800
0.68)or$185,000.
(5) 190,000pints=95,000quartsofsourcream
Quartsofmilk
Quartsofsourcream
Totalquarts
240,000(72%)
95,000(28%)
335,000
Sincethemilkrepresents72percentofthetotalphysicalquantityproduced,$125,800
represents72percentofthetotaljointcosts.Totaljointcostis($125,8000.72)or
$174,722.
19.a.
Product
Candied
apples
Apple
jelly
Apple
jam
Final
Revenues
SplitOff
SalesValue
Increm.
Revenue
Increm.
Costs
Increm.
Profit
$690,000
$670,000
$20,000
$26,000
$(6,000)
775,000
730,000
45,000
32,000
13,000
271,000
260,000
11,000
15,000
(4,000)
Managementshouldnothavefurtherprocessedcandiedapplesandapplejambecause
the incremental costs from further processing were greater than the incremental
revenues.Theseproductsshouldhavebeensoldatthesplitoffpoint.
b. Candiedapplesadditionalprofit
$6,000
21.a.Salesvalueofblouses=Jointcostofblouse
TotalsalesvalueTotalallocatedjointcost
$80,000$600,000=X360,000
$600,000X=($80,000)($360,000)
$600,000X=$2,880,000,000,000
X=$48,000forblouses
Totaljointcost
Jointcostforjacketsandblouses($138,000+$48,000)
$360,000
(186,000)
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Chapter 11
Jointcostassignedtodresses
b.
c.
$174,000
Jointcost=$138,000$230,000=60%ofrelativesalesvalueatsplitoff
amounts
$174,000=0.6X
X=$290,000salesvalueatsplitofffordresses
Finalsalesvalue
Salesvalueatsplitoff
Increaseinvalue
Additionalcosts
Incrementalbenefit(loss)
Dresses
$300,000
290,000
$10,000
(26,000)
$(16,000)
Jackets
$268,000
230,000
$38,000
(20,000)
$18,000
Blouses
$210,000
80,000
$130,000
(78,000)
$52,000
Jacketsandblousesshouldbeprocessedbeyondsplitoff.
Chapter 11
d. Jointcostallocatedtojackets
Additionalcosts
Totalcostfor16,000jackets
Sales(12,000$16.75*)
Costfor12,000jackets(0.75$158,000)
Grossprofit
71
$138,000
20,000
$158,000
$201,000
(118,500)
$82,500
*$268,00016,000=$16.75perjacket
25. a. Ifthebyproductisaccountedforatthetimeofproduction,byproductinventoryis
recordedatitsnetrealizablevalueandthatamountreducesthejointcostincludedin
thegasolinescostofsales.Therefore,costofsalesofthebyproductwouldbezero.
Costofsalesforgasoline:Beginninginventoryofgasoline
Productioncoststosplitoffpoint
LessNRVofbyproduct
Salesofbyproduct
$60,000
Production&Marketing
(50,000)
Currentmanufacturingcostsofgasoline
Endinginventoryofgasoline
Costofsalesforgasoline
$
0
240,000
(10,000)
$230,000
(30,000)
$200,000
b. IfGoGohadreducedthegasolinesjointcost,theaveragecostpergallonofgasoline
would have been decreased. Thus, the ending inventory value would have been
slightlyless,andthegrossmarginwouldhavebeenslightlymore.
(CPAadapted)
26. a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
2
2
2
1
1
1
2
2
2
1
1
1
1
$337,500
27. Jointprocesscost
Lessnetrealizablevalueofbyproductinventory
(65,000)
Amounttobeallocated
$272,500
72
Chapter 11
Prorationofamounttobeallocatedbasedonweight:
Product
Bushels
Proportion
Allocation
Premium
16,500
0.25
$68,125
Good
43,560
0.66
179,850
Fair
5,940
0.09
24,525
66,000
1.00
$272,500
28.a. Jointcost
LessNRVofbyproduct[2,000($1.50$0.30)]
$142,000
(2,400)
$139,600
Approx.NRVofFillet[18,000($16$3)]
Approx.NRVofSmoked[20,000($13.00$5.20)]
TotalNRV
Costallocation:
Fillet(0.6$139,600)
Smoked(0.4$139,600)
Totalcostallocation
b. SeparatecostsforFillet
SeparatecostsforSmoked
Jointcost
Separatecosts
Totalcosts
Dividebypounds
Costperpound(rounded)
$234,000 60%
156,000
40%
$390,000
$83,760
55,840
$139,600
=18,000$3.00=$54,000
=20,000$5.20=$104,000
Fillet
$83,760
54,000
$137,760
18,000
$7.65
Inventoryvalues:
Fillet(4,000$7.65)
Smoked(2,400$7.99)
Remnants(350$1.20)
Totalinventoryvalue
Smoked
$55,840
104,000
$159,840
20,000
$7.99
$30,600
19,176
420
$50,196
29. Becausethebyproducthassubstantialvalue,thebyproductshouldbeaccountedfor
usingNRVratherthanrealizedvalue,whichwouldresultindistortedcostinformation.
Whetherthedirectorindirectmethodisusedwouldbedependentonthetimingofthe
saleofbyproductandjointproducts.Ifbothproductgroupssellshortlyaftertheyare
produced,thenthechoiceofmethodislessimportant.However,ifthebyproducttends
tosellinadifferentperiodthantherelatedjointproducts,useofthedirectmethodwould
provideastrongermatchbetweencostsandbenefits.
30.a. Totaljointcost
Revenuefromtours
$20,000,000
$800,000
Chapter 11
Expensesoftours
73
(480,000)
(320,000)
$19,680,000
GreedyCEOs
$10,000,000
(6,800,000)
$3,200,000
Sequel
$58,000,000
(41,200,000)
$16,800,000
Grossrevenues
Separatecosts
Netrealizablevalue
GreedyCEOs
Sequel
NRV
$3,200,000
16,800,000
$20,000,000
b.
Grossrevenues
Separatecosts
Netrealizablevalue
Jointcost
Netprofit
16%
84%
100%
Allocation
$3,148,800
16,531,200
$19,680,000
GreedyCEOs
$10,000,000
(6,800,000)
$3,200,000
(3,148,800)
$51,200
31.Totalsalesvalue(1,200$335)
Lesscosts(1,200$250)
Reductionofjointcost
Sequel
$58,000,000
(41,200,000)
$16,800,000
(16,531,200)
$268,800
$402,000
(300,000)
$102,000
Thegrossmarginforthemajorproductswilldecreaseby$102,000,butnetincomewill
remainthesame.
32.a. Salesoflumber(160,000$10)
Costofsales:
Productioncosts
Byproductrevenue
(40,000pounds100=400bags;400$4)
Grossmargin
b.
$1,600,000
$664,000
(1,600)
Saleswouldincreaseto$1,601,600whilecostofsaleswouldbe$664,000,
resultinginthesamegrossmarginof$937,600.
33. Salesofbyproduct
Costofbyproductsales(135,000$0.06)
Netrealizablevalueofbyproduct
a.
(662,400)
$937,600
ZeenaFoods
IncomeStatement
ForMonthEndedMay31,2013
Salesrevenue(jointproducts)
$20,250
(8,100)
$12,150
$319,000
74
Chapter 11
Costofgoodssold:
Jointcost(90%$82,000)
$73,800
Separatecosts(90%$48,000)
43,200
Byproducts
8,100
Grossprofit
Nonfactoryexpenses
Incomefromoperations
Otherrevenues(byproductsales)
Netincomebeforetaxes
b.
ZeenaFoods
IncomeStatement
Salesrevenue(jointproducts)
Costofgoodssold($73,800+$43,200)
Grossprofit
Nonfactoryexpenses
Incomefromoperations
Otherincome(byproductsales)
c. Jointcost
NRVofbyproduct
Jointcosttoallocate
(125,100)
$193,900
(47,850)
$146,050
20,250
$166,300
$319,000
(117,000)
$202,000
(47,850)
$154,150
12,150
$166,300
$82,000
(12,150)
$69,850
ZeenaFoods
IncomeStatement
Salesrevenue
Costofgoodssold[(90%$69,850)+$43,200]
Grossprofit
Nonfactoryexpenses
d.
$319,000
(106,065)
$212,935
(47,850)
$165,085
The approach in (c) is better than either (a) or (b) because it consistently
matchestheNRVofthebyproductwiththecostsofthejointproductionoperations
thatproducedthebyproduct.
34.a. EstimatedOH
EstimatedNRVofbyproduct
EstimatedOHtobecovered
Dividedbyestimatedbillablehours
PredeterminedOHrateperbillablehour
b. Cash 9,700
ManufacturingOverhead
Torecordsaleofbyproduct
c. TotalactualOH
TotalactualNRVofbyproduct
$415,200
(9,200)
$406,000
70,000
$5.80
9,700
$410,500
(9,700)
Chapter 11
75
TotaladjustedactualOH
TotalappliedOH(70,900$5.80)
Overappliedoverhead
$400,800
(411,220)
$10,420
35. a. $315,00045,000=$7perDLH
b. DM
DL($20125)
OH($7125)
Total
$890
2,500
875
$4,265
c. Cash 93
Torecorddisposalvalueofspoiledwork
incurredonJobXX(stainedglasswindow)
d.
93
OHrate=($297,200+$25,200)45,000=$7.16(rounded)
DM
$890
DL($20125)
2,500
OH($7.16125)
895
Total
$4,285
Scrapsalesvalue
(93)
Totalcostofjob
$4,192
36. a. Cash
WorkinProcessInventoryHedgeFund
TorecordsaleofHedgeFundmodel
8,500
8,500
Cash 8,500
TorecordsaleofHedgeFundmodel
b.
8,500
c. TheNRVapproachispreferablebecauseitallowsMaeDofftoreducethecostofthe
HedgeFundExtraordinairebuildingtoascertainamorereasonableprofitamount.
37.a. JointServices
Rental
Sales
Totals
IncreaseinRevenues
$770,000
105,000
$875,000
0.88
0.12
1.00
AllocatedCost
$28,600
3,900
$32,500
b. JointServices
Rental
Sales
Totals
IncreaseinNetIncome
$104,500
0.55
85,500
0.45
$190,000
1.00
AllocatedCost
$17,875
14,625
$32,500
c.
The allocation based on increase in net income may be better because it

matchestheadvertisingcosttothedirectnetbenefitoftheadvertising.
76
Chapter 11
38. a. Trainingcost=$120,0006,000=$20perhour
Overheadcost=$55,5006,000=$9.25perhour
CostAssignment:
Directcosts(4,000$20;2,000$20)
Overheadcost(4,000$9.25;2,000$9.25)
Totalcostassigned
Children
$80,000
37,000
$117,000
Adults
$40,000
18,500
$58,500
b. Applicationrate=$55,500[($354,000)+($652,000)]
=$55,500($140,000+$130,000)
=$55,500$270,000
=$0.21perdollarofsalesvalue(rounded)
CostAssignment:
Directcosts(4,000$20;2,000$20)
Overheadcost($140,0000.21;$130,0000.21)
Totalcostassigned(offduetorounding)
c.
Children Adults
$80,000 $40,000
29,400 27,300
$109,400 $67,300
BothmethodsresultinhigherchargestotheChildrensgroup.Thetraining
hoursmethodwouldbeappropriateifhoursspentwithclientswereconsideredthe
mostimportantcostdriver.However,itisalsoappropriatetoassigncostsbasedonan
abilitytobearsuchasoccurswhencostsareassignedusingthesalesvaluemethod
ofallocation.Basedontheinformationinthisproblem,itseemsthatthesellingprice
per hour for childrens lessons is too low. There is probably a higher need for
supervision,greaterratesforinsurance,andmoreequipmentdamageforchildrenthan
foradults.
39.a. JointActivity
Fundraising
Program
Total
Percent
0.10
0.90
1.00
b.
Percent
0.02
0.98
1.00
JointActivity
Fundraising
Program
Total
JointCostAllocated
$26,100
234,900
$261,000
JointCostAllocated
$5,220
255,780
$261,000
40. Eachstudentwillhaveadifferentanswer.Nosolutionisprovided.
Chapter 11
77
PROBLEMS
41. Eachstudentwillhaveadifferentanswer.Nosolutionisprovided.Onegoodsourceof
informationisCornFarmersSmileasEthanolPricesRise,butExpertsonFoodSupplies
Worryathttp://www.public.iastate.edu/~yikes/iowa_corn.html.
42.a. Jointcostallocation:
Forever($238,365$317,820)$76,950
Fantasy($79,455$317,820)$76,950
Total
$57,712.50
19,237.50
$76,950.00
Totalcost:
Forever=$57,712.50+$3,180.00=$60,892.50
Fantasy=$19,237.50+$2,940.00+$4,680.00+$6,195.00=$33,052.50
b.
WorkinProcessInventoryCombining
RawMaterialInventory
WagesPayable
59,715.00
WorkinProcessInventoryHeating
WorkinProcessInventoryCombining
59,715.00
WagesPayable
17,235.00
3,180.00
WagesPayable
13,815.00
FinishedGoodsInventoryForever
FinishedGoodsInventoryFantasy
60,892.50
33,052.50
42,000.00
11,340.00
6,375.00
59,715.00
9,150.00
3,225.00
4,860.00
3,180.00
2,940.00
4,680.00
6,195.00
93,945.00
78
c.
Chapter 11
WorkinProcessCombining
DM
42,000 ToHeating
DL
11,340
OH
6,375
Bal.
0
59,715
WorkinProcessHeating
DM
9,150 ToFGForever
DL
3,225 ToFGFantasy
OH
4,860
Prev.Dept.
59,715
DM
3,180
DM
2,940
DL
4,680
OH
6,195
Bal.
0
FGInv.Forever
Beg.XXX
CGM60,892.50
43.a. Oil(5,000,000bushels11lbs.)
Meal(5,000,000bushels44lbs.)
Total
FGInv.Fantasy
Beg.XXX
CGM33,052.50
55,000,000
220,000,000
275,000,000
Oil(0.20$49,800,000)
Meal(0.80$49,800,000)
Total
20%
80%
$9,960,000
39,840,000
$49,800,000
b. Costofgoodssold(inmillions):
Oil(0.60$9,960,0000)
Meal(0.75$39,840,000)
Total
c. Endingfinishedgoods(inmillions):
Oil(0.40$9,960,000)
Meal(0.25$39,840,000)
Total
60,892.50
33,052.50
$5,976,000
29,880,000
$35,856,000
$3,984,000
9,960,000
$13,944,000
Skim(1,555,5001,830,000)$872,000
Cream(274,5001,830,000)$872,000
Total
$741,200
130,800
$872,000
Chapter 11
79
b. Skim[($741,200+$67,660)1,555,500]=$808,8601,555,500=$0.52;$0.52
(1,555,5001,550,000)=$0.525,500=$2,860
Cream[($130,800+$83,310)274,500]=$214,110274,500=$0.78;$0.78
(274,500274,000)=$0.78500=$390
Totalfinishedgoodsinventory=$2,860+$390=$3,250
c.
Beginningfinishedgoodsinventory
Costofgoodsmanufactured
Goodsavailableforsale
Endingfinishedgoodsinventory
Costofgoodssold
$0
1,022,970
$1,022,970
(3,250)
$1,019,720
Sales($1,472,500+$282,220)
Costofgoodssold
Grossmargin
$1,754,720
(1,019,720)
$735,000
The dairy could test the fat content of the milk before purchaseand only
purchasemilkthat,whenprocessed,wouldresultinminimalloss.
45.a.Relativesalesvalue:
Oil($0.5055,000,000)
Meal($0.20220,000,000)
Total
$27,500,000 38%(rounded)
44,000,000 62%(rounded)
$71,500,000 100%
Oil(0.38$49,800,000)
Meal(0.62$49,800,000)
Total
$18,924,000
30,876,000
$49,800,000
b.Costofgoodssold:
Oil(0.60$18,924,000)
Meal(0.75$30,876,000)
Total
$11,354,400
23,157,000
$34,511,400
c.Endingfinishedgoods:
Oil(0.40$18,924,000)
Meal(0.25$30,876,000)
Total
$7,569,600
7,719,000
$15,288,600
d.
Eachmethodallocatesadifferentamountofjointcosttothejointproducts
andresultsinadifferentperunitcostforeachproduct.InProblem43,usingthe
physical measure assigned more joint cost to the meal. This problems allocation
resultedinalowercostofgoodssoldamountandahighervalueinendinginventory.
46. a. Skim:$1,472,5001,550,000gallons=$0.95pergallon
Cream:$282,220274,000gallons=$1.03pergallon
80
Chapter 11
b. Relativesalesvalues:
Skim($0.951,555,500)
Cream($1.03274,500)
Total
$1,477,725
282,735
$1,760,460
Skim(0.84$872,000)
Cream(0.16$872,000)
Total
$732,480
139,520
$872,000
84%(rounded)
16%(rounded)
100%
c. Skim[($732,480+$67,660)1,555,500]=$800,1401,555,500=$0.51(rounded);
$0.51(1,555,5001,550,000)=$0.515,500=$2,805
Cream[($139,520+$83,310)274,500]=$222,830274,500=$0.81(rounded);
$0.81(274,500274,000)=$0.81500=$405
Totalfinishedgoodsinventory=$2,805+$405=$3,210
Beginningfinishedgoodsinventory
Costofgoodsmanufactured
Goodsavailableforsale
Endingfinishedgoodsinventory
Costofgoodssold
$0
1,022,970
$1,022,970
(3,210)
$1,019,760
Sales($1,472,500+$282,220)
Costofgoodssold
Grossmargin
$1,754,720
(1,019,760)
$734,960
Checking:$800,000($1,914,000$3,300,000)
Creditcards:$800,000($1,386,000$3,300,000)
Total
b.
Revenues
Jointcost
Separatecosts
Grossmarginunadjusted
Identitytheftinsurancerevenue
Overallgrossmargin
=$464,000
=336,000
$800,000
Checking
CreditCards
$1,914,000
$1,386,000
(464,000) (336,000)
(850,000)
(380,000)
$600,000 $670,000
c. $800,000$26,000=$774,000
Checking:$774,000($1,914,000$3,300,000)
CreditCards:$774,000($1,386,000$3,300,000)
Total
$3,300,000
(800,000)
(1,230,000)
$1,270,000
26,000
$1,296,000
=$448,920
=325,080
Chapter 11
81
Total
$774,000
Thegrossmarginwillbethesamebecausethejointcostsofthetwojointproductsare
$26,000lessthanin(b).
48.a. Peaches
Labor
Overhead(40%oflabor)
Jointcost
b.
c.
Joint
Product
Premium
Good
Sales
Value
$30,000
15,000
$15,000
700
280
$15,980
Addl
Cost
$1,500
4,200
NRVat
SplitOff
$28,500
10,800
$39,300
Percent*
73
27
100
Joint
Cost*
$11,665
4,315
$15,980
rounded
d. RawMaterialInventory
Cash(A/P)
Torecordpurchaseofpeaches
15,000
WorkinProcessInventoryClean&Sort
WagesPayable
Torecordjointprocessingcost
15,980
WorkinProcessInventoryPackaging(Premium)
WorkinProcessInventoryCutting(Good)
11,665
4,315
15,000
15,000
700
280
15,980
82
Chapter 11
TotransferjointcosttoPackagingandCutting
Variousaccounts
Torecordcuttingandcanningcostsforgoodpeaches
2,000
WorkinProcessInventoryPackaging(Good)
TomovegoodpeachesfromCuttingtoPackaging
6,315
Variousaccounts
Torecordpackaginganddeliverycosts
1,500
2,200
2,000
6,315
3,700
FinishedGoodsInventory(Premium)
WorkinProcessInventoryPackaging
(Premium)
Torecordcompletedproductionofpremiumpeaches
13,165
13,165
FinishedGoodsInventory(Good)
Torecordcompletedproductionofgoodpeaches
8,515
Cash
Variousaccounts
OtherIncome
Torecordsaleoffairpeaches
4,500
e. Totalcost
EstimatedNRVofscrap
Jointcosttoallocate
Joint
Product
Premium
Good
Sales
Value
$30,000
15,000
8,515
500
4,000
$15,980
(4,000)
$11,980
Addl
Cost
$1,500
4,200
NRVat
SplitOff Percent*
$28,500
73
10,800
27
$39,300
100
Joint
Cost*
$8,745
3,235
$11,980
rounded
f. RawMaterialInventory
Cash(A/P)
Torecordpurchaseofpeaches
WagesPayable
15,000
15,980
15,000
15,000
700
280
Chapter 11
83
Torecordjointcost
WorkinProcessInventoryPackaging(Fair)
Torecognizebyproduct
4,000
Toallocatejointcost
8,745
3,235
Variousaccounts
Torecordcuttingcostforgoodpeaches
2,000
TomovegoodpeachesfromCuttingtoPackaging
5,235
Variousaccounts
Torecordpackagingcost
1,500
2,200
500
FinishedGoodsInventory(Premium)
FinishedGoodsInventory(Good)
FinishedGoodsInventory(Fair)
Tomovecompletedproductiontofinishedgoods
4,000
11,980
2,000
5,235
4,200
10,245
7,435
4,500
10,245
7,435
4,500
49. a. 2,500($2.50$1.00)=2,500$1.50=$3,750
b. $36,000+$43,750+$3,000$3,750=$79,000
c. CGSforapparel=BI+PurchasesEI
=$35,000+$181,350$21,500
=$194,850
PersonalTraining
Apparel
Grossrevenues
$753,000
$289,000
Separatecosts:
Costofgoodssold
(194,850)
Labor
(231,000)
(33,250)
Supplies
(151,300)
(700)
Equipmentdepreciation
(165,000)
(1,200)
84
Chapter 11
Administration
Netrealizablevalue
(103,000)
$102,700
65%
PersonalTraining($79,0000.65)=$51,350
Apparel($79,0000.35)=$27,650
e.
PersonalTraining
Grossrevenues
$753,000
Separatecosts:
CostofGoodsSold
Labor
(231,000)
Supplies
(151,300)
Equipmentdepreciation
(165,000)
Administration
(103,000)
Jointcost
(51,350)
Operatingincome
$51,350
(3,700)
$55,300
35%
d.
Apparel
$289,000
(194,850)
(33,250)
(700)
(1,200)
(3,700)
(27,650)
$27,650
50. a. Jointcost=$44,200+$33,800=$78,000
Salesvalueoforangejuice=$5.2522,400=$117,600
Salesvalueofmarmalade=$3.4526,880=$92,736
Salesvalueofpulp=$0.056,720=$336
b.
56,000gallonsofoutputinDept.1:
TransferredtoDept.2(40%)=22,400gallons
TransferredtoDept.3(60%)=33,600gallons
c.
33,600gallonsofinputtoDept.3:
Pulp(20%)=6,720gallons
Chapter 11
85
Marmalade(80%)=26,880gallons
d.
e.
Salesvalue(6,720$0.05) $336
Distributionexpense
(90)
NRV
$246
Joint
Product
Juice
Marmalade
Gallons
22,400
26,880
Sales
Price
$5.25
3.45
Total
Separate
Sales
Costs
$117,600 $9,620
92,736 6,204*
NRV
$107,980
86,532
*$6,450$246
f.
Joint
Product
Juice
Marmalade
g.
Joint
Product
Juice
Marmalade
NRV
$107,980
86,532
$194,512
Joint
Cost
$43,680
$34,320
Percent
56%(rounded)
44%(rounded)
100%
Separate
Costs
$9,620
$6,204
Joint
Cost
$43,680
34,320
$78,000
TotalInv.
Valueof
Cost%
End.Inv.
$7,995.00
$53,3000.15
$6,078.60
$40,5240.15
51.a. ByProductInventoryCorma
WorkinProcessInventoryZilla(5,000$30)
Torecordcompletedproductionofbyproduct
150,000
b. ByProductInventoryCorma(5,000$45)
Variousaccounts
WorkinProcessInventoryZilla
225,000
(Alternative)
WorkinProcessInventoryCorma
Variousaccounts
Torecordproductionofbyproduct
150,000
50,000
175,000
50,000
50,000
TorecordreductionofmainproductforNRVof
byproduct
175,000
ByProductInventoryCorma
225,000
c. SalesvalueofZillaatsplitoff(705,000$3.50)
175,000
225,000
$1,225,000 (89%)*
86
Chapter 11
SalesvalueofCormaatsplitoff(5,000$30)
150,000 (11%)*
$1,375,000
rounded
Totaljointcosts
ProportionofCormasalesvalueatsplitoff
JointcostassignabletoCorma
$875,000
0.11
$96,250
Variousaccounts
Toallocatejointcost
96,250
778,750
Variousaccounts
TorecordseparateprocessingcostsofCorma
FinishedGoodsInventoryCorma
TorecordcompletedproductionofCorma
52.a. Jointprocesscost:
Directmaterial
Directlabor
Overhead
Total
LessbyproductNRV
Amounttobeallocated
50,000
146,250
875,000
50,000
146,250
$40,000
23,400
10,000
$73,400
(4,600)
$68,800
Allocationonthebasisofsalesvalueatsplitoff:
Product
SalesValue
Proportion*
Tenderloin
$132,000
0.55
Roast
86,000
0.36
Ham
22,400
0.09
$240,400
1.00
*
rounded
Allocation
$37,840
24,768
6,192
$68,800
Allocationonthebasisofpoundsproduced:
Product
Pounds
Proportion*
Tenderloin
8,600
0.26
Roast
13,400
0.41
Ham
10,800
0.33
32,800
1.00
*
rounded
Allocation
$17,888
28,208
22,704
$68,800
ComputationofEIvaluesundereachallocationbase:
SalesValueApproach:
Product
Allocation
Units
UnitCost*
UnitsinEI
EIValue
Chapter 11
Tenderloin
Roast
Ham
87
$37,840
24,768
6,192
6,440
16,740
8,640
PhysicalPoundsApproach:
Product
Allocation
Units
Tenderloin
$17,888
6,440
Roast
28,208
16,740
Ham
22,704
8,640
$5.88
1.48
0.72
1,000
2,600
1,000
$5,880
3,848
720
UnitCost*
$2.78
1.69
2.63
UnitsinEI
1,000
2,600
1,000
EIValue
$2,780
4,394
2,630
b. (1) Forfinancialstatementpurposes,thesalesvalueallocationapproachassignsjoint
cost according to the relative market values of the products, while the physical
measureallocationapproachtreatseverypoundofoutputasequallyworthyand,
thus,assignsthesamecostperpoundtoalloutputsandignoresthatsomeproducts
haveahighersellingpricethanothers.Poundsare,however,anunchangingmeasure
of output, while the value of money changes as the purchasing power of the
monetaryunitchanges.
(2)Becausejointcostissunkoncethejointprocesshasbeenconducted,theallocated
cost and the bases used to allocate that cost are irrelevant to decisions about
processing beyond the splitoff point. However, using an inappropriate base to
allocate joint cost could make it appear that certain products are not worth
producingbecausetheallocationwouldmaketheproductsappeartobeunprofitable.
53.a. Totaljointcost:
Directmaterial
Directlabor
Overhead
$37,500
12,000
11,000
$60,500
(1,620)
$58,880
Salesvalueofscrap($0.453,600lbs.)
b.
Revenues
Separatecosts
NRVperunit
Multiplyby#ofunitsproduced
TotalNRV
NRV%
Robes
$20.00
(6.80)
$13.20
6,000
$79,200
55%
Jointcostassignabletorobes(55%$58,880)
Jointcostassignabletotowels(45%$58,880)
WorkinProcessInventoryRobes
WorkinProcessInventoryTowels
WorkinProcessInventoryCutting
Toallocatejointcoststorobesandtowels
BeachTowels
$7.00
(1.60)
$5.40
12,000
$64,800
45%
$32,384
26,496
$58,880
32,384
26,496
58,880
88
Chapter 11
FinishedGoodsInventoryScrap
WorkinProcessInventoryCutting
Torecordproductionofscrap
c.
Allocatedjointcost
Separatecosts:
$6.806,000
$1.6012,000
Totaltofinishedgoods
54.a.
Product
Alpha
Beta
Gamma
Total
Units
Produced
2,500
5,000
7,500
Sales
Valueat
SplitOff
$250,000
400,000
150,000
$800,000
Sales
Price
$100
80
20
1,620
1,620
Robes
$32,384
BeachTowels
$26,496
40,800
$73,184
19,200
$45,696
Joint
Allocated
%
Costs
JointCosts
31.25% $720,000 $225,000
50.00
720,000
360,000
18.75
720,000
135,000
100.00%
$720,000
b. JointcostsofBeta[from(a)]
Additionalprocessingcosts
TotalcostofBeta
$360,000
150,000
$510,000
c. Alphashouldnotbeprocessedfurther:
Incrementalrevenue[($150$100)$2,500]
Incrementalprocessingcost
Declineinincomeifprocessedfurther
Netrealizablevalueofproducts:
Units
Selling
Produced
Price
Revenue
Alpha
(soldatsplitoff)
2,500
$100 $250,000
Beta
(processedfurther) 5,000
115 575,000
Gamma
(processedfurther) 7,500
30 225,000
Jointcosts
NetrealizablevalueofGamma
Jointcoststobeallocated
Allocationofjointcosts:
NetRealizable
Product
Value
Alpha
$250,000
Beta
425,000
Totals
$675,000
%
37%
63
100%
$125,000
(150,000)
$(25,000)
Processing
Costs
NetRealizable
Value
$0
$250,000
150,000
425,000
100,000
125,000
$720,000
(125,000)
$595,000
Joint
Processing
Final
Cost
Allocation
Costs
Cost
$595,000 $220,150 $0 $220,150
595,000 374,850
150,000 524,850
$595,000 $150,000 $745,000

(CIAadapted)
Chapter 11
89
55. a. Withmanyscrapandwastematerialsitisoftenanissueofwhoistobearthecost.
Undoubtedly,theresultingcostsinthiscasetothefirmsandsocietyfarexceededthe
costtheindividualorfirmwouldhaveincurredtoproperlydisposeofthehazardous
wastematerials.
If caught, those involved with this type of illegal disposal of materials could be
subjecttodamageclaims,verylargefines,andprisontime.Furthermore,itislikely
thatthecostsofthecleanupwouldbeimposedonthem.
b.
Firmshaveanobligationtoensureproperwastedisposalandtoeducatetheir
employeesinpropermethodsofwastedisposal.Employeesshouldbemadeawareof
therisksassociatedwithimproperdisposalincludingthelegalrepercussions.Thus,
theleastexpensiveandmosteffectivewaytocontrolwasteisforeachfirmtoassume
responsibilityforitsownwaste.
Beyond internal measures, the larger society can assume a greater oversight role
throughincreasedregulationandmonitoringofwastecontrolefforts.Muchofthis
activity is currently monitored by the EPA, but the role of this agency could be
expanded.Further,lawscouldbetightened,andthepenaltystructureforimproper
disposalofwastematerialscouldbeimproved.Lastly,wasterecyclingopportunities
for manufacturing firms could be improved, and companies could pursue other
alternativestoreducethecostsofwastedisposal.
c.
Thevendor/manufacturermustbearsomeoftheresponsibilityforproperuse
anddisposalofitsproducts.Manufacturersshouldhavesuperiorknowledgeabout
chemicalpropertiesandtherisksassociatedwiththeirproductscomponents.Further,
whilegivingdueconsiderationtorelativecost,manufacturershaveanobligationto
makeproductswithmaterialsandcomponentsthataretheleasttoxicandthemost
convenient to recycle. If product materials are extraordinarily toxic to the
environment,manufacturersshouldbedirectlyresponsibleforproperwastedisposal.
56. Eachstudentwillhaveadifferentanswer.However,someinformationonvariousby
productsfollows.
PorkByProducts:insulinfortheregulationofdiabetes;valvesforhumanheartsurgery;
suedeforshoesandclothing;andgelatinformanyfoodandnonfooduses.Swineby
product are also important parts of such products as water filters, insulation, rubber,
antifreeze,certainplastics,floorwaxes,crayons,chalk,adhesives,andfertilizer.Sincethe
firstoperationin1971,tensofthousandsofpigheartvalveshavebeenusedtoreplace
humanheartvalvesweakenedbydiseaseorinjury.
Wheat/Soybean/CottonseedByProducts:livestock,poultry,andfish/shrimpfeed
RiceByProducts:petfoods;riceflour
LumberByProducts:animalbedding,sawdust(andparticleboard),woodchips,mulch;
slabsandchipsproducepaper;firewood
Fish ByProducts: used in organic farming, fish meal production, and production of
formulatedbait(crab,crawfish,andlobster),andformulatedfood(aquaculture).Skins
fromcarphavebeenusedtomakeleatherproducts.
AnimalByProducts:
90
Chapter 11
Gluemadefromcowhideispreferredwhenbindingbooksbecauseanimalgluecan
withstandhightemperaturesandhastheabilitytodissolveinwater,makingrecycling
possible.
Plasticandrubberaremadeusingfattyacidswhichcomefromanimalandvegetable
fats.
Animal gelatins are an ingredient in a wide range of foods like candies,
marshmallows, flavorings and of course JellO. Gelatin is also a common food
stabilizer initems suchas mayonnaise andice cream, lite products,and frozen
foods.Gelatinsareusedtoclarifybeverageslikefruitjuices,beerandwine.
Purifiedboneashisusedtorefinesugarandtomakechina.
Animalfatsareusedinmakingmaplesyrup.
Plastic,cardboardandpapercontainers,cellophaneandwaxpaperallinvolveanimal
products,asdoplywood,drywall,andinsulation.
Freonforairconditioningandrefrigeratorscontainsaderivativefromanimalfat.
Eggwhitesareusedinceramictileandcatalaseenzymeisusedtomakefoamrubber.
Laundry detergents and fabric softeners contain animal products, as do many
disinfectants,householdcleaners,andpolishes.
Animals provideingredients forcoldandallergy medicines aswellasthegelatin
capsulestheycomein.Stomachremedies,vitamins,andmineralsupplementsarealso
derived from animals. Cortison and treatments for anemia, emphysema, malaria,
stroke,andheartattacksareanimalbased.
Latexsurgicalglovescontaintallow,xrayfilmcontainsgelatin,andwoolgreaseis
usedtomakethermometersheatsensitive.
Sheepwoolgivesbaseballstheirbounce.Gelatinhelpsgolfballsrollstraight.
Leather,foamrubber,andplasticsareusedinmosttypesofsportsequipment.
Sheepintestinesareusedtostringsometypesofsportsracquets,andpoultryfeathers
arethoughttomakethebestdartsandfishinglures.
Animalproductsareusedinmakingelectricalcircuitry,inktonerstoprintontocopy
paper,andpaper.Steelballbearings,lubricants,andfireextinguisherscontainanimal
products.Animalproductsareusedinbrushes,artsupplies,andininstrumentssuch
asdrumsandpianos.
57. The purpose, audience, and content criteria are met, and the joint costs should be
allocated. The purpose criterion is met because the materials call for recipient action
(encouraging parents to counsel their children and informing the parents on drug abuse
detection) that will help accomplish the entitys mission. This same call for action means
that the materials meet the content criterion. The audience criterion is met because the
audience (high school students parents) was chosen because of an actual or potential
need for the action called for by the program component.
(American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of
Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund
Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=
MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)
(AICPA adapted)
58. a. The purpose, audience, and content criteria are met, and the entire $24,000 should be
allocated. The activity calls for specific action by the recipient (exercising) that will
Chapter 11
91
help accomplish the entitys mission. The purpose criterion is met based on the other
evidence, because (a) performing such programs helps accomplish Entity Ds mission,
and (b) the objectives of the program are documented in a letter to the public relations
firm that developed the brochure. The audience criterion is met because the audience
(residents over 65) is selected based on its need to use or reasonable potential for use
of the action called for by the program component. The content criterion is met
because the activity calls for specific action by the recipient (exercising) that will help
accomplish the entitys mission (increasing the physical activity of senior citizens),
and the need for and benefits of the action are clearly evident (explains the importance
of exercising).
b. The cost of the first brochure should be split between fundraising and program; the
cost of the second brochure should be charged entirely to program.
c.
The content and audience criteria are met. The purpose criterion is not met,
however, because a majority of compensation or fees for the fund-raising consultant
varies based on contributions raised for this discrete joint activity. All costs should be
charged to fund raising, including the costs of the second brochure and any other costs
that otherwise might be considered program or management and general costs if they
had been incurred in a different activity.
(American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs
of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include
Fund Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata&
blobtable=MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)
(AICPA adapted)
59. The purpose, audience, and content criteria are not met. All costs should be charged to
fund-raising.The purpose criterion is not met because the activity has no call for specific
action; the program onlyeducates the audience about causes (describing its programs and
showing theneedy children). (Although the executive producer will bepaid $5,000 if the
activity raises over $1,000,000, that amount would not be a majority of the executive
producers total compensation for this activity; as such, this compensation is not
relevant.) Also, the operating policies and internal management memoranda state that
these programs are designed to educate the public about the needs of children in
developing countries with no call for specific action by recipients and to raise
contributions, indicate that the purpose is fund-raising.The audience criterion is not met
because the audience is a broadsegment of the population of a country that is not in need
of or has no reasonablepotential for use of the program activity.The content criterion is
not met because the activity does not call forspecific action by the recipient that will help
accomplish the entitys mission.
(American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of
Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund
Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=
MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)
(AICPA adapted)
60. a. Yes,itwouldmeettheaudiencecriterionbecausetheattendeeswereselfselected
andwerenotinvitedbasedontheirabilityorlikelihoodtocontribute.
b. Asking attendees to take a quiz about diabetes, volunteer to distribute pamphlets
aboutthediseasetolocalbusinesses,writeletterstotheirinsurancecompaniesabout
92
Chapter 11
additionalcoverageavailability,andparticipateintheMedicareAdvocacyProgramto
gatherinformationandidentifyproblemsencounteredbybeneficiariesandproviders
wereallcallsforaction.
c. Program(0.65$360,000)
Management/general(0.25$360,000)
Fundraising(0.10$360,000)
Total
$234,000
90,000
36,000
$360,000
d. Other than time, and assuming that no one type of discussion prevailed over the
others,thejointcostcouldbeallocated1/3,1/3,and1/3,whichwouldberationaland
systematic.
e. Allofthe$430,000wouldbeallocatedtofundraisingbecausethecompensationtest
ofthepurposecriterionwasviolatedinthattheconsultantsfeewasbasedonthe
quantityofmoneyraisedbythelecture.
61. Each student will have a different answer. No solution is provided. However, the
followinginformationmaybeappropriate:
Thecosttoraiseadollarappearstoreflecttherelativeimportanceofcapitalcampaigns
toeachsector.Hospitalsoftenhavethemostcapitalfundraisingactivitiesand,often,the
lowestfundraisingcost.Education andhumanservices haveamix ofoperating and
capitalfundraisingandseemtofallinthemiddleoftherange.Highereducationratios
arelowerthannonhighereducation,ashigheredismorecapitalcampaignintensive.
Artsandcultureandnonhospitalhealtharetypicallyraisingmostlyoperatingfundsand
thuswouldhavethehighestfundraisingcost.
62. a. The income statement provided is incomplete if the Center for Entrepreneurship
producesjointproducts.Oneoftwoapproacheswouldmaketheincomestatement
more accurate. First, part of the costs shown on the income statement could be
assigned to fundraising using one of the methods discussed in the chapter. The
remaining costs would be those reasonably allocated only to the executive
development activity. An alternative approach would be to add to the revenues
reportedontheincomestatementaportionoftheproceedsgeneratedbyallofthe
fundraisingactivitiesofthecollege.
b. TheCenterforEntrepreneurshipshouldcontinueitsoperationsifyoucanpersuade
thedeanthattheCenterproducesanetfinancialbenefitforthecollegeratherthana
$250,000loss.Asoutlinedinthesolutionto(a),oneoftwoapproachescouldbe
taken.ThefirstapproachistoarguethatsomeportionofthecostsincurredbytheCenter
shouldappropriatelybeallocatedagainstresourcesgeneratedthroughfundraisingrather
thanchargedagainstfeesgeneratedfromexecutivedevelopmentactivity.Forexample,
onecouldeffectsuchanallocationusingamonetarymeasuresuchastotalcashandfair
marketvalueofotherassetsgeneratedbythecenterfromfundraising andfees.To
presentacredibleargument,thecashandfairmarketvalueofotherassetsderived
from fundraising would be limited to contributions to the college from parties
primarilyassociatedwiththecollegethroughtheCenter.Theresultofthisapproach
wouldbetoassignaportionoftheCenterstotalcoststofundraisingandaportionto
Chapter 11
93
executivedevelopment.Ifmorethan$250,000ofcostscanbejustifiablychargedto
fundraising, the executive development program will be profitable. In short, this
approachallocatessomecostsoutoftheCenterandtofundraising.Thealternative
approachwouldbetokeepallcostsintheCenterandtoallocatesomeofthecashand
fairmarketvalueofotherpropertyraisedthroughfundraisingtotheCenter.This
approachwouldrequireonetocrediblydemonstratethataportionofthetotalvalueof
cashandpropertyraisedforthecollegefromfundraisingshouldbeassignedtothe
Center.TheCentersportionofthetotalvalueofcashandpropertyraisedthrough
collegefundraisingwouldbeestablishedbydemonstratingwhichcontributorswere
primarilyconnectedtothecollegeoruniversitythroughrelationshipswiththeCenter.
With this approach, the Centers costs would be as reported in the condensed
statement, but reported revenues would increase by the amount allocated to the
Center. Ifthe allocated revenues exceed $250,000,the Center would reportanet
profitandshouldremaininoperation.
63. Eachstudentwillhaveadifferentanswer.Nosolutionisprovided.

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Chapter 11

Four categories of output may be obtained from joint production. Joint

The allocation based on increase in net income may be better because it

$595,000 $150,000 $745,000

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