Solution manual cost management measuring monitoring and motivating performance 1st by wolcott ch09

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Chapter 9
Joint Product and By-Product Costing
LEARNING OBJECTIVES
Chapter 9 addresses the following questions:
Q1 What is a joint process, and what is the difference between a by-product and a main
product?
Q2 How are joint costs allocated?
Q3 What factors are considered in choosing a joint cost allocation method?
Q4 What information is relevant for deciding whether to process a joint product beyond the
split-off point?
Q5 What methods are used to account for the sale of by-products?
Q6 How does a sales mix affect joint cost allocation?
Q7 What are the uses and limitations of joint cost information?
These learning questions (Q1 through Q7) are cross-referenced in the textbook to individual
exercises and problems.

COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.
Questions Having a Single Correct Answer:
No Symbol
This question requires students to recall or apply knowledge as shown in the
textbook.
This question requires students to extend knowledge beyond the applications
e
shown in the textbook.

Open-ended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):


Step 1 skills (Identifying)

Step 2 skills (Exploring)

Step 3 skills (Prioritizing)

Step 4 skills (Envisioning)


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9-2

Cost Management

QUESTIONS
9.1

Some goods are produced jointly; many products result from a common process. These
are called joint products. Main products have high sales value relative to other products
when split-off occurs. By-products have low sales value relative to the main products’
values.

9.2

Because all of the other products are sold at $200 or more, the product that sells for only
$10 would probably be considered a by-product. Main products have relatively high
sales values compared to by-products.

9.3

There are two methods of recognizing revenue from by-products. The revenue can be
recognized at the split-off point, or recognized at the time of sale. The treatment depends
on whether the NRV is positive or negative, and also on whether it is recognized at the
time of production or sale. Negative NRV is always added to joint costs. When positive
NRV is recognized at time of production, it is subtracted from joint costs. When positive
NRV is recognized at time of sale, it may be treated as revenue, treated as non-revenue
income, or subtracted from COGS.

9.4

Products from any of the following industries would be appropriate: oil and gas,
chemical, lumber products, tour companies, meat production, wheat production, milling
companies.

9.5

Joint costs are product costs that cannot be separately traced to individual products, so
they are indirect with respect to individual products. Separable costs are the direct costs
of producing separate products (but these costs may or may not be direct with respect to
individual units).

9.6

The split-off point in a joint process occurs at the point when the individual joint products
become separately identifiable. All costs incurred up to the split-off point are joint costs
and (assuming no further split-off points) the costs that follow are separable costs
identifiable with a specific joint product.

9.7

Here are a few examples; students may think of others that are also appropriate. A
professor may do some consulting work that simultaneously generates ideas for a journal
article (main product), a case for a book (main product), and a problem for an exam (byproduct). A CPA firm may work on client development that simultaneously produces
prospective engagements for the auditing and tax services (all probably main products).
A research scientist may have an individual project that results in twenty-two patentable
items (some may be main products, some may be by-products, and some may be
scrapped).

9.8

Once the joint product emerges, the joint cost should be viewed as a "sunk" cost; it is a
past cost that should not influence subsequent product decisions. Further processing
decisions should be made based on the additional revenues obtained in relation to the
additional separable costs needed to obtain those revenues.


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Chapter 9: Joint Product and By-Product Costing

9-3

9.9

If all joint products were sold in the period produced, costs might not need to be
allocated. But for financial reporting, all production costs must be assigned to cost of
goods sold and ending inventories of the joint products to match revenues and expenses.

9.10

The contribution of each product is the selling price less separable costs. Revenues and
separable costs are relatively easy to identify and measure. Therefore accountants know
each product’s contribution. However, if profit is defined to mean accounting income, all
costs including fixed and joint costs are allocated. To allocate costs, an allocation base
must be chosen. Different allocation bases result in different profit figures. Hence, the
profitability of one joint product cannot be uniquely determined, but will vary with
different allocation bases.

9.11

Because the products have relatively equal value, they should all be treated as main
products.

9.12

To perform market based joint cost allocations (net realizable value and constant gross
margin NRV), an estimate is made of the sales value of each product. Common and
separable costs are known with reasonable certainty, but price may be estimated. If the
market for goods is not volatile, the price can be determined from past experience. If
prices change frequently, information sources such as competitor’s prices or a list of
commodity prices could be used for estimates.

9.13

Following are qualitative factors that might influence managers to process a joint product
beyond the split-off point. The organization may offer a product mix, and dropping one
of the products could affect sales of other products, so a group of products are always
processed further. An example of this would be meat related products. Even though

round steak does not need to be processed further, some people want very lean
hamburger and customers may shop elsewhere if lean hamburger is not sold. Manager
preferences might affect the decision to process further. For example, managers of a
dairy might have a preference for a particular type of cheese that other dairies do not
produce, and so they continue producing it even though sales are low and the milk could
be used for other products. Resource scarcity encourages managers to consider new
processes for raw materials such as sawdust and wood chips. Environmental issues also
influence joint product decisions. Sometimes companies choose to convert waste into a
by-product that can be sold to avoid contributing to waste disposal. Another factor is the
effect on employees and local communities. Managers may choose to continue
additional processing even when the financial results are relatively weak to avoid closing
production facilities and laying off employees.

9.14

Some by-products are valuable and could be stolen, and so internal controls and records
are kept. For by-products that are unlikely to be stolen, no controls or records need to be
kept. An example of a by-product that could be stolen is raw malachite, a by-product of
copper production that can be further processed into cabochons for jewelry. An example
of a by-product that would not need controls is whey from dairy product processing.


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9-4

Cost Management

EXERCISES
9.15 By-Product Further Processing Decision

According to the following calculations, the contribution margin is higher if the byproduct is sold at the split-off point rather than processed further. Therefore, the byproduct should not be processed further.
Sold at split-off: 100 x $8 = $800
Processed further: 100 x ($19 - $12) = $700

9.16 Identifying Joint Products
A. The following are joint products
1. Sand produced with three levels of fineness. The sand is produced by processing
raw dirt and includes a number of joint costs such as labor and equipment. Some
of the products are processed further.
3. Milk products are joint products because they all come from one liquid that is
processed further, depending on the product.
6. Airlines could be considered as incurring joint costs because a large proportion of
cost is common to all of the products.
The following are not joint products
2. Automobiles and trucks because either one can be manufactured without
producing the other.
4. Motorcycles and mopeds because either one can be manufactured without
producing the other.
5. Clothing can be manufactured in any style without producing other styles and is
therefore not a joint product.
B. Two other product groups would include tour services or cruise lines, products
manufactured from crude oil such as gasoline, diesel, and heating oil, and many types of
food products such as beverage manufacture, cereals, milling operations, and so on.


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Chapter 9: Joint Product and By-Product Costing

9-5

9.17 Cowboy Cattle Company
1. Joint
2. Separable
3.
4.
5.
6.

Joint
Joint
Separable
Separable

7. Joint

All cattle require veterinary work, and the cost per specific cow is
incurred before the split-off point.
The cost occurs after the split-off point and can be traced directly to
hamburger.
The cost is incurred before the split-off point.
The cost is incurred before the split-off point.
The cost is incurred after the split-off point, specifically for leather.
The cost is incurred after the split-off point, specifically for steaks and
roasts.
Cost of production incurred before the split-off point.

9.18 Deluxe Tours
A.
Number of passengers

Revenue
Incremental costs
Net realizable value
Allocated lease cost
Margin

First-Class
100
$200,000
30,000
170,000
100,000 a
$ 70,000

Tourist-Class
200
$200,000
30,000
170,000
100,000 b
$ 70,000

a $200,000 lease cost * [$170,000/($170,000+$170,000] = $100,000
b $200,000 lease cost * [$170,000/($170,000+$170,000] = $100,000
B. The answer to this question depends upon what is meant by ―the contribution margin
generated by first-class passengers.‖ An accountant could determine it is $70,000, the
margin after deducting a share of the lease cost. However, a more accurate reflection
would be $170,000, the revenue generated by first-class passengers, less the incremental
costs of serving those passengers.
An alternative answer is to consider the amount of margin generated by having a separate

class of passengers rather than filling the entire cruise ship with tourist-class passengers.
Assume that 25 tourist-class berths replaced 20 first-class berths. (Students could make
any reasonable assumption concerning how many tourist-class berths would replace firstclass berths.) So, the trade-off is 25 tourist-class versus 20 first-class berths.


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9-6

Cost Management
Incremental contribution margin if first-class cabins are sold to tourist-class passengers:
Contribution per passenger for first-class: $200 - $30 = $170
Contribution per passenger for tourist-class: $100 - $15 = $85
Contribution for 20 first class passengers (20 x $170)
Contribution for 25 tourist class passengers (25 x $85)
Additional contribution for first class

$3,400
2,125
$1,275

C. In the example above, no allocated costs were considered because they are essentially
sunk costs for the decision to use the space for first-class or tourist class. Those costs are
incurred either way, so only incremental contribution is analyzed.

9.19 The Palm Oil Company
A. Computation of $100,000 joint-cost allocation using four allocation methods:
(1) Sales value at split-off point
Sales Value at
Product

Split-Off Point
Soap grade
$ 50,000
Cooking grade
30,000
Light moisturizer
50,000
Heavy moisturizer
70,000
$200,000

Proportions
50/200 = 0.25
30/200 = 0.15
50/200 = 0.25
70/200 = 0.35

Allocation
of $100,000
$ 25,000
15,000
25,000
35,000
$100,000

(2) Physical volume

Soap grade
Cooking grade
Light moisturizer

Heavy moisturizer

Physical volume
Proportion
100,000 gallons
$ 20,000
300,000 gallons
60,000
50,000 gallons
10,000
50,000 gallons
10,000
500,000 gallons

Allocation
of $100,000
100/500 = 0.20
300/500 = 0.60
50/500 = 0.10
50/500 = 0.10
$100,000


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Chapter 9: Joint Product and By-Product Costing

9-7

(3) Estimated Net Realizable Value

Product
Fine Soap
Superior Cooking Oil
Light moisturizer
Premium Moisturizer

Estimated
Net
Final Sales Separable
Realizable
Value
Costs
Value
Proportion
$300,000 $200,000
$100,000
100,000
80,000
20,000
50,000
0
50,000
120,000
90,000
30,000
$200,000

Allocation
of $100,000

100/200=0.50
20/200=0.10
50/200=0.25
30/200=0.15
$100,000

(4) Constant Gross Margin Method
First calculate the gross profit margin ratio for all products:
Product
Final Sales Value
Fine Soap
$300,000
Superior Cooking Oil
100,000
Light Moisturizer
50,000
Premium Moisturizer
120,000
Total
$570,000
Less joint costs
Gross margin

Separable Costs Contribution
$200,000
$100,000
80,000
20,000
0
50,000

90,000
30,000
$370,000
200,000
100,000
$100,000

Gross profit margin ratio = $100,000/$570,000 = 0.175439
Second, apply the gross profit margin ratio to each product to determine cost of goods
sold. Then subtract separable costs from cost of goods sold to determine the joint
cost allocation for each product.

Product
Fine Soap
Superior Cooking Oil
Light Moisturizer
Premium Moisturizer

Revenue
$300,000
100,000
50,000
120,000
$570,000

Gross
Separable Allocation
Margin* COGS
Costs of $100,000
$ 52,632

247,368
$200,000
$ 47,368
17,544
82,456
80,000
2,456
8,772
1,228
0
41,228
21,052
948,948
90,000
8,948
$100,000
$100,000

* Gross margin = Revenue x Gross profit margin ratio = Revenue x 0.175439
B.
Contribution from Processing Soap Grade into Fine Soap:
Incremental revenue = $300,000 - 50,000
Incremental costs
Incremental operating income

$250,000
200,000
$ 50,000

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9-8

Cost Management
Contribution from Processing Cooking grade oil into Superior Cooking Oil:
Incremental revenue = $100,000 - 30,000
$ 70,000
Incremental costs
80,000
Incremental operating income
$(10,000)
Contribution from Processing Heavy Moisturizer into Premium Moisturizer:
Incremental revenue = $120,000 - 70,000
$ 50,000
Incremental costs
90,000
Incremental operating income
$(40,000)
Operating income can be increased by $50,000 if both Cooking Grade Oil and Heavy
Moisturizers are sold at the split-off point. Soap Grade should continue to be processed
further.

9.20 Flowering Friends
A.
1. Sales value at split-off point method

Premium
Regular

Allocation
of $15,000
$ 4,350
10,650
$15,000

Sales Value at Split-off Point
Percent
($5*2,000)
$10,000
29%
($3*8,000)
24,000
71
$34,000 100%

2. Physical output method
Percent
20%
80
100%

Allocation
of $15,000
$ 3,000
12,000
$15,000

Net Realizable Value
Percent

($25*2,000)
$ 50,000
38%
($10*8,000)
80,000
62
$130,000 100%

Allocation
of $15,000
$ 5,700
9,300
$15,000

Number of Pots
2,000
8,000
10,000

Premium
Regular

3. Net realizable value method

Premium
Regular

B. Based on a comparison of the contributions for each alternative, the company should
process further:
Sell as premium

Process further ($35 – $20/4 - $3)
Extra contribution from processing further

$25
27
$ 2


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Chapter 9: Joint Product and By-Product Costing

9-9

9.21 Click and Clack Recyclers
A. There are no separable costs for these products, so each product’s net realizable value is
the revenue per gallon. However, one gallon of oil yields 0.7 motor oil and 0.3 fuel oil,
so for each gallon of oil produced, the total NRV is $2.55 (0.7*$3 + 0.3*$1.50). The
percentage of cost per gallon allocated to residual fuel oil is 0.1324 [(0.3*$1.50)/$2.55 *
$0.75].
B. If allocated cost were based on physical output, the cost per gallon for residual fuel oil is
$0.225 (0.3*$0.75).
C. Special fuel would need to match the contribution for residual fuel oil. The contribution
for residual fuel oil is $1.50 per gallon. The minimum acceptable price for Special Fuel
Oil is $1.50 plus the $0.40 per gallon for additional processes or $1.90 per gallon. At this
price the managers would be indifferent to selling residual oil or processing it further.

9.22 Mile High Lumber Mill
A. Income Statement With By-Product Value Recognized at the Time of Sale
Revenue:

Lumber (270,000 BF x $3)
Scraps (900 logs x $10)
Total Revenue
Cost of Goods Sold (270,000BF x $2a)
Gross Margin
a

$810,000
9,000
819,000
540,000
$279,000

Cost is calculated as follows: $600,000/300,000 bd ft = $2 per BF

Although the problem does not call for this calculation, the ending inventories at March
31 would be:
Lumber (30,000 BF x $2)

$60,000

An additional inventory of 100 logs’ worth of scrap is on hand at an estimated
value of $10 each, or $1,000 total. This value is not recognized in the accounting
records.


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9-10 Cost Management
B. Income Statement With By-Product Value Recognized at the Time of Production

Value of inventory for the main product:
Joint product costs incurred
Less NRV of by-product (1,000 logs x $10)
Net joint product cost

$600,000
10,000
$590,000

Product cost per board foot ($590,000/300,000 bd ft)

$1.966667

Income statement:
Revenue (270,000 BF x $3.00)
Cost of Goods Sold (270,000 BF x $1.966667)
Gross Margin

$810,000
531,000
$279,000

Although the problem does not call for this calculation, the ending inventories at March
31 would be:
Lumber (30,000 BF x $1.966667)
By-product (100 logs x $10)
Total Inventory

$59,000
1,000

$60,000

Notice that there is no difference between gross margins or total inventory under the two
methods. This will be true only under rigid conditions: (1) the proportion of main
products sold is equal to the proportion of by-products sold during the period, and (2)
there is either no beginning inventory or by-products in beginning inventory are sold for
the exact amount estimated during the prior period. However, as long as by-product
values are immaterial, the methods have little effect on the income statement and balance
sheet.

9.23 The Paint Palette Company
A. Physical output method:
For Premium: (30% * $10,000)
For regular: (70% * $10,000)
Total allocated

$ 3,000
7,000
$10,000

B. NRV method
For premium [30%*1,000 gallons * ($20 - $4)]
For regular [70%*1,000 gallons * ($10 – $1)
Total NRV

$ 4,800
6,300
$11,100

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Chapter 9: Joint Product and By-Product Costing 9-11
Allocation:
Allocated to premium ($4,800/$11,100)*$10,000
Allocated to regular ($6,300/$11,100)*$10,000
Total allocated costs

$ 4,324
5,676
$10,000

C. Constant Gross Margin NRV Method
First, determine gross margin percentage:
Total revenue ($20 x 300 + $10 x 700)
Less:
Separable costs ($4 x 300 + $1 x 700)
Common costs
Gross margin

$13,000
$ 1,900
10,000

Gross margin percentage ($1,100/$13,000)

11,900
$ 1,100
8.46153%

Next, allocate common cost:
Revenue
Gross Margin
Separable costs
Allocated Common Cost

Premium
Regular
$6,000
$7,000
(508)
(592)
(1,200)
(700)
$4,292
$5,708

Total
$13,000
(1,100)
(1,900)
$10,000

D. Compare the contribution per gallon of the two alternatives:
Contribution per gallon if processed further ($22 - $11 - $1)
Continue with current process: ($10 - $1)
Increase in contribution per gallon if process further

$10
9

$ 1

9.24 The Chile Salsa Company
This problem can be solved in a series of steps, where the answers for some parts are
needed to answer others.
If joint costs are allocated based on the sales value at split-off point method, the joint
costs for Spicy Hot are: ($25,000/$100,000) * $60,000 = $15,000 (1)
Therefore, the joint cost for Medium is ($60,000 - $24,000 - $15,000) = $21,000 (2)
Now the values for sales at split-off for medium and mild can be calculated:
Medium: [($21,000/$60,000)*$100,000] = $35,000 (3)
Mild: ($100,000 - $35,000 - $25,000) = $40,000 (4)


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9-12 Cost Management

Units produced
Joint costs
Sales value at split-off point
Additional cost if process further
Sales value if processed further

Mild
24,000
$24,000
(4) $40,000
$9,000
$55,000

Medium
?
(2)$21,000
(3) $35,000
$7,000
$45,000

Spicy Hot
?
(1)$15,000
$25,000
$5,000
$30,000

Total
48,000
$60,000
$100,000
$21,000
$130,000

Notice that the information about units produced was irrelevant in this problem.

9.25 Conrad Miller
A. Allocation for Very Flexible under the sales value at split-off point method:
$120/000/($840,000 + $540,000 + $120,000) * $900,000 = $72,000
Gross profit:
Revenue – Separable costs – Allocated joint costs
= $135,000 - $12,000 - $72,000
= $51,000

B. Based on a comparison of the contribution of the two alternatives, the company should
process further:
Sell at split-off
Process further ($135,000 - $12,000)
Contribution from processing further

$120,000
123,000
$ 3,000

9.26 Nutri-Smoothie
A. Gross margin if by-product value is recognized at time of production
Value of inventory for main product
Joint product costs incurred
Less NRV of by-product
Net joint product cost
Income statement
Revenue (18,000 * $2.00)
Joint costs (18,000/20,000 * $10,000)
Gross margin

$12,000
(2,000)
$10,000

$36,000
(9,000)
$27,000

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Chapter 9: Joint Product and By-Product Costing 9-13
B. Gross margin if by-product value is recognized at the time of sale
Revenues: Smoothies (18,000 * $2.00)
Revenues: Compost
Total revenue
Joint Costs (18,000/20,000)* $12,000
Gross Margin

$36,000
2,000
38,000
(10,800)
$27,200

C. Inventories if by-product value is recognized at the time of production:
Smoothies (2,000/20,000 * $10,000)
Compost ($2,000/8,000 * 2,000)

$1,000
500

Ending Inventories if by-product value is recognized at the time of sale:
Smoothies (2,000/20,000)*$12,000
$1,200
Compost
0

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9-14 Cost Management

PROBLEMS
9.27 Roses to Go
A. Roses to Go must pay someone to water and tend to the roses. The company must pay
for labor to cut the roses. It pays for fertilizer and water and depreciation on any
buildings used in the production and cutting process. If the roses are cooled after cutting,
the cost of cooling must be paid. All of these are joint costs.
B. Use the physical volume method because it is the most simple and will not distort costs if
there is little difference in the packaging and pricing of the products.
C. If there are different prices, the sales value at split-off point method would work best here
because the separable costs would be very similar. This method is most simple and
would be the best choice because it does not distort the costs.

9.28 Doe Corporation
The following chart traces the physical flow of the products and summarizes cost and
sales information.

Slicing
Crushing
Juicing
Animal Feed
Total

Weight After
Total Weight
Evaporation Loss
94,500 lbs.

(35%*270,000)
75,600 lbs.
(28%*270,000)
72,900 lbs.
67,500 lbs.
(27%*270,000)
(72,900/1.08)
27,000 lbs.
(10%*270,000)
270,000 lbs.

Costs
$ 4,700
10,580
3,250
700
$19,230

Total Revenue
$ 56,700
($0.60*94,500)
41,580
($0.55*75,600)
20,250
($0.30*67,500)
2,700
($0.10*2,700)
$121,230

A. The weights are obtained by multiplying the initial 270,000 pounds by the proportion

delivered to each department and, in the case of juicing, dividing by 1.08 to account for
evaporation. The resulting weights are 94,500 lbs. for slicing, 75,600 for crushing,
67,500 for juicing and 27,000 for feed.
B.
Product
Slices
Crushed
Juice
Total

Selling price
$ 56,700
41,580
20,250
$118,530

Separable cost
$ 4,700
10,580
3,250
$18,530

NRV
$ 52,000
31,000
17,000
$100,000


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Chapter 9: Joint Product and By-Product Costing 9-15
C. None of the costs are assigned to the by-product. The allocation of the $60,000 of cutting
department costs to the main products is reduced by $2,000 ($2,700 - $700) for the NRV
of animal feed (the by-product), so $58,000 is allocated
Product
Slices
Crushed
Juice
Total

NRV
$ 52,000
31,000
17,000
$100,000

Sales
Joint cost
Separable cost
Gross margin

Slices
$56,700
30,160
4,700
$21,840

Proportion
52/100

31/100
17/100

Allocation
$30,160
17,980
9,860
$58,000

D.
Crushed
$41,580
17,980
10,580
$13,020

Juice
$20,250
9,860
3,250
$ 7,140

Total
$118,530
58,000
18,530
$ 42,000

E. The gross margin information is of little value to management. As long as the overall
processing is profitable, the net realizable value approach will show each of the products

as valuable. For product mix decisions (such as whether to produce more juice and less
crushed pineapple), information is needed about incremental revenues and costs rather
than gross margin data.
F. The $800 would become an additional joint cost necessary to obtain the three main
products (assuming that $700 of chopping costs would not be increased). The $800
would be added to each product in the same proportions as in part C. Thus the additional
joint costs assigned to each product would be:

Slices
Crushed
Juice
Total

Additional Cost
$416
248
136
$800


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9-16 Cost Management
9.29 Jumping Juice Ltd.
A. According to the requirements of the problem, the costs of the vat process need to be
allocated, which would amount to $30,000 [=$5,000 + $250*100].
Allocation base:
Volume
Relative volume
Allocated cost of vat process:

Standard (2/3*$30,000)
Premium (1/3*$30,000)

Standard Grade
20,000 bottles
2/3

Premium Grade
10,000 bottles
1/3

$20,000
$10,000

Cost of handling and bottling:
Standard ($1,000+$100*200)
Premium ($2,000+$200*100)

21,000
______

22,000

Total cost

$41,000

$32,000

20,000 bottles

10,000 bottles

Divided by volume
Cost per bottle

$2.05

$3.20

B.
Allocation base:
Volume
Relative volume
Allocated variable cost:
Standard (2/3*$250*100)
Premium (1/3*$250*100)

Standard Grade
20,000 bottles
2/3

Premium Grade
10,000 bottles
1/3

$16,667
$8,333

Variable cost of handling and bottling:

Standard ($100*200)
Premium ($200*100)

20,000
______

20,000

Total variable cost

$36,667

$28,333

Divided by volume

20,000 bottles

10,000 bottles

Variable cost per bottle

$1.83

$2.83

Note: While the calculation above would be labeled as a variable cost by most
accountants, it really is not a variable cost in the usual sense of the word. Of the total
―variable cost per bottle,‖ $1,667 (1/3*5,000) could not be avoided even if no more
premium grade cider were produced.

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Chapter 9: Joint Product and By-Product Costing 9-17
C.

As Is
Production:
Standard Grade
Premium Grade

20,000 bottles
10,000 bottles

Revenue
As Is ($3*20,000+$5*10,000)
Discontinue Standard ($5*10,000)

Discontinue Standard

10,000 bottles

$110,000
$50,000

Factory
As Is ($5,000+$250*100)
Discontinue Premium

(30,000)
(30,000)

Handling and bottling:
Standard grade:
As Is ($1,000+$100*200)
Discontinue Standard

(21,000)
(0)

Premium grade:
As Is ($2,000+$200*100)
Discontinue Premium

(22,000)
(22,000)

Profit

$ 37,000

$ (2,000)

Profit would decline by about $39,000 if the premium brand were discontinued.
D. If a special order of premium cider were produced without producing any standard cider,
the decision to produce premium would requiring incurring the fixed and variable vat
costs, as well as the fixed and variable costs for premium bottling. The special order
would need to pay for all of these costs.

9.30 Champion Chip Company
First translate amounts to U.S. dollars and total.
Deluxe
Sales value at split-off point
If process further:
Sales value
Separable costs

Superior

Good

Total

400£*2 = $800

3,200 HK$*0.125 = $400

US$200

US$1,400

550£*2=$1,100
200£*2 = $400

4,800 HK$*0.125=$600
800 HK$*0.125=$100

US$800
US$500

US$2,500
US$1,000


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9-18 Cost Management
A.
Sales
Joint costs:
Deluxe
($800/$1,400)*$1,000
Superior ($400/$1,400)*$1,000
Good
($200/$1,400)*$1,000
Pretax income

Deluxe
$800

Superior
$400

Good
$200

Total
$1,400
1,000

571
286
$229

$114

143
$ 57

______
$ 400

B. Below is the proforma income statement if only the Deluxe chip is processed further.
The Deluxe manager will choose to sell at split-off point (income of $229 versus $53)

Sales
Separable costs
Net realizable value
Joint costs:
Deluxe
($1,100/$1,700)*$1,000
Superior ($400/$1,700)*$1,000
Good
($200/$1,700)*$1,000
Pretax income

Deluxe
$1,100
400

700

Superior
$400
0
400

Good
$200
0
200

Total
$1,700
400
1,300
1,000

647
235
$ 53

$165

118
$ 82

______
$ 300

Below is the proforma income statement if only the Superior chip is processed further.
The Superior manager will choose to process further (income of $125 versus $114)

Sales
Separable costs
Net realizable value
Joint costs:
Deluxe
($800/$1,600)*$1,000
Superior ($600/$1,600)*$1,000
Good
($200/$1,600)*$1,000
Pretax income

Deluxe
$800
0
800

Superior
$600
100
500

Good
$200
0
200

Total

$1,600
1,000
1,500
1,000

500
375
$300

$125

125
$ 75

______
$ 500

Below is the proforma income statement if only the Good chip is processed further. The
Good manager will choose to sell at the split-off point (income of $57 versus a loss of
$100).


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Chapter 9: Joint Product and By-Product Costing 9-19

Sales
Separable costs
Net realizable value
Joint costs:

Deluxe
($800/$2,000)*$1,000
Superior ($400/$2,000)*$1,000
Good
($800/$2,000)*$1,000
Pretax income

Deluxe
$800
0
800

Superior
$400
0
400

Good
$800
500
300

Total
$2,000
500
1,500
1,000

400
200

$400

$200

400
$(100)

______
$ 500

C. The best decisions for the firm are for each division to bring in the highest contribution.
For Deluxe, selling at the split-off point is best ($800 at split-off point versus $700 if
processed further). For Superior, process further ($500 for processing further versus
$400 for selling at split-off). For Good, process further ($300 for further processing
versus $200 at split-off point).
D. Below is the proforma income statement if all managers make best decision for their
division:

Sales
Separable costs
Net realizable value
Joint costs:
Deluxe
($800/$1,600)*$1,000
Superior ($600/$1,600)*$1,000
Good
($200/$1,600)*$1,000
Pretax income

Deluxe

$800
0
800

Superior
$600
100
500

Good
$200
0
200

Total
$1,600
100
1,500
1,000

500
375
$300

$125

125
$ 75

______

$ 500

Below is the proforma income statement if all managers make the optimal decision for
overall profitability

Sales
Separable costs
Net realizable value
Joint costs:
Deluxe
($800/$2,200)*$1,000
Superior ($600/$2,200)*$1,000
Good
($800/$2,200)*$1,000
Pretax income

Deluxe
$800
0
800

Superior
$600
100
500

Good
$800
500
300

Total
$2,200
600
1,600
1,000

364
273
$436

$227

363
$ (63)

______
$ 600

Notice that the choice of an accounting procedure encourages the managers to act in their
own interest instead of the interest of the firm as a whole.


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9-20 Cost Management
E. Note that if the net realizable value method is used to allocate the joint cost, the managers
will reach the following stable solution. The allocation of joint costs would be

Deluxe

Superior
Good

Eventual
Selling Separable
Price
Costs
$800
$ 0
600
100
800
500

Net
Realizable
Value
$ 800
500
300
$1,600

Allocation
8/16(1000) $ 500.00
5/16(1000) 312.50
3/16(1000) 187.50
$1,000.00

Given this allocation, the income statement would be:

Sales
Joint
Further processing
Pretax Income

Deluxe
$800
500
$300

Superior
$600
312
100
$188

Good
$800
188
500
$112

Total
$2,200
1,000
600
$ 600

F. Managers often act in the best interest of their divisions. If allocations are used to
determine the income of divisions, the allocations may distort the profitability of each

division, relative to the entire company.
G. Bonuses should be based on a combination of factors, both financial and non-financial,
and on the profitability of both divisions and the entire corporation. This type of
incentive structure encourages managers to maximize efforts that lead to best overall
profitability for the entire corporation.

9.31 S-T, Inc.
Physical Flow
WIP beginning
Started
Completed and transferred out
Ending WIP

2 batches (30% and 80% converted)
21 batches
20 batches
1 batch (50% converted)

Equivalent units and costs under weighted average. Remember that under weighted
average, beginning inventory is counted as part of units completed. Also remember that
direct material and conversion costs from work completed on beginning inventory and
costs incurred this period are summed. Following are the equivalent units and costs
under weighted average.


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Chapter 9: Joint Product and By-Product Costing 9-21
Equivalent Units (Batches)
Work performed this period:

Materials
Conv. Costs
Units completed
20.0
20.0
Ending inventory (50% complete)
1.0
0.5
Total
21.0
20.5
Costs to account for:
Beginning WIP
Current costs
Total

Materials
Conv. Costs
$ 8,550
$ 3,007
71,250
40,740
$79,800
$43,747

Cost per equivalent unit

$3,800

$2,134

Total
$ 11,557
111,990
$123,547
$5,934

Process Cost Report – Weighted Average Method
Units completed
($5,934 x 20)
Ending inventory
Materials
($3,800 x 1.0)
Conversion
($2,134 x 0.5)
Total ending WIP
Total costs accounted for

$118,680
$3,800
1,067
4,867
$123,547

By-product Z is valued at its estimated selling price of $1 per gallon. This amount is
subtracted from the cost of batches completed to arrive at the net amount of joint costs to
be allocated:
Cost of goods completed (calculated above)
Less by-product sales
(20 batches x 100 gal. x $1)

Net joint cost

$118,680
(2,000)
$116,680

Note that the firm produced 400 gal. x 20 batches = 8,000 gallons of X and 500 gal. x 20
batches = 10,000 gallons of Y. Given these volumes, the joint costs are allocated to each
product as follows under the net realizable value method

Gallons
Price per gallon
Separable costs per gallon
Sales revenue
Separable costs
NRV

Product X
Product Y
8,000
10,000
$8
$11
$2
$3
$64,000
16,000
$48,000

$110,000

30,000
$ 80,000

Total

$174,000
46,000
$128,000

The final step is to calculate the total costs assigned to each product and then calculate
the total cost per gallon:


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9-22 Cost Management
Product X
Allocation of joint costs:
X: $116,680 x ($48/$128)
Y: $116,680 x ($80/$128)
Separable costs
Total Cost

$43,755

Divided by gallons
Total Cost per gallon

Product Y

16,000
$59,755

$ 72,925
30,000
$102,925

8,000

10,000

$7.47

$10.29

9.32 Hudziak Industries
A.
Allocation of joint costs:

Ingredient
J-52A
Quitoban
Total

Sales
Separable
Value
Cost
$1,500 $150
1,400 250

Net
Realizable
Value
Proportion Allocation
$1,350$1,350/$2,500
$1,080
1,150$1,150/$2,500
920
$2,500
$2,000

Income per lot:
Sales
Joint cost
Separable cost
Income Per Lot

Chemicals
Cosmetics
$1,500
$1,400
1,080
920
150
250
$ 270
$ 230

Total

$2,900
2,000
400
$ 500

B.
The allocation of the cost of the new material would be:
Net
Sales
Separable Realizable
Ingredient
Value
Cost
Value
Proportion Allocation
J-52A
$1,500 $400
$1,100$1,100/$3,850
$ 857
Quitoban
3,000 250
2,750$2,750/$3,850
2,143
Total
$3,850
$3,000
The income per lot with the new material is expected to be:
Chemicals
Cosmetics
Sales

$1,500
$3,000
Joint cost
857
2,143
Separable cost
400
250
Income Per Lot
$ 243
$ 607

Total
$4,500
3,000
650
$ 850

1. Based on the calculations shown above, the gross margin of the Chemicals division is
expected to decline by $27 per lot ($270-$243) if the new material is purchased. This


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Chapter 9: Joint Product and By-Product Costing 9-23
decline is a combination of an increase in separable costs from the additional
processing required by the new material, offset by a reduction in allocated joint costs
under the NRV method. In addition, there may be uncertainties about the specific
processing changes needed and costs involved, increasing the manager’s uncertainty
about the operating results. Assuming that this manager is rewarded based on

reported division profit, she or he would not be in favor of purchasing the new
material.
2. Based on the calculations shown above, the gross margin of the Cosmetics division is
expected to increase by $377 per lot ($607-$230) if the new material is purchased.
This increase is a combination of an increase in expected revenue caused by a selling
price increase, offset by an increase in allocated joint costs under the NRV method.
The manager may face significant uncertainty about whether the price increase can be
achieved and how it will affect the volume of sales. As long as these risks are not too
high and the Cosmetics manager is rewarded based on reported division and/or
overall company profit, he/she would be in favor of purchasing the new material.
3. Many potential pros and cons could be discussed, including:
Pros:
Higher expected profit of $300 per lot ($850-$500)
Decreased risk from lawsuits related to ingredients in the old raw material
Improved product quality, which could improve brand image (as an
innovative company, an ethical company, etc.)
Cons:
Potential conflict of interest between the Chemicals and Cosmetics managers
Increased raw material and production costs
Possibility that revenue and cost projections may not be met
C. Many potential uncertainties could be discussed, including:
Whether the revenue projections are reasonable:
o Will the price increase reduce the quantity demanded?
o Will the price increase attract new competition?
o Will the new chemical formula lead to additional product opportunities?
o Will the ingredient change have any effect on the quality and product
demand of J-52A?
Whether the cost projections are reasonable:
o Will unforeseen production problems occur with the new ingredient?
o Will the price and supply of the new ingredient be as stable as that of the

old ingredient?
o Will changes occur in the quantities of spoilage with the new ingredient?
Health effects of the old and new raw material:
o Will the new ingredient have fewer or more health risks than the old
ingredient?


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9-24 Cost Management
o Will the old ingredient be found to be safe after all?
How might the change in production processes and profits affect the morale and
performance of managers and other employees?
D. Students may propose a variety of incentive solutions, including one or more of the
following:
Reward managers based on company-wide income
Exclude joint cost allocations from individual manager performance evaluation
Allocate joint costs using the constant gross margin NRV method
Allocate the Chemicals division loss in NRV ($27 per lot) to the Cosmetics
division
Allocate the increase in the Chemical division’s separable costs ($400-$150 =
$250 per lot) to the Cosmetics division
Reduce the Chemical division’s target income under the compensation plan to
accommodate the change in costs
Open communication among division managers and top management to ensure
that all parties are adequately informed about the reasons for decisions and the
effects on the company as a whole
Establish rules for managers to follow (e.g., require managers to purchase the new
raw material)
E. The advantages and disadvantages that students discuss will depend on the option(s) they

identify. Some of these advantages and disadvantages include the following:
Methods that focus on company-wide income encourage managers to consider the
overall benefit to the company, but might invite a ―free rider‖ problem.
Methods that focus on division performance encourage managers to make
decisions to maximize division efficiency and income, but might conflict with
company-wide interests (see Chapter 15 for more information about incentive
problems between managers).
Methods that include an allocation of joint costs necessarily involve arbitrary
allocations of costs between divisions; in general, it is desirable to eliminate
uncontrollable costs from evaluations of individual division performance.
Methods that focus on communication can improve morale and provide better
information for decision making, but may be misunderstood and do not
necessarily motivate desired actions.
Methods that focus on rules or instructions work for situations such as the raw
material decision, where the best decision for the company can be identified and
managers can be told what to do. However, it is difficult to identify all possible
rules that might be needed for other decisions.
F. and G. There is no one answer to these parts. Sample solutions and a discussion of typical
student responses will be included in assessment guidance on the Instructor’s web site for
the textbook (available at www.wiley.com/college/eldenburg).


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Chapter 9: Joint Product and By-Product Costing 9-25

BUILD YOUR PROFESSIONAL COMPETENCIES
9.33 Focus on Professional Competency: Marketing/Client Focus
A.
1. Accountants provide a service to internal customers. It is their job to develop positive

relationships with these customers in the same manner that the entire company
develops positive relationships with its external customers. Relationship building is
an open-ended problem because it involves human beings who are not identical and
who do not always respond in expected ways. In addition, accountants have not
always been highly oriented toward their internal customers. Therefore, accountants
may need to overcome negative preconceived ideas about their role and relationships
with others.
2. Internal customers are most likely to enter into productive working relationships with
accounting personnel if they believe they will benefit from the relationship. Potential
benefits include:
Providing relevant and timely information for making decisions
Recommending ways to improve efficiency or reduce costs
Providing relevant information about the costs and benefits of alternatives
Providing relevant information about financial and non-financial performance
to help managers better monitor operations.
3. Internal customers typically expect to obtain historical financial data from accounting
personnel. They also expect accountants to focus on minute details and not on the
―big picture.‖
4. Good working relationships are usually evident through increased requests for
services and participation in important decisions. However, the accounting
department could proactively survey its customers to determine the nature of the
relationship.
5. Different students will have different answers to this question. The purpose is to have
students consider the needs of internal customers and develop a viable strategy for
helping them avoid misuse of accounting information. Their implementation strategy
needs to take into account internal customers’ potential responses.
B.
1. The two settings are similar in many ways. Individual accountants often find
themselves working with internal or external client personnel who may not
understand the accountant’s role or perceive it as value-added. Other clients,

however, have learned to rely on internal or external accountants for advice and
information that is useful for decision making. One difference in the two settings is
the degree of accountant independence. Most internal accountants are not expected to
be independent (although they are often valued for their ability to analyze problems