Solution manual cost and managerial accounting 3rd by barficost allocation for joint products and by products

Chapter 9
Cost Allocation for Joint Products and By-Products
Questions
1.

A joint production process is one that yields more than one
principal product simultaneously. By definition, a given
joint process yields more than one output, so managers get
several outputs. In some cases, management may decide to
“tune” the process to produce more of the most desirable
product. But management must always decide the best use of
the remaining outputs. For example, in the natural resources
industries, it is common for both oil and natural gas to be
extracted from an oil field, multiple types of ores to be
extracted simultaneously from mines and for multiple meat
products to be obtained from processing hogs and cattle.

2.

Joint products are those items resulting from a joint process
that have the greatest relative sales value of all outputs.
By-products are of insufficient sales value to justify
undertaking the joint process. Scrap has little, if any,
sales value. Thus, the distinction among the three product
groups is their relative sales value. Joint products have the
highest value followed by by-products.

3.

Management decides whether a joint process output is a joint
product, a by-product, or scrap based on judgment. Output

from a joint process is subjectively classified according to
management's assessment of the relative sales value of each
type. The classification of outputs of a joint process is
usually decided before the process is undertaken. However, in
unusual cases, the actual outputs of the joint process may not
result as planned. In such cases, management may classify
them differently than originally intended.

4.

Joint products gain separate identity at the split-off point.
They may or may not be processed further outside the joint
process after the split-off point. It is also possible that
there may be several subsequent split-off points after the
original one within a joint process. In other words, a joint
process may continue to refine outputs after the original
split-off point.

215


216
5.

Chapter 9
Cost Allocation for Joint Products and By-Products
Separate costs can be distinctly traced to one joint product
or another; joint costs cannot be. This difference is due to
the fact that joint costs are incurred prior to the split-off
point and separate costs are incurred after the split-off

point.

6.

Joint processing costs are allocated only to the joint
products, not to by-products or scrap. Joint process cost is
not allocated to scrap or to by-products because the purpose
of engaging in the joint process is to produce the joint
products, not the scrap or by-products. Thus, the costs
resulting from the joint process are best matched with the
primary revenues from the products obtained from that process.
(Additionally, the revenues from scrap or by-product may not
be great enough to cover any costs which might potentially be
assigned to them.) Under some accounting treatments using the
net realizable approach to accounting for by-products and
scrap, joint process costs are reduced by the value of the byproducts or scrap. Thus, in those cases, all of the joint
process costs initially incurred are not allocated to the
joint products.

7.

The three decision points are (1) before the joint process is
undertaken, (2) at the split-off point, and (3) after the
split-off point. The criterion for proceeding at any point is
whether the anticipated incremental revenues will exceed the
anticipated incremental costs.

8.

Cost allocation refers to the assignment of an indirect cost

to a cost object using some reasonable method. Since
production costs are incurred in a joint process to produce
several outputs, those costs are indirect to the individual
output produced and must be assigned to the output because of
the cost principle. This is necessary in order to have
appropriate inventory valuations for the joint products
produced in the joint process. Accountants allocate fixed
production costs to products produced within a period, and
allocate certain plant and equipment costs to the time periods
during which those assets are used through depreciation.
Amortization and allocation of intangible costs are other
examples.

9.

Approaches to allocating joint process costs are classified
into two general categories: (1) physical measures and (2)
monetary measures. Physical measures (e.g., tons, barrels,
feet) are unchanging yardsticks; monetary measures change over
time with inflation and deflation. However, monetary measures
assign joint process costs to joint products proportionately
to relative sales value. Physical measures treat each physical
unit of output as equally desirable by assigning a uniform
amount of joint process cost to every unit of output produced.

10.

Approximated net realizable values are necessary when some or

238

Chapter 9
217
Cost Allocation for Joint Products and By-Products
all of the joint products are not salable at the split-off
point. An approximated net realizable value is calculated by
subtracting the incremental separate costs incurred between
split-off and point of sale from the expected final sales
price of the product. Thus the additional approximations are
the final sale price and the incremental separate costs.

11.

One approach is to ignore by-product inventory completely
until it is sold. Only then does the revenue it generates
acknowledge the existence of the by-product. This revenue is
carried to the income statement as an increase to net income
of the period. The second approach is to record, at the
split-off point, the final net realizable value of the
by-products recovered. The net realizable value is credited
as a reduction of the joint process costs that gave rise to
the by-product. The second approach is theoretically
preferable because it causes the benefit to be matched with
the source of the benefit – namely, the joint process costs
being incurred during the period.
Each student will have a different answer to
preferability

12.

If a company using job order costing produces a by-product or
a scrap item continuously from normal production, the net
realizable value of that by-product or scrap should be
considered in setting the predetermined overhead rate. The
estimated net realizable value of the by-product or scrap
should be deducted from total estimated overhead costs in
setting the rate. When the by-product or scrap is actually
sold, its net realizable value should be credited to
Manufacturing Overhead.
If a company using job order costing only produces a byproduct or a scrap item during a particular job, then the net
realizable value of the by-product/scrap should not be
considered in setting the predetermined overhead rate. The
net realizable value should be credited to the particular job
that gave rise to the by-product/scrap.

13.

For a not-for-profit to appropriately evaluate the uses of its
resources, the AICPA require that multipurpose costs be
allocated between program and support categories. Program
expenses are those that are directly aimed at the
accomplishment of the organization's charitable objectives and
are considered a more valid use of resources. Comparison of
support expenses to total expenses may suggest a measure of
organizational efficiency. The AICPA is concerned with donors
having knowledge of the relative and absolute magnitude of
funds spent on fundraising.

14.

Student solutions will vary.

No answer provided.


Chapter 9
Cost Allocation for Joint Products and By-Products
Exercises
218

15.

a.
b.
c.
d.
e.
f.
g.
h.
i.
j
k.
l.
m.
n.
o.
p.

No match
12
10
4&9
6
13
2
16
1
3
15
8
7
14
11
5

16.

a.

In a butcher shop, the major joint input is
meat. The major questions to be asked follow: (1) Do I
really want to be in the butcher shop business?
Presumably, this question has been answered in the
affirmative. (2) What specific meats do I want to work
with and what customers do I want to serve? The answer
to this question will determine what inputs will be
purchased and, to some extent, what production processes
will be performed. (3) What specific cuts of meat should

be selected from the meat carcasses? The answer to this
question will determine how the carcasses are cut into
salable parts. (4) How much processing should I do to
the individual cuts. The answer to this question will
determine what specific processes will be necessary
beyond the split-off point. The answer to this question
will also determine what types of equipment the butcher
shop must have to execute the required conversion
operations. The decision to classify output as joint
product, by-product, scrap, or waste is not as important
in this environment because inventory levels will be
minimal due to the perishable nature of the product.
Rather, the focus will be on maximizing the value added
to the raw carcasses that are purchased from meat
wholesalers.


238
b.

17.

Chapter 9
219
Cost Allocation for Joint Products and By-Products
For a butcher shop, the manner in which joint costs is
allocated can affect some decisions. For example, in
pricing products, a butcher shop wants to cover all
costs. To do so requires that an appropriate price be
established for each cut of meat. This price will be

determined partly by the costs of each cut, and part of
the cost is joint cost. The allocation of joint costs
can also be important in meeting reporting requirements,
e.g., income determination and inventory valuation for
purposes of reporting to the Internal Revenue Service.
Joint products are also relevant in determining whether
one is going to engage in production. However, once the
split-off point is reached in the production operation,
the joint costs are irrelevant in determining whether
additional conversion operations should be performed.

c.

Four potential categories of output are obtained from
joint production. Joint products are the main products
obtained and are distinguished from the other outputs by
their relatively greater sales value. At the opposite
end of the continuum, waste is an incidental output of a
joint production process and has no value. By-products
and scrap are distinguished by the fact that they both
have some value but the value is substantially below that
of joint products. By-product differs from scrap in that
a by-product has a somewhat larger market value.

a.

Direct instructional costs
Overhead
Total costs

$38,000
4,000
$42,000

Application rate = $42,000 ÷ (4,000 + 2,000)
= $7.00 per hour
Cost assignment:
Small Business Management
Intro. to Internet
Total cost assigned

(4,000 × $7.00)
(2,000 × $7.00)

$28,000
14,000
$42,000

Application rate = $42,000 ÷ [(4,000 × $5) + (2,000
$15)] = $42,000 ÷ $50,000
= $0.84 per dollar of sales value
Cost Assignment:
Small Business Management
($20,000 × 0.84) $16,800
Intro. to Internet
($30,000 × 0.84)
25,200
Total cost assigned
$42,000
b.

×


220
c.

18.

Chapter 9
Cost Allocation for Joint Products and By-Products
The monetary method of allocation best captures the
relative incentives of providing the joint services. It
is appropriate to assign Introduction to Internet more
cost because it generates more revenues. Alternatively,
more class hours are required for Small Business
Management. If class hours is considered to be a cost
driver, it is appropriate to assign more costs to Small
Business Management.

a.

Allocation rate = $12,000,000 ÷ 20,000 = $600 per ton
Chemical A: $600 × 12,000 = $7,200,000
Chemical B: $600 × 8,000 = $4,800,000

b.

Incremental revenue = (12,000 tons ×
2,000 lbs. × $1.00 per lb.) =
Incremental costs

(12,000 tons ×
$1,500 per ton)
Increase in income

$24,000,000
18,000,000
$ 6,000,000

Based on the incremental change in net income, the
company should process Chemical A further.
19.

a.

Fish = 8 oz. ÷ 16 oz. = 50%
Oil = 4 oz. ÷ 16 oz. = 25%
Meal = 2 oz. ÷ 16 oz. = 12.5%
The remaining 25% is waste.

Joint
Products
Fish
Oil
Meal

Unit
Weight
0.5
0.25
0.125

b.
Joint
Products
Fish
Oil
Meal

Units
50,000
25,000
12,500

c.

Total lbs.
Produced
100,000
100,000
100,000

Product
Total
50,000
25,000
12,500
87,500

Unit
Selling Price

Total
$3.00
$150,000
4.00
100,000
2.00
25,000
$275,000

Percent
57.1
28.6
14.3
100.0

Allocated
Joint Cost
$54,359
27,227
13,614
$95,200

Percent
54.5
36.4
9.1
100.0

Allocated
Joint Cost

$51,884
34,653
8,663
$95,200

The physical measure (pounds) is an unchanging yardstick,
but it treats all pounds as equally valuable. The
monetary basis assigns joint costs using sales value but,
because of inflation and market price variability, is a
changing yardstick. However, the monetary basis probably
provides a better way of matching the joint costs to the
benefits achieved from the joint production process
because of the substantial differences in per pound
prices among the three products.


238
20.

a.

Cost Allocation
Sales value of
Sales value of
Total sales

Chapter 9
for Joint Products and By-Products
milk
$ 50,000 (31.25%)

sour cream
110,000 (68.75%)
value
$160,000

221

Since the milk represents 31.25% of the total sales value
at split-off, then $21,600 represents 31.25% of the total
joint costs. Total joint costs are $69,120 ($21,600 ÷
0.3125).
b.

21.

2 pints = 1 quart
160,000 pints = 80,000 quarts of sour cream
Quarts of milk
120,000 (60%)
Quarts of sour cream (160,000 ÷ 2)
80,000 (40%)
Total quarts
200,000
Since the milk represents 60% of the total physical
quantity produced, then $21,600 represents 60% of the
total joint costs. Total joint costs are $36,000 ($21,600
÷ 0.60).

a.
Revenues

Separate Costs
NRV

Communications
News
Entertainment
$18,000,000
$15,000,000
$95,000,000
(17,000,000)
(8,000,000) (55,000,000)
$ 1,000,000
$ 7,000,000
$40,000,000

Joint cost allocation:
Communications $12,000,000 × ($1 ÷ $48)
News
$12,000,000 × ($7 ÷ $48)
Entertainment $12,000,000 × ($40 ÷ $48)
Total
Revenues
Separate Costs
Allocated costs
Net Profit
b.

$18,000,000
(17,000,000)
(250,000)

$
750,000

Total revenues = $18 m + $15
Joint cost allocation:
Communications $12,000,000 ×
News
$12,000,000 ×
Entertainment $12,000,000 ×
Total
Revenues
Separate Costs
Allocated costs
Net Profit

$15,000,000
(8,000,000)
(1,750,000)
$ 5,250,000

$

250,000
1,750,000
10,000,000
$12,000,000

$95,000,000
(55,000,000)
(10,000,000)

$30,000,000

m + $95 m = $128 m
($18 ÷ $128)
($15 ÷ $128)
($95 ÷ $128)

$18,000,000
(17,000,000)
(1,687,500)
$ (687,500)

$15,000,000
(8,000,000)
(1,406,250)
$ 5,593,750

$ 1,687,500
1,406,250
8,906,250
$12,000,000
$95,000,000
(55,000,000)
( 8,906,250)
$31,093,750


222
c.

22.

a.

Chapter 9
Cost Allocation for Joint Products and By-Products
Obviously, as head of the Communications Group, a manager
would be very concerned about the effects of allocating
joint costs under the scheme in part (b). The result of
the allocation is to make the Communications Group appear
to be very unprofitable.
Some of the points students might make in their
presentations include (some of which may be rebuttable):
1.
The allocation of joint costs is totally arbitrary;
there is no cause and effect relationship
represented in the allocations in part (b).
2.
The Communications Group has a different
degree of utilization than the other two groups of
facilities, administration, etc. because most of its
activities originate at a different location.
Evidence of this relationship is found in the
separate costs incurred by the Communications Group
relative to the other two groups. The allocations
in part (b) fail to consider this fact.
Units of output allocation:
Total units = 7,500 + 10,000
Product 1
(7,500 ÷ 30,000)

Product 2 (10,000 ÷ 30,000)
Product 3 (12,500 ÷ 30,000)
Total

+
×
×
×

12,500 = 30,000
$120,000
$30,000
$120,000
40,000
$120,000
50,000
$120,000

Total weight = [(7,500 × 3) + (12,500 × 3)] = 22,500 +
20,000 + 37,500 = 80,000 ounces
Weight-based allocation:
Product 1 (22,500 ÷ 80,000) × $120,000
$33,750
Product 2 (20,000 ÷ 80,000) × $120,000
30,000
Product 3 (37,500 ÷ 80,000) × $120,000
56,250
Total
$120,000
Approximated Net realizable

Product 1
[7,500 × ($4.25
Product 2 [10,000 × ($3.00
Product 3 [12,500 × ($3.00
Total

value computation:
- $1)]
$24,375
- $0.50)]
25,000
- $0.75)]
28,125
$77,500

Approximated net realizable value allocation:
Product 1 (24,375 ÷ 77,500) × $120,000
$37,742
Product 2 (25,000 ÷ 77,500) × $120,000
38,710
Product 3 (28,125 ÷ 77,500) × $120,000
43,548
Total
$120,000


238
b.

Chapter 9

Cost Allocation for Joint Products and By-Products
Cost assigned to inventory = allocated joint cost +
separate costs
Product 1 = $30,000 + ($1 × 7,500) =
$37,500
Product 2 = $40,000 + ($0.50 × 10,000) = $45,000
Product 3 = $50,000 + ($0.75 × 12,500) = $59,375

223

Inventory valuation based on units of production:
Product 1 ($37,500) × (500 ÷ 7,500)
$ 2,500
Product 2 ($45,000) × (1,000 ÷ 10,000)
4,500
Product 3 ($59,375) × (1,500 ÷ 12,500)
7,125
Total
$14,125
Inventory valuation based on weight:
Product 1 ($33,750 + $7,500) × (1,500 ÷ 22,500)
Product 2 ($30,000 + $5,000) × (2,000 ÷ 20,000)
Product 3 ($56,250 + $9,375) × (4,500 ÷ 37,500)
Total

$2,750
3,500
7,875
$14,125

Inventory valuation based on approximated net realizable
value:
Product 1 ($37,742 + $7,500) × (500 ÷ 7,500)
$3,016
Product 2 ($38,710 + $5,000) × (1,000 ÷ 10,000)
4,371
Product 3 ($43,548 + $9,375) × (1,500 ÷ 12,500)
6,351
Total
$13,738
23.

a.

Final sales value = Final sales price × Units
Split-off sales value = Sales price at split-off × units
Incremental costs = Incremental processing cost × units

(a)
(b)
(c)=(a)–(b)
(d)
(e)=(c)–(d)
Final Sales Split-off Incremental Incremental Incremental
Product
Value
Sales Value
Sales
Costs
Profit

Sun
$15,000
$10,000
$ 5,000
$ 7,500
$(2,500)
Moon
60,000
10,000
50,000
20,000
30,000
Mars
450
375
75
50
25
Only products Moon and Mars should be processed beyond
the split-off point.


224
b.

Chapter 9
Cost Allocation for Joint Products and By-Products
Joint costs
$30,000
Less NRV of Mars ($1.80 - $0.20) × 250

(400)
Joint costs to be allocated
$29,600
Unit-based allocation:
Sun (5,000 ÷ 15,000) × $29,600
Moon (10,000 ÷ 15,000) × $29,600
Total

$ 9,867
19,733
$29,600

Weight-based allocation:
Sun
(50,000 ÷ 110,000) × $29,600
Moon (60,000 ÷ 110,000) × $29,600
Total

$13,455
16,145
$29,600

NRV computation (assuming Sun is not processed further)
Sun
(5,000 × $2)
$10,000
Moon (10,000 × $4)
40,000
NRV
$50,000

NRV-based allocation:
Sun (10,000 ÷ 50,000) × $29,600
Moon (40,000 ÷ 50,000) × $29,600
Total
24.

a.

$ 5,920
23,680
$29,600

Product A
$180,000
(120,000)
$ 60,000
(40,000)

Final revenues
Revenues at split-off
Incremental revenues
Incremental costs
Net benefit (cost)
of further processing

$ 20,000

Product B
$140,000
(100,000)

$ 40,000
(34,000)
$

6,000

Both products should be processed further.
b.
25.

a.

Product
Candied
peaches
Peach
jelly
Peach
jam
b.

The irrelevant item is the $40,000 of joint processing
cost.
(a)
Final
Revenues

(b)
(c)= (a)-(b)
(d)

(e)=(c)-(d)
Split-off Incremental Incremental Incremental
Sales Value
Revenues
Costs
Profit

$62,000

$40,000

$22,000

$26,000

$(4,000)

74,000

40,000

34,000

38,000

(4,000)

27,000

10,000

17,000

15,000

2,000

Candied peaches
Peach jelly
Additional potential profit

$ 4,000
4,000
$8,000


238
26.

a.

b.

Chapter 9
225
Cost Allocation for Joint Products and By-Products
Joint cost
$32,000
Less NRV of Z [1,000 × (0.50 - 0.10)]
(400)

Joint cost to be allocated
$31,600
NRV of X [9,000 × ($4 - $0.75)]
NRV of Y [10,000 × ($4.25 - $1)]
Total NRV

$29,250
32,500
$61,750

Cost allocation:
X [$31,600 × ($29,250 ÷ $61,750)]
Y [$31,600 × ($32,500 ÷ $61,750)]
Total cost allocation

$14,968
16,632
$31,600

Separate costs for X = 9,000 × $0.75 = $6,750
Separate costs for Y = 10,000 × $1.00 = $10,000
X
Y
Joint costs
$14,968
$16,632
Separate costs
6,750
10,000
Total costs

$21,718
$26,632
Divide by units
9,000
10,000
Unit cost
$2.41
$2.66
Inventory values
X: 600 × $2.41
Y: 900 × $2.66
Z: (54 ÷ 1,000) × $400
Total inventory value

$1,446
2,394
22
$3,862

27.

Because the by-products have substantial value, they should be
accounted for on the basis of net realizable value rather than
realized value. Use of realized value would result in
distorted cost information. Whether the direct or indirect
method is used would be dependent on the timing of the sale of
by-products and joint products. If both product groups sell
shortly after they are produced, then the choice of method is
less important. However, if the by-product tends to sell in a
different period than its related joint products, the use of

the direct method would provide a stronger match between costs
and benefits.

28.

a.

b.

Allocate joint cost of $50,000:
Joint Services
Increase in Revenues
Leasing
$ 800,000
1/3
Sales
1,600,000
2/3
Totals
$2,400,000
1

Allocated Cost
$16,667
33,333
$50,000

Allocate joint cost of $50,000:
Joint Services
Increase in Net Income

Leasing
$ 150,000
0.60
Sales
100,000
0.40
Totals
$ 250,000
1.00

Allocated Cost
$30,000
20,000
$50,000


226
c.

29.

Cost Allocation
The allocation
better because
benefit of the

Chapter 9
for Joint Products and By-Products
based on increase in net income may be
it matches the advertising cost to the net

advertising.

Joint process cost
Less net realizable value of
by-product inventory
Amount to be allocated

$120,000
20,000
$100,000

Proration of amount to be allocated based on weight:
Product
M
N
O

30.

a.

Pounds
4,800
13,000
4,200
22,000

Proportion
0.22
0.59

0.19
1.00

Sales value of pants
Total sales value

Allocation
$ 22,000
59,000
19,000
$100,000

= Joint cost of pants
Total joint cost

$ 40,000 =
X
$300,000
$180,000
$300,000X = $40,000($180,000)
$30X = $4($180,000)
$30X = $720,000
X = $24,000 for pants
Total joint cost
Joint cost for hats and pants
($87,000 + $24,000)
Joint cost assigned to shirts
b.

$180,000

(111,000)
$ 69,000

Joint costs = 60% of relative sales value amounts;
therefore, $87,000 = 0.6X
X = $145,000 sales value for hats
$300,000 – ($145,000 for hats and $40,000 for pants) =
sales value of $115,000 for shirts

c.

Hats
Final sales value
$150,000
Sales value at split off 145,000
Increase in value
$ 5,000
Additional costs
(13,000)
Incremental benefit
(loss)
$ (8,000)

Shirts
Pants
$134,000 $105,000
115,000
40,000
$ 19,000 $ 65,000
(10,000) (39,000)

$

9,000

$ 26,000

Process shirts and pants further.
d.

Joint costs allocated to shirts:
Additional costs

$69,000
10,000


Chapter 9
Cost Allocation for Joint Products and By-Products
Total costs for 8,000 units
$79,000

238

Sales
Cost for 4,000 units
Gross profit
31.

a.

Total joint cost
Revenue from tours
Expenses of tours
Joint cost to be allocated
Total Receipts
Separate costs
Net realizable value

$67,000
(39,500)
$27,500
$8,000,000
$350,000
(190,000)

Total Receipts
Separate costs
Net realizable value
Joint costs
Net profit
32.

(160,000)
$7,840,000

Movie 1
$4,000,000
(2,400,000)
$1,600,000

Allocate joint cost of $7,840,000:
NRV
Movie 1
$ 1,600,000
16%
Movie 2
8,400,000
84
$10,000,000 100%
b.

Joint cost allocated
$1,254,400
6,585,600
$7,840,000

Movie 1
$4,000,000
(2,400,000)
$1,600,000
(1,254,400)
$ 345,600

Total sales value (12,000 × $42)
Less costs (12,000 × $8)
Reduction of joint cost

Movie 2
$27,000,000
(18,600,000)

$ 8,400,000

Movie 2
$27,000,000
(18,600,000)
$ 8,400,000
(6,585,600)
$ 1,814,400

$504,000
(96,000)
$408,000

The gross margin for the major products will decrease by
$408,000, but net income will remain the same.
33.

Sales of by-product
Cost of by-product sales (45,000 × $0.30)
Net realizable value of by-product
a.

b.

Sales of potato patties
Cost of goods sold:
Potato patties (80% × $60,000)
By-products
Gross profit
Expenses

Income from operations
Other revenues (by-product sales)
Net income before taxes
Sales of potato patties
Cost of goods sold
Gross profit

227

$23,850
(13,500)
$10,350
$79,000

$48,000
13,500

(61,500)
$17,500
(7,600)
$ 9,900
23,850
$33,750
$79,000
(48,000)
$31,000


Chapter 9
Cost Allocation for Joint Products and By-Products

Expenses
(7,600)
Income from operations
$23,400
Other income (by-product sales)
10,350
Net income before taxes
$33,750

228

c.

Sales of potato patties
Cost of goods sold
Gross profit
Expenses
Net income before taxes
*$60,000 - $10,350 = $49,650;

34.

$79,000
(39,720)*
$39,280
(7,600)
$31,680
$49,650 × 80% = $39,720.

d.

The approach in part (c) is the best because it
consistently matches the NRV of the by-product with the
costs of the joint production operations that produced
the by-product.

a.

Estimated OH
Estimated NRV of by-product
Estimated OH to be covered
Divided by estimated CPU time
Predetermined OH rate per CPU hr.

b.

Cash

$398,500
(18,400)
$380,100
35,000
$ 10.86
19,588

Manufacturing Overhead
c.

35.

19,588

Total actual OH
Total applied OH (34,200 × $10.86) $371,412
Total actual NRV of by-product
19,588
Underapplied overhead

a.

$135,000 ÷ 15,000 = $9.00 per DLH

b.

DM
DL ($20 × 63)
OH ($9.00 × 63)
Total

c.

Disposal Value of Spoiled Work
Manufacturing Overhead
Work in Process - Job XX
To record disposal value of
spoiled work incurred on Job
XX (the stained glass window)

$

420.00
1,260.00
567.00
$2,247.00
18
37
55

$399,500
391,000
8,500

$


238
36.

a.

Chapter 9
Cost Allocation for Joint Products and By-Products
Cash
5,000
Work in Process - Monroe Bldg.
5,000

b.

Cash

5,000
Manufacturing Overhead

37.

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

38.

a.

b.

39.

a.

b.

229

5,000

2
1
1
2
2
1
1
2
1
2
Joint Product
Fundraising
Program
Total

Percent
0.10
0.90
1.00

Joint Cost
$ 18,000
162,000
$180,000

Joint Product
Fundraising

Program
Total

Percent
0.0200
0.9800
1.0000

Joint Cost
$ 3,600
176,400
$180,000

Work in Process - Mixing
Raw Material Inventory
Wages Payable
Manufacturing Overhead

39,810

Work in Process - Cooking
Work in Process - Mixing

39,810

Work in Process - Cooking
Raw Material Inventory
Wages Payable
Manufacturing Overhead

11,490

Work in Process - Cooking
Raw Material Inventory

2,120

Work in Process - Cooking
Raw Material Inventory
Wages Payable
Manufacturing Overhead

9,210

28,000
7,560
4,250
39,810
6,100
2,150
3,240
2,120
1,960
3,120
4,130

Finished Goods - Elegance
40,595
Finished Goods - Sooosoft
22,035

Work in Process - Cooking
62,630
Joint cost allocation:
Elegance [($158,910 ÷ $211,880) × $51,300] $38,475


Chapter 9
Cost Allocation for Joint Products and By-Products

230

Sooosoft
Total
c.

[($52,970 ÷ $211,880) × $51,300]

12,825
$51,300

Work in Process - Mixing
DM 28,000 | To Cooking 39,810
DL
7,560 |
OH
4,250 |
Bal.
0
Work in Process - Cooking
From Mixing 39,810

| To FG - Elegance 40,595
DM
6,100
| To FG - Sooosoft 22,035
DL
2,150
|
OH
3,240
|
DM
2,120
|
DM
1,960
|
DL
3,120
|
OH
4,130
|
Bal.
0
Finished Goods - Elegance
Beg.
XXX |
CGM
40,595 |

40.

41.

Finished Goods - Sooosoft
Beg.
XXX |
CGM
22,035 |

a.

Joint cost allocation
Checking
$800,000 × ($1,897,500÷$3,300,000) = $460,000
Credit Cards$800,000 × ($1,402,500÷$3,300,000) = 340,000
Total
$800,000

b.

Checking Cred. Cards Total
Revenues
$1,897,500 $1402,500 $3,300,000
Joint costs
(460,000) (340,000) (800,000)
Separate costs
(250,000) (180,000) (430,000)
Gross margin unadjusted $1,187,500 $ 882,500 $2,070,000
Insurance revenue

65,000
Overall gross margin
$2,135,000

a.

Total joint costs:
Direct material
Direct labor
Overhead
Sales value of scrap
($1.25 per lb. × 1,800 lbs.)
Joint cost to be allocated

$23,875
6,000
5,900
$35,775
2,250
$33,525


238
b.

Chapter 9
231
Cost Allocation for Joint Products and By-Products
Robes
Bath Towels

Revenues
$ 20.00
$ 11.00
Separate costs
(8.40)
(2.30)
NRV per unit
$ 11.60
$ 8.70
Multiply by # of units produced
× 3,000
× 6,000
Total NRV
$34,800
$52,200
NRV %
40%
60%
Joint cost assignable to robes (40% × $33,525
Joint cost assignable to towels (60% × $33,525)
WIP-Robes
WIP-Towels
Work in Process - Cutting

13,410
20,115

Finished Goods - Scrap
Work in Process - Cutting

2,250

c.

42.

a.

Materials
Labor
Overhead
Joint cost

33,525
2,250
Robes
$13,410

Joint costs
Separate costs
($8.40 X 3,000)
($2.30 X 6,000)
Total

Bath Towels
$20,115

25,200
$38,610

13,800
$33,915

$1,500
300
150
$1,950

b.
Joint
Product
Group 1
Group 2

$13,410
20,115
$33,525

Sales
Price
$3,000
1,500

Add'l
Cost
$150
440

NRV at
Split-Off

$2,850
1,060
$3,910

Allocated
Joint
Percent
Cost
73
$1,424
27
526
100
$1,950


232
c.

Chapter 9
Cost Allocation for Joint Products and By-Products
Raw Materials
1,500
Cash (A/P)
1,500
Work in Process - Rec. & Sep.
Raw Materials
Wages Payable
Manufacturing Overhead

1,950

Work in Process - Boxing (Group 1)
Work in Process - Slicing (Group 2)
Work in Process - Rec. & Sep.

1,424
526

Work in Process - Boxing (Group 1)
Work in Process - Slicing (Group 2)
Various accounts

150
220

1,500
300
150

1,950

370

Finished Goods (Group 1)
1,574
Work in Process - Boxing (Group 2)
746
Work in Process - Boxing (Group 1)
1,574

Work in Process - Slicing (Group 2)
746
Work in Process - Boxing (Group 2)
Various accounts

220

Finished Goods (Group 2)
Work in Process - Boxing (Group 2)

966

Cash

450
Various accounts
Other Income

d.

Total cost
Estimated NRV of scrap
Joint cost to allocate
Joint
Product
Group 1
Group 2

Sales
Price

$3,000
1,500

Add'l
Cost
$150
440

220
966
50
400

$1,950
(400)
$1,550
NRV at
Split-Off
$2,850
1,060
$3,910

Allocated
Joint
Percent
Cost
73
$1,132
27
418

100
$1,550


238
e.

Chapter 9
233
Cost Allocation for Joint Products and By-Products
Work in Process - Rec. & Sep.
1,950
Raw Materials
1,500
Wages Payable
300
Manufacturing Overhead
150
Work in Process - Boxing (Group 3)
Work in Process - Rec. & Sep.

400

Work in Process - Boxing (Group 1)
Work in Process - Slicing (Group 2)
Work in Process - Rec. & Sep.

1,132
418

Work in Process - Slicing (Group 2)
Various accounts

220

Work in Process - Boxing (Group 2)
Work in Process - Slicing (Group 2)

638

Work in Process - Boxing (Group 1)
Work in Process - Boxing (Group 2)
Work in Process - Boxing (Group 3)
Various accounts

150
220
50

Finished Goods (Group 1)
Finished Goods (Group 2)
Finished Goods (Group 3)
Work in Process - Boxing (Group 1)
Work in Process - Boxing (Group 2)
Work in Process - Boxing (Group 3)
43.

400

1,550

220
638

420
1,282
858
450
1,282
858
450

a.

[2,510 × ($6.00 - $0.50 - $0.30)] = $13,052

b.

$36,000 + $23,800 + $3,000 - $13,052 = $49,748

c.
Gross revenues
Separate costs:
Cost of Goods Sold
Labor
Supplies
Equipment depreciation
Administration
Net realizable value
*

d.

Styling Services
$753,000
n/a
(431,000)
(98,000)
(65,000)
(113,000)
$ 46,000

Cosmetics
$289,000
(194,850)*
(24,000)
(700)
(1,200)
(3,700)
$ 64,550

BI + Purchases - EI = $35,000 + $181,350 - $21,500

Styling Services:
Cosmetics:

$49,748 × ($46,000 ÷ $110,550)
= $20,700

$49,748 × ($64,550 ÷ $110,550)
= $29,048

234
e.

44.

Chapter 9
Cost Allocation for Joint Products and By-Products
Styling Services
Cosmetics
Gross revenues
$753,000
$289,000
Separate costs:
Cost of Goods Sold
(194,850)
Labor
(431,000)
(24,000)
Supplies
(98,000)
(700)
Equipment depreciation
(65,000)
(1,200)
Administration
(113,000)
(3,700)
Joint costs

(20,700)
(29,048)
Net income
$ 25,300
$ 35,502

a.

56,000 gallons of output in Dept. 1:
Transferred to Dept. 2 (56,000 × 30%) 16,800 gallons
Transferred to Dept. 3 (56,000 × 70%) 39,200 gallons

b.

39,200 gallons of input to Dept. 3:
P&S (39,200 × 20%)
7,840 gallons
Tomato sauce (39,200 × 80%) 31,360 gallons

c.

Sales value (7,840 × $.08)
Distribution expense
NRV

d.

Joint
Product
Paste

Sauce

Gallons
16,800
31,360

$627.20
(110.00)
$517.20

Sales Total
Separate
Price Sales
Costs
NRV
$5.25 $ 88,200 $9,620.00 $ 78,580.00
3.45 108,192 5,932.80* 102,259.20

*$6,450 - $517.20
e.

*

Total joint cost:

Joint
Product
NRV
Paste
$ 78,580.00

Sauce
102,259.20
$180,839.20

45.

$44,200 + $33,700 = $77,900
Percent
43
57
100

f.

Joint
Product
Paste
Sauce

a.

By-Product Inventory - Straw
Work in Process - Wheat
(5,000 tons × $30 per ton)

Joint
Cost*
$33,497
44,403
$77,900

Joint
Separate Total
Cost
+
Costs = Cost
×
$33,497
$9,620.00 $43,117.00
44,403
$5,932.80 $50,335.80

Inv. Value of
% =
EI
15
$6,468
15
$7,550

150,000
150,000


238
b.

Chapter 9
235
Cost Allocation for Joint Products and By-Products

By-Product Inventory - Straw
225,000
Various production expenses
50,000
Work in Process - Wheat
175,000
(5,000 tons at $45 per ton - $50,000)
(Alternative)
Work in Process - Straw
Various production expenses

c.

50,000
50,000

Work in Process - Straw
Work in Process - Wheat

175,000

By-Product Inventory - Straw
Work in Process - Straw

225,000

Work in Process - Straw
Work in Process - Wheat

175,000

*Sales value of wheat at split-off
(70 × 5,000 × $3.50)
Sales value of straw at split-off
(5,000 × $30)

225,000
96,250*
96,250
$1,225,000

(89%)

150,000
$1,375,000

(11%)

Total joint costs ($175 × 5,000)
$875,000
Proportion of straw sales value at split-off ×
.11
Joint costs assignable to straw
$ 96,250
Work in Process - Straw
Various production expenses

50,000

Finished Goods Inventory - Straw

Work in Process - Straw

146,250

50,000
146,250
(CPA adapted)


Chapter 9
Cost Allocation for Joint Products and By-Products

236
Case
46.

a.
Joint process cost:
Direct material
Direct labor
Overhead
Total
Less by-product NRV
Amount to be allocated

$20,000
11,700
5,000
$36,700
2,300

$34,400

Allocation on the basis of sales value at split-off:
Product
Sales Value
Decimal Amount Allocation
X
$ 66,000
0.55
$34,400 $18,920
Y
43,000
0.36
$34,400
12,384
Z
11,200
0.09
$34,400
3,096
$120,200
1.00
$34,400
Allocation on the basis of pounds produced:
Product
Pounds
Decimal Amount
Allocation
X
4,300

0.26
$34,400
$ 8,944
Y
6,700
0.41
$34,400
14,104
Z
5,400
0.33
$34,400
11,352
16,400
1.00
$34,400
Computation of EI values under each allocation base:
Sales Value Approach:
Product Allocation
Units Unit Cost Units in EI
EI Value
X
$18,920
3,220
$5.88
500
$2,940.00
Y
12,384
8,370

1.48
1,300
1,924.00
Z
3,096
4,320
0.72
520
374.40
Physical Pounds Approach:
Product Allocation
Units
X
$ 8,944
3,220
Y
14,104
8,370
Z
11,352
4,320
b.

1.

Unit Cost
$2.78
1.69
2.63

Units in EI
500
1,300
520

EI Value
$1,390.00
2,197.00
1,367.60

For financial statement purposes, the sales value
approach apportions costs according to the relative
market values of the products while the physical
(pounds) approach allocation treats every pound of
output as equally worthy. This is done by assigning
the same cost per pound to all outputs ignoring that
some pounds of product sell for a higher amount than
others. Pounds are, however, an unchanging measure
of output while dollars (sales value in the
present case) change as the purchasing power of the
monetary unit changes.


238
2.

Chapter 9
237
Cost Allocation for Joint Products and By-Products
Because joint process costs are sunk, once the joint

process has been conducted, these costs and the
bases used to allocate them are irrelevant to
decisions about processing beyond the split-off
point.

Reality Check
47.

The following is provided to illustrate an answer. Student
responses will vary.
a.

Business
Joint products
By-products
Scrap
Waste
Lumber Mfg. lumber products
saw dust
tree bark
paper, furniture wood chips
Beef Prod. meat
bone meal
offal
leather products blood meal
University teaching
service
research
Corn Prod. corn
cobs

shucks
corn stalks
Oil
refined products
water
Extraction chemical products
plastics
natural gas

b.

For lumber manufacturing, use of approximated NRV or
NRV would be the best base. Lumber products have
tremendous potential for processing beyond the split-off
point and the value that can be added in such additional
processing should be recognized in the allocation scheme.
The same logic applies to beef production and oil
extraction. A university produces two major unique
services. Some measure of activity would be the logical
choice for allocating joint costs to teaching and
research. A logical activity measure would be faculty
time. Corn production costs could be allocated based on
sales value at the split-off point. The producer of the
corn can easily establish market values for both corn
stalks and the grain at the split-off point.


238
48.

a.

Chapter 9
Cost Allocation for Joint Products and By-Products
With many scrap and waste materials, it is often an issue
of who is to bear the cost. Undoubtedly, the resulting
costs, in this case to the firms and society, far
exceeded the cost the individual or firm would have
incurred to properly dispose of the hazardous waste
materials.

b.

If caught, those involved with this type of illegal
disposal of materials could be subject to damage claims,
very large fines, and prison time. Furthermore, it is
likely that the costs of the cleanup would be imposed on
them.

c.

Firms have an obligation to ensure proper waste disposal
and to educate their employees in proper methods of waste
disposal. Employees should be made aware of the risks
associated with improper disposal including the legal
repercussions. Thus, the least expensive and most
effective way to control waste is for each firm to assume
responsibility for its own waste.
Beyond internal measures, the larger society can
assume a greater oversight role through increased

regulation and monitoring of waste control efforts. Much
of this activity is currently monitored by the EPA, but
the role of this agency could be expanded. Further, we
could tighten laws and improve the penalty structure for
improper disposal of waste materials. Lastly, we could
improve waste recycling opportunities for manufacturing
firms and pursue other alternatives to reduce the costs
of waste disposal.

d.

The vendor/manufacturer must bear some of the
responsibility for proper use and disposal of its
products. Manufacturers should have superior knowledge
about chemical properties and the risks associated with
the components of their products. Furthermore, while
giving due consideration to relative cost, manufacturers
have an obligation to produce products with materials and
components that are the least toxic and the most
convenient to recycle. If extraordinarily toxic to the
environment, manufacturers should be directly responsible
for proper waste disposal.

49.

Student solutions will vary.

No solution provided.

50.

Student solutions will vary.

No solution provided.