The following is acceptable regarding the allocation of joint product costs to a by-product:

Chapter 8

Chapter 8

COSTING BY-PRODUCTS AND JOINT PRODUCTS

MULTIPLE CHOICE

Question Nos. 7, 10, 1219, and 22 are AICPA adapted.

Question No. 25 is ICMA adapted.

Question Nos. 11, 20, 23, and 24 are CIA adapted.

B1.The allocation of joint costs to individual products is useful primarily for purposes of:

A.determining whether to produce one of the joint products

B.inventory costing

C.determining the best market price

D.deciding whether to sell at the split-off point

E.evaluating whether an output is a main product or a by-product

B2.The method used for the allocation of joint costs to products is important:

A.only in the minds of accountants

B.because profits will be affected when ending inventories change from the beginning of the period

C.because its validity for justifying prices before regulatory authorities is unquestioned

D.because profit margins differ when the relative sales value method is used

E.for income determination when inventories are nonexistent

A3.In a joint production process, a by-product is also described as:

A.a simultaneously produced product of relatively low value

B.a form of main product with controllable production proportions

C.waste

D.products of low value recovered at the end of a production process

E.a product with no value contribution to help offset production costs

D4.All of the following are methods of costing by-products except the:

A.market value method

B.recognition of net revenue method

C.recognition of gross revenue method

D.average unit cost method

E.replacement cost method

E5.Reporting revenue from by-product sales on the income statement as additional sales revenue:

A.allocates costs to by-products on the basis of quantities produced

B.reduces the main product cost by the estimated market value of the by-product

C.credits main product costs only when the by-product is used in further production

D.allocates a proper share of production costs to the by-product

E.overstates ending inventory costs of the main product

E6.All of the following are methods of allocating joint production costs except the:

A.market value method

B.quantitative unit method

C.average unit cost method

D.average cost method

E.recognition of net revenue method

D7.Tobin Company manufactures products S and T from a joint process. The market value at split-off was $50,000 for 6,000 units of Product S and $50,000 for 2,000 units of Product T. Assuming that the portion of the total joint cost properly allocated to Product S using the market value method was $30,000, the total joint cost was:

A.$40,000

B.$42,500

C.$45,000

D.$60,000

E.$75,000

SUPPORTING CALCULATION:

C8.Costs to be incurred after the split-off point are most useful for:

A.adjusting inequities in the joint cost allocation procedure

B.determining the levels of joint production

C.assessing the desirability of further processing

D.setting the mix of output products

E.assessing sales realization values for allocating joint costs accurately

D9.Alphabet Company manufactures Products A and B from a joint process that also yields a by-product, X. Alphabet accounts for the revenues from its by-product sales as a deduction from the cost of goods sold of its main products. Additional information is as follows:

ABXTotalUnits produced

15,0009,000

6,00030,000

Joint costs

$264,000

Market value at split-off

$290,000$150,000$10,000$450,000

Assuming that joint product costs are allocated using the market value at the split-off approach, the joint cost allocated to Product B would be:

A.$136,540

B.$79,200

C.$88,000

D.$86,591

E.$99,000

SUPPORTING CALCULATION:

D10.If a company obtains two salable products from the refining of one ore, the refining process should be accounted for as a(n):

A.reduction process

B.depletion process

C.mixed cost process

D.joint process

E.extractive process

A11.The assignment of raw material costs to the major end products resulting from refining a barrel of crude oil is best described as:

A.joint costing

B.differential costing

C.incremental costing

D.variable costing

E.indirect costing

B12.The following components of production that can be allocated as joint costs when a single manufacturing process produces several salable products are:

A.indirect production costs only

B.materials, labor, and overhead

C.materials and labor only

D.labor and overhead only

E.overhead and materials only

A13.The following statement that best describes a by-product is:

A.a product that usually produces a small amount of revenue when compared to the main product's revenue

B.a product that does not bear any portion of the joint processing costs

C.a product that is produced from material that would otherwise be scrap

D.a product that has a lower unit selling price than the main product

E.a product created along with the main product whose sales value does not cover its cost of production

B14.Relative sales value at split-off is used to allocate:

Cost Beyond

Split-Off Joint Costs

A.yesno

B.noyes

C.nono

D.sometimesnever

E.yesyes

B15.The following is acceptable regarding the allocation of joint product costs to a by-product:

None AllocatedSome Portion Allocated

A.not acceptablenot acceptable

B.acceptableacceptable

C.acceptablenot acceptable

D.sometimes acceptablenever acceptable

E.not acceptableacceptable

D16.Idaho Corporation manufactures liquid chemicals A and B from a joint process. Joint costs are allocated on the basis of relative market value at split-off. It costs $4,560 to process 500 gallons of Product A and 1,000 gallons of Product B to the split-off point. The market value at split-off is $10 per gallon for Product A and $14 for Product B. Product B requires an additional process beyond split-off at a cost of $2 per gallon before it can be sold. What is Idaho's cost to produce 1,000 gallons of Product B?

A.$5,040

B.$4,360

C.$4,860

D.$5,360

E.$3,360

SUPPORTING CALCULATION:

C17.Harry Corp. manufactures Products J, K, L, and M from a joint process. Additional information is as follows:

Market

If Processed Further

UnitsValue atAdditionalMarket

ProductProduced Split-Off Costs Value

J6,000$80,000$7,500$90,000

K5,000

60,000

6,000

70,000

L4,000

40,000

4,000

50,000

M 3,000

20,000

2,500

30,000

18,000$ 200,000$ 20,000$ 240,000Assuming that total joint costs of $160,000 were allocated using the market value at split-off approach, what joint costs were allocated to each product?

ADVANCE \u0JKLM

A.$53,333$44,444$35,556$26,667

B.$60,000$46,667$33,333$20,000

C.$64,000$48,000$32,000$16,000

D.$60,000$48,000$32,000$20,000

E.$40,000$40,000$40,000$40,000

SUPPORTING CALCULATION:

J:40% x $160,000 = $64,000

K:30% x $160,000 = $48,000

L:20% x $160,000 = $32,000

M:10% x $160,000 = $16,000

E18.Cayan Company manufactures three main products, F, G, and W, from a joint process. Joint costs are allocated on the basis of relative market value at split-off. Additional information for June production activity follows:

FGWTotalUnits produced

50,000

40,00010,000100,000

Joint costs

?

??$450,000

Market value at split-off

$420,000$270,000$60,000$750,000

Additional costs if

processed further

$88,000$30,000$12,000$130,000

Market value if

processed further

$538,000$320,000$87,000$945,000

Assuming that the 10,000 units of W were processed further and sold for $87,000, what was Cayan's gross profit on this sale?

A.$75,000

B.$51,000

C.$21,000

D.$28,500

E.$39,000

SUPPORTING CALCULATION:

Sales:

$87,000

Cost of Goods Sold:

Joint Costs

$36,000

Separable Costs

12,000 48,000Gross Profit

$39,000B19.A company manufactures two joint products at a joint cost of $1,000. These products can be sold at split-off, or when further processed at an additional cost, sold as higher quality items. The decision to sell at split-off or further process should be based on the:

A.allocation of the $1,000 joint cost using the quantitative unit measure

B.assumption that the $1,000 joint cost is irrelevant

C.allocation of the $1,000 joint cost using the relative sales value approach

D.assumption that the $1,000 joint cost must be allocated using a physical-measure approach

E.allocation of the $1,000 joint cost using any equitable and rational allocation basis

D20.The characteristic that is most often used to distinguish a product as either a joint product or a by-product is the:

A.amount of labor used in processing the product

B.amount of separable product costs that are incurred in processing

C.amount (i.e., weight, inches, etc.) of the product produced in the manufacturing process

D.relative sales value of the products produced in the process

E.none of the above

A21.A company processes raw material into products F1, F2, and F3. Each ton of raw material produces five units of F1, two units of F2, and three units of F3. Joint processing costs to the split-off point are $15 per ton. Further processing results in the following per unit figures:

F1F2F3Additional processing costs per unit

$28$30$25

Selling price per unit

30 35 35

If joint costs are allocated by the net realizable value of finished product, what proportion of joint costs should be allocated to F1?

A.20%

B.30%

C.33 1/3%

D.50%

E.none of the above

SUPPORTING CALCULATION:

B22.Jeffrey Co. manufactures Products A and B from a joint process. Market value at split-off was $700,000 for 10,000 units of A, and $300,000 for 15,000 units of B. Using the market value at split-off approach, joint costs properly allocated to A were $140,000. Total joint costs were:

A.$98,000

B.$200,000

C.$233,333

D.$350,000

E.none of the above

SUPPORTING CALCULATION:

C23.A company produces three main joint products and one by-product. The by-product's relative market value is quite low compared to that of the main products. The preferable accounting for the by-product's net realizable value is as:

A.an addition to the revenues of the other products allocated on their respective net realizable values

B.revenue in the period in which it is sold

C.a reduction in the joint cost to be allocated to the three main products

D.a separate net realizable value upon which to allocate some of the joint costs

E.none of the above

C24.A company manufactures Products X and Y using a joint process. The joint processing costs are $10,000. Products X and Y can be sold at split-off for $12,000 and $8,000 respectively. After split-off, Product X is processed further at a cost of $5,000 and sold for $21,000, whereas Product Y is sold without further processing. If the company uses the market value method for allocating joint costs, the joint cost allocated to X is:

A.$4,000

B.$5,000

C.$6,000

D.$6,667

E.none of the above

SUPPORTING CALCULATION:

D25.The Hovart Corporation manufactures two products out of a joint processCompod ADVANCE \u2and Ultrasene. The joint (common) costs incurred are $250,000 for a standard production run that generates 120,000 gallons of Compod and 80,000 gallons of Ultrasene. Compod sells for $2.00 per gallon, while Ultrasene sells for $3.25 per gallon. If there are no additional processing costs incurred after the split-off point, the amount of joint cost of each production run allocated to Compod by the quantitative unit method is:

A.$100,000

B.$120,000

C.$130,000

D.$150,000

E.some amount other than those given above

SUPPORTING CALCULATION:

A26.Ace Company produced 20,000 units of Clubs, 15,000 units of Diamonds, and 10,000 units of Hearts. If the company uses the average unit cost method of allocating joint production costs, which were $120,000 for the period, the joint costs allocated to Diamonds would be:

A.$40,000

B.$20,000

C.$80,000

D.$45,000

E.none of the above

SUPPORTING CALCULATION:

C27.A company uses the weighted average method to assign joint products. Weight factors used to assign joint costs to its three joint products were: Product A, 4 points; Product B, 7 points; and Product C, 8 points. Units produced were: Product A, 10,000; Product B, 5,000; and Product C, 3,125. The amount of the joint costs of $100,000 that would be allocated to Product C are:

A.$42,105

B.$17,241

C.$25,000

D.$30,000

E.none of the above

SUPPORTING CALCULATION:

E28.The two standards in the Standards of Ethical Conduct for Management Accountants that pertain most specifically to consideration of joint costs allocation are:

A.competence and confidentiality

B.confidentiality and integrity

C.competence and integrity

D.confidentiality and objectivity

E.none of the above

PROBLEMS

PROBLEM

1.

Consideration of By-Product in Net Income Determination. Harvard Products Co. manufactures two productsYalies and Brownies. The Brownies are a by-product from its ADVANCE \u2regular process. During the year, 10,000 Yalies were sold at $8 each. The total production cost was $5 per unit of Yalies, and marketing and administrative expenses totaled $20,000. There were no beginning inventories, but ending inventories amounted to 1,000 units. From the sale of Brownies, the company received $12,000, which was recorded as additional revenue from sales.

Required: Prepare an income statement showing the operating income for the year.

SOLUTION

Harvard Products Co.

Income Statement

For Year Ended December 31, 19--

Sales: Main product (10,000 Yalies @ $8)

$80,000

By-product (Brownies)

12,000Total sales

$92,000

Cost of goods sold:

Total production cost (12,000 units1 @ $5)

$60,000

Ending inventory (1,000 units @ $5)

5,000 55,000Gross profit

$37,000

Marketing and administrative expenses

20,000Operating income

$17,0001Sales+ Ending inventory-Beginning inventory=Production

10,000+ 1,000-0=11,000

PROBLEM

2.

By-Product Sales in Net Income Determination. Galaxy Flavorings Company produces tea bags. As part of the manufacturing process, the tea leaves are separated from the stalks and stems. The tea leaves are sold as the main product, while the stalks and stems are sold as the by-product for use in nursery mulch. During May, the company processed 25,000 boxes of tea bags at a unit cost of $.75. Beginning inventory consisted of 2,000 boxes at a unit cost of $.70 per box. During May, 20,000 boxes were sold for $1.75 each. The company also sold 500 pounds of stalks and stems at a total price of $850. Marketing and administrative expenses amounted to $12,000.

Required: Prepare an income statement showing the operating income for May, assuming that the revenue from the company's by-product sales is deducted from the production costs. (Show unit costs for the ending inventory using the average cost method rounded to three decimal places.)

SOLUTION

Galaxy Flavorings Company

Income Statement

For Month Ended May 31, 19--

Sales: Main product (20,000 boxes @ $1.75)

$35,000

Cost of goods sold:

Beginning inventory (2,000 boxes @ $.70)

$1,400

Total production cost (25,000 boxes @ $.75)

$18,750

Revenue from sales of by-product

(850)

17,900Cost of goods available for sale

$19,300

Ending inventory (7,000 boxes @ $.7461)

5,222

14,078Gross profit

$20,922

Marketing and administrative expenses

12,000Operating income

$ 8,9221(25,000 x $.75) + (2,000 x $.70)/(20,000 + 7,000) =

($18,750 + $1,400)/27,000 =

$20,150/27,000 = $.746

PROBLEM

3.

Determination of Ending Inventory; Hypothetical Market Value Method. Macho Inc. manufactures two beveragesRed Eye and Tornado. The production process is such that both ADVANCE \u2beverages are jointly processed in the Basic Blending Department. At the end of the basic blending process, Red Eye is sold at $10 per gallon, but Tornado must be processed at a further cost of $7 per gallon before it can be sold at $15 per gallon. In June, the total joint cost amounted to $96,000, while 5,000 gallons of Red Eye and 12,500 gallons of Tornado were produced. There were no beginning inventories. At the end of June, there were 1,500 gallons of Red Eye and 2,000 gallons of Tornado on hand.

Required: Calculate the ending inventory costs for Red Eye and Tornado, using the hypothetical market value method.

SOLUTION

Ending

InventoryUnit CostsTotal

Product (Units) (per Schedule)CostsRed Eye

1,500$6.40$9,600

Tornado

2,000

12.12 24,240Ending inventory

$ 33,840

Ultimate

UltimateProcessing)

Market ValueUnitsMarketCosts After)

Product per Unit Produced Value Split-Off )

Red Eye

$105,000$50,0000 )

Tornado

1512,500 187,500$87,5001 )

$ 237,500$87,500 )

(

Total

(HypotheticalJoint CostProduction

(Market ValueAllocation2 Cost Unit Cost($50,000$32,000$32,000$ 6.40

(

100,000 64,000 151,500 12.12

($ 150,000$96,000$ 183,500

112,500 units x $7 = $87,500

2$96,000/$150,000 = 64%, percentage to allocate joint cost

PROBLEM

4.

Joint Cost AllocationMarket Value and Weighted Average Methods. Texarkana Oil Co. ADVANCE \u2produces three joint products: gasoline, kerosene, and naphtha. Total joint production cost for May was $59,500. The units produced and unit sales prices at the split-off point were:

ProductUnitsUnit Sales PriceGasoline

10,000$5

Kerosene

15,0004

Naphtha

20,0003

In determining costs by the weighted average method, each unit is weighted as follows:

Product

Per Unit WeightingGasoline

10.3

Kerosene

5

Naphtha

3

Required: Allocate the production cost, using:

(1)The market value method

(2)The weighted average method

SOLUTION

(1)

UnitTotal

SalesMarketProductUnitsPriceValueAllocation1Gasoline

10,000$5$50,000$17,500

Kerosene

15,0004

60,000

21,000

Naphtha

20,0003

60,000

21,000

$ 170,000$ 59,5001$59,500/$170,000 = 35%

(2)

Per UnitWeightedProductUnitsWeighting Units Allocation2Gasoline

10,00010.3

103,000$25,750

Kerosene

15,0005

75,000

18,750

Naphtha

20,0003

60,000

15,000

238,000$59,5002$59,500/238,000 = $.25 per weighted unit

PROBLEM

5.

Market Value Method for By-Products. Flores Inc. manufactures one main product and two by-products. Data for July are:

MainByProductBy-Product

Product A B TotalSales

$150,000$12,000$ 7,000$169,000

Manufacturing cost before

separation

75,000

Manufacturing cost after

separation

23,0002,2001,80027,000

Marketing and administrative

expense

12,0001,5001,10014,600

Profit allowed for By-Product A is 15% of sales and for By-Product B is 20% of sales.

Required:(1)Calculate the manufacturing cost before separation that is to be charged to By-Products A and B.

(2)Prepare an income statement detailing sales and costs for each product.

SOLUTION

(1)ABSales

$12,000$7,000Manufacturing cost after separation

$2,200$1,800

Marketing and administrative expenses

1,5001,100

Profit allowance (A, 15%; B, 20%)

1,800 1,400$ 5,500$4,300Manufacturing cost before separation

$ 6,500$2,700(2)Flores Inc.

Income Statement

For July, 19--

Main

ProductABTotalSales

$ 150,000$ 12,000$7,000$ 169,000Cost of goods sold:

Before separation

$65,800$6,500$2,700$75,000

After separation

23,000

2,200 1,800

27,000

$ 88,800$8,700$4,500$ 102,000Gross profit

$61,200$3,300$2,500$67,000

Less marketing and

administrative expenses

12,000

1,500 1,100

14,600Profit from operations

$ 49,200$ 1,800$1,400$ 52,400PROBLEM

6.

Joint Cost Analysis for Managerial Decisions. The Conga Company produced three products, C, O, and N, as the result of joint processing which cost $51,700.

CONUnits produced

22,000

17,500

11,750

Separable processing costs

$33,000$24,875$31,375

Unit sales price

$5.50$7.25$8.50

Required:(1)Allocate the joint cost to the three products using the market value method.

(2)Suppose that Product O could be sold at the split-off point for $5.00. Would that be a good idea? Show calculations.

SOLUTION

(1)Ultimate

Ultimate)

Market ValueUnitsMarket)

Product per Unit Produced Value )

C

$5.5022,000$121,000)

O

7.2517,500126,875)

N

8.5011,750 99,875)

$347,750)

(ProcessingHypotheticalApportionment

(Cost AfterMarketof Joint

( Split-Off Value Production Cost($33,000$88,000$17,600*

(24,875

102,00020,400

( 31,375 68,500 13,700 ($89,250$ 258,500$51,700 * 51,700 $258,500 = .20; $88,000 x .20 = 17,600

(2)

Differential revenue [17,500 x (7.25 - 5.00)]

$39,375

Differential cost

24,875Net effect of separable processing

$14,500Conclusion: Based on the information given, O should be processed beyond the split-off point.

PAGE 101

What are the joint cost Allocation Methods for by products?

What will justify the treatment of a product as joint product by

What factors should be considered when determining the allocation of joint costs?

What method is most commonly used for allocating joint processing costs to joint products?