To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 16 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS 16-1 Exhibit 16-1 presents nine examples of joint products from four different general industries These include: Industry Separable Products at the Splitoff Point Food Processing: • Lamb • Lamb cuts, tripe, hides, bones, fat • Turkey • Breasts, wings, thighs, poultry meal Extractive: • Petroleum • Crude oil, natural gas, raw LPG 16-2 A joint cost is a cost of a production process that yields multiple products simultaneously A separable cost is a cost incurred beyond the splitoff point that is assignable to each of the specific products identified at the splitoff point 16-3 The distinction between a joint product and a byproduct is based on relative sales value A joint product is a product from a joint production process (a process that yields two or more products) that has a relatively high sales value A byproduct is a product that has a relatively low sales value compared to the sales value of the joint (or main) products 16-4 A product is any output that has a positive sales value (or an output that enables a company to avoid incurring costs) In some joint-cost settings, outputs can occur that not have a positive sales value The offshore processing of hydrocarbons yields water that is recycled back into the ocean as well as yielding oil and gas The processing of mineral ore to yield gold and silver also yields dirt as an output, which is recycled back into the ground 16-5 The chapter lists the following six reasons for allocating joint costs: Computation of inventoriable costs and cost of goods sold for financial accounting purposes and reports for income tax authorities Computation of inventoriable costs and cost of goods sold for internal reporting purposes Cost reimbursement under contracts when only a portion of a business's products or services is sold or delivered under cost-plus contracts Insurance settlement computations for damage claims made on the basis of cost information of joint products or byproducts Rate regulation when one or more of the jointly-produced products or services are subject to price regulation Litigation in which costs of joint products are key inputs 16-6 The joint production process yields individual products that are either sold this period or held as inventory to be sold in subsequent periods Hence, the joint costs need to be allocated between total production rather than just those sold this period 16-7 This situation can occur when a production process yields separable outputs at the splitoff point that not have selling prices available until further processing The result is that selling prices are not available at the splitoff point to use the sales value at splitoff method Examples include processing in integrated pulp and paper companies and in petro-chemical operations 16-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-8 Both methods use market selling-price data in allocating joint costs, but they differ in which sales-price data they use The sales value at splitoff method allocates joint costs to joint products on the basis of the relative total sales value at the splitoff point of the total production of these products during the accounting period The net realizable value method allocates joint costs to joint products on the basis of the relative net realizable value (the final sales value minus the separable costs of production and marketing) of the total production of the joint products during the accounting period 16-9 Limitations of the physical measure method of joint-cost allocation include: a The physical weights used for allocating joint costs may have no relationship to the revenue-producing power of the individual products b The joint products may not have a common physical denominator––for example, one may be a liquid while another a solid with no readily available conversion factor 16-10 The NRV method can be simplified by assuming (a) a standard set of post-splitoff point processing steps, and (b) a standard set of selling prices The use of (a) and (b) achieves the same benefits that the use of standard costs does in costing systems 16-11 The constant gross-margin percentage NRV method takes account of the post-splitoff point ―profit‖ contribution earned on individual products, as well as joint costs, when making cost assignments to joint products In contrast, the sales value at splitoff point and the NRV methods allocate only the joint costs to the individual products 16-12 No Any method used to allocate joint costs to individual products that is applicable to the problem of joint product-cost allocation should not be used for management decisions regarding whether a product should be sold or processed further When a product is an inherent result of a joint process, the decision to process further should not be influenced by either the size of the total joint costs or by the portion of the joint costs assigned to particular products Joint costs are irrelevant for these decisions The only relevant items for these decisions are the incremental revenue and the incremental costs beyond the splitoff point 16-13 No The only relevant items are incremental revenues and incremental costs when making decisions about selling products at the splitoff point or processing them further Separable costs are not always identical to incremental costs Separable costs are costs incurred beyond the splitoff point that are assignable to individual products Some separable costs may not be incremental costs in a specific setting (e.g., allocated manufacturing overhead for postsplitoff processing that includes depreciation) 16-14 Two methods to account for byproducts are: a Production method—recognizes byproducts in the financial statements at the time production is completed b Sales method—delays recognition of byproducts until the time of sale 16-15 The sales byproduct method enables a manager to time the sale of byproducts to affect reported operating income A manager who was below the targeted operating income could adopt a ―fire-sale‖ approach to selling byproducts so that the reported operating income exceeds the target This illustrates one dysfunctional aspect of the sales method for byproducts 16-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-16 (20-30 min.) Joint-cost allocation, insurance settlement (a) Breasts Wings Thighs Bones Feathers Sales value at splitoff-point method Pounds of Product 100 20 40 80 10 250 Wholesale Selling Price per Pound $1.10 0.40 0.70 0.20 0.10 Sales Value at Splitoff $110 28 16 $163 Weighting: Joint Sales Value Costs at Splitoff Allocated 0.675 $ 67.50 0.049 4.90 0.172 17.20 0.098 9.80 0.006 0.60 1.000 $100.00 Allocated Costs per Pound 0.6750 0.2450 0.4300 0.1225 0.0600 Costs of Destroyed Product Breasts: $0.6750 per pound 20 pounds = $13.50 Wings: $0.2450 per pound 10 pounds = 2.45 $15.95 b Physical measures method Pounds Weighting: of Physical Product Measures Breasts 100 0.400 Wings 20 0.080 Thighs 40 0.160 Bones 80 0.320 Feathers 10 0.040 250 1.000 Costs of Destroyed Product Breast: $0.40 per pound 20 pounds Wings: $0.40 per pound 10 pounds Joint Costs Allocated $ 40.00 8.00 16.00 32.00 4.00 $100.00 = = Allocated Costs per Pound $0.400 0.400 0.400 0.400 0.400 $ $12 Note: Although not required, it is useful to highlight the individual product profitability figures: Product Breasts Wings Thighs Bones Feathers Sales Value $110 28 16 Sales Value at Splitoff Method Joint Costs Gross Allocated Income $67.50 $42.50 4.90 3.10 17.20 10.80 9.80 6.20 0.60 0.40 16-3 Physical Measures Method Joint Costs Gross Allocated Income $40.00 $70.00 8.00 0.00 16.00 12.00 32.00 (16.00) 4.00 (3.00) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The sales-value at splitoff method captures the benefits-received criterion of cost allocation and is the preferred method The costs of processing a chicken are allocated to products in proportion to the ability to contribute revenue Chicken Little’s decision to process chicken is heavily influenced by the revenues from breasts and thighs The bones provide relatively few benefits to Chicken Little despite their high physical volume The physical measures method shows profits on breasts and thighs and losses on bones and feathers Given that Chicken Little has to jointly process all the chicken products, it is nonintuitive to single out individual products that are being processed simultaneously as making losses while the overall operations make a profit Chicken Little is processing chicken mainly for breasts and thighs and not for wings, bones, and feathers, while the physical measure method allocates a disproportionate amount of costs to wings, bones and feathers 16-17 (10 min.) Joint products and byproducts (continuation of 16-16) Ending inventory: Breasts 10 Wings Thighs Bones Feathers $0.6750 0.2450 0.4300 0.1225 0.0600 = = = = = $6.7500 0.9800 1.2900 0.6125 0.1200 $9.7525 Joint products Breasts Thigh Byproducts Wings Bones Feathers Revenues of byproducts: Wings $ Bones 16 Feathers $25 Joint costs to be allocated: Joint costs – Revenues of byproducts $100 – $25 = $75 Breast Thighs Pounds of Product Wholesale Selling Price per Pound Sales Value at Splitoff Weighting: Sales Value at Splitoff Joint Costs Allocated Allocated Costs Per Pound 100 40 $1.10 0.70 $110 28 $138 110/138 28/138 $59.78 15.22 $75.00 $0.5978 0.3805 Ending inventory: Breasts 10 $0.5978 Thighs 0.3805 $5.9780 1.1415 $7.1195 Treating all products as joint products does not require judgments as to whether a product is a joint product or a byproduct In contrast, the approach in requirement results in inventory values being shown for only two of the five products 16-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-18 (10 min.) Net realizable value method A diagram of the situation is in Solution Exhibit 16-18 (all numbers are in thousands) Cooking Oil Final sales value of total production, 1,000 $50; 500 $25 Deduct separable costs Net realizable value at splitoff point Weighting, $20,000; $5,000 $25,000 Joint costs allocated, 0.8; 0.2 $24,000 $50,000 30,000 $20,000 0.8 $19,200 Soap Oil Total $12,500 7,500 $ 5,000 0.2 $ 4,800 $62,500 37,500 $25,000 $24,000 SOLUTION EXHIBIT 16-18 (all numbers are in thousands) Joint Costs Separable Costs Processing $30,000 Cooking Oil: 1,000 drums at $50 per drum Processing $7,500 Soap Oil: 500 drums at $25 per drum Processing $24 000 Splitoff Point 16-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-19 (40 min.) Alternative joint-cost-allocation methods, further-process decision A diagram of the situation is in Solution Exhibit 16-19 Physical measure of total production (gallons) Weighting, 2,500; 7,500 10,000 Joint costs allocated, 0.25; 0.75 $120,000 Final sales value of total production, 2,500 $21.00; 7,500 $14.00 Deduct separable costs, 2,500 $3.00; 7,500 $2.00 Net realizable value at splitoff point Weighting, $45,000; $90,000 $135,000 Joint costs allocated, 1/3; 2/3 $120,000 Methanol Turpentine Total 2,500 0.25 $ 30,000 7,500 0.75 $ 90,000 10,000 Methanol Turpentine $ 52,500 $105,000 $157,500 7,500 $ 45,000 15,000 $ 90,000 22,500 $135,000 1/3 $ 40,000 2/3 $ 80,000 $120,000 $120,000 Total a Physical-measure (gallons) method: Revenues Cost of goods sold: Joint costs Separable costs Total cost of goods sold Gross margin Methanol $52,500 Turpentine $105,000 Total $157,500 30,000 7,500 37,500 $15,000 90,000 15,000 105,000 120,000 22,500 142,500 $ 15,000 Methanol $52,500 Turpentine $105,000 Total $157,500 40,000 7,500 47,500 $ 5,000 80,000 15,000 95,000 $ 10,000 120,000 22,500 142,500 $ 15,000 $ b Estimated net realizable value method: Revenues Cost of goods sold: Joint costs Separable costs Total cost of goods sold Gross margin 16-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Alcohol Bev Final sales value of total production, 2,500 $60.00; 7,500 $14.00 Deduct separable costs, (2,500 $12.00) + (0.20 $150,000); 7,500 $2.00 Net realizable value at splitoff point Weighting, $90,000; $90,000 $180,000 Joint costs allocated, 0.5; 0.5 $120,000 Turpentine $150,000 $105,000 60,000 $ 90,000 0.50 $ 60,000 15,000 $ 90,000 0.50 $ 60,000 An incremental approach demonstrates that the company should use the new process: Incremental revenue, ($60.00 – $21.00) 2,500 Incremental costs: Added processing, $9.00 2,500 Taxes, (0.20 $60.00) 2,500 Incremental operating income from further processing Proof: Total sales of both products Joint costs Separable costs Cost of goods sold New gross margin Old gross margin Difference in gross margin 16-7 $ 97,500 $22,500 30,000 (52,500) $ 45,000 $255,000 120,000 75,000 195,000 60,000 15,000 $ 45,000 Total $255,000 75,000 $180,000 $120,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 16-19 Joint Costs Separable Costs 500 gallons Processing $3 per gallon Methanol: 500 gallons at $21 per gallon 500 gallons Processing $2 per gallon Turpentine: 500 gallons at $14 per gallon Processing $120 000 for 10 000 gallons Splitoff Point 16-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-20 (40 min.) Alternative methods of joint-cost allocation, ending inventories Total production for the year was: X Y Z Ending Inventories 180 60 25 Sold 120 340 475 Total Production 300 400 500 A diagram of the situation is in Solution Exhibit 16-20 a Net realizable value (NRV) method: X Final sales value of total production, 300 $1,500; 400 $1,000; 500 $700 Deduct separable costs Net realizable value at splitoff point Weighting, $450; $400; $150 $1,000 Joint costs allocated, 0.45, 0.40, 0.15 $400,000 Y Z Total $450,000 –– $450,000 $400,000 –– $400,000 $350,000 200,000 $150,000 $1,200,000 200,000 $1,000,000 0.45 0.40 0.15 $180,000 $160,000 $ 60,000 X 180 300 60% Y 60 400 15% $ 400,000 Ending Inventory Percentages: Ending inventory Total production Ending inventory percentage Z 25 500 5% Income Statement X Revenues, 120 $1,500; 340 $1,000; 475 $700 Cost of goods sold: Joint costs allocated Separable costs Production costs Deduct ending inventory, 60%; 15%; 5% of production costs Cost of goods sold Gross margin Gross-margin percentage Y Z Total $180,000 $340,000 $332,500 $852,500 180,000 –– 180,000 160,000 –– 160,000 60,000 200,000 260,000 400,000 200,000 600,000 108,000 72,000 $108,000 24,000 136,000 $204,000 13,000 247,000 $ 85,500 145,000 455,000 $397,500 60% 60% 25.71% 16-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com b Constant gross-margin percentage NRV method: Step 1: Final sales value of prodn., (300 $1,500) + (400 $1,000) + (500 Deduct joint and separable costs, $400,000 + $200,000 Gross margin Gross-margin percentage, $600,000 ÷ $1,200,000 $700) $1,200,000 600,000 $ 600,000 50% Step 2: X Final sales value of total production, 300 $1,500; 400 $1,000; 500 $700 Deduct gross margin, using overall gross-margin percentage of sales, 50% Total production costs Step 3: Deduct separable costs Joint costs allocated Y Z $450,000 $400,000 $350,000 $1,200,000 225,000 225,000 200,000 200,000 175,000 175,000 600,000 600,000 $225,000 $200,000 Total 200,000 200,000 $(25,000) $ 400,000 The negative joint-cost allocation to Product Z illustrates one ―unusual‖ feature of the constant gross-margin percentage NRV method: some products may receive negative cost allocations so that all individual products have the same gross-margin percentage Income Statement Revenues, 120 $1,500; 340 $1,000; 475 $700 Cost of goods sold: Joint costs allocated Separable costs Production costs Deduct ending inventory, 60%; 15%; 5% of production costs Cost of goods sold Gross margin Gross-margin percentage X Y Z Total $180,000 $340,000 $332,500 $852,500 225,000 225,000 200,000 200,000 (25,000) 200,000 175,000 400,000 200,000 600,000 135,000 90,000 $ 90,000 50% 30,000 170,000 $170,000 50% 8,750 166,250 $166,250 50% 173,750 426,250 $426,250 50% 16-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-29 (30 min.) Joint-cost allocation, process further or sell A diagram of the situation is in Solution Exhibit 16-29 a Sales value at splitoff method Studs (Building) Decorative Pieces Posts Totals Monthly Unit Output 75,000 5,000 20,000 Selling Price Per Unit $ 60 20 Sales Value of Total Prodn at Splitoff $ 600,000 300,000 400,000 $1,300,000 Weighting 46.1539% 23.0769 30.7692 100.0000% Joint Costs Allocated $ 461,539 230,769 307,692 $1,000,000 Physical Measure of Total Prodn 75,000 5,000 20,000 100,000 Weighting 75.00% 5.00 20.00 100.00% Joint Costs Allocated $ 750,000 50,000 200,000 $1,000,000 Weighting 44.4445% 25.9259 29.6296 100.0000% Joint Costs Allocated $ 444,445 259,259 296,296 $1,000,000 b Physical measure method at splitoff Studs (Building) Decorative Pieces Posts Totals c Net realizable value method Studs (Building) Decorative Pieces Posts Totals a b Monthly Units of Total Prodn 75,000 4,500a 20,000 Fully Processed Selling Price per Unit $ 100 20 Net Realizable Value at Splitoff $ 600,000 350,000b 400,000 $1,350,000 5,000 monthly units of output – 10% normal spoilage = 4,500 good units 4,500 good units $100 = $450,000 – Further processing costs of $100,000 = $350,000 Presented below is an analysis for Sonimad Sawmill, Inc., comparing the processing of decorative pieces further versus selling the rough-cut product immediately at split-off: Monthly unit output Less: Normal further processing shrinkage Units available for sale Final sales value (4,500 units $100 per unit) Less: Sales value at splitoff Incremental revenue Less: Further processing costs Additional contribution from further processing 16-30 Units 5,000 500 4,500 Dollars $450,000 300,000 150,000 100,000 $ 50,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Assuming Sonimad Sawmill, Inc., announces that in six months it will sell the rough-cut product at split-off due to increasing competitive pressure, behavior that may be demonstrated by the skilled labor in the planing and sizing process include the following: lower quality, reduced motivation and morale, and job insecurity, leading to nonproductive employee time looking for jobs elsewhere Management actions that could improve this behavior include the following: Improve communication by giving the workers a more comprehensive explanation as to the reason for the change so they can better understand the situation and bring out a plan for future operation of the rest of the plant The company can offer incentive bonuses to maintain quality and production and align rewards with goals The company could provide job relocation and internal job transfers SOLUTION EXHIBIT 16-29 Separable Costs Joint Costs $1,000,000 Studs $8 per unit Raw Decorative Pieces $60 per unit Processing Posts $20 per unit Splitoff Point 16-31 Processing $100 000 Decorative Pieces $100 per unit To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-30 (25 min.) Joint-cost allocation, relevant costs The ―four-day progressive product trimming‖ ignores the fundamental point that the $300 cost to buy the pig is a joint cost A pig is purchased as a whole The butcher’s challenge is to maximize the total revenues minus incremental costs (assumed zero) from the sale of all products At each stage, the decision made ignores the general rule that product emphasis decisions should consider relevant revenues and relevant costs Allocated joint costs are not relevant For example, the Day decision to drop bacon ignores the fact that the $300 joint cost has been paid to acquire the whole pig The $414 of revenues are relevant inflows This same position also holds for the Day to Day decisions The revenue amounts are the figures to use in the sales value at splitoff method: Product Pork chops Ham Bacon Sales Value of Total Prodn $120 150 144 $414 Weighting 0.2899 0.3623 0.3478 1.0000 Joint Costs Allocated $ 86.97 108.69 104.34 $300.00 No The decision to sell or not sell individual products should consider relevant revenues and relevant costs In the butcher’s context, the relevant costs would be the additional time and other incidentals to take each pig part and make it a salable product The relevant revenues would be the difference between the selling price at the consumer level for the pig parts and what the butcher may receive for the whole pig 16-32 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-31 (30 min.) Joint and byproducts, NRV method A diagram of the situation is in Solution Exhibit 16-31 Allocate joint costs between Alpha and Gamma Alpha: Sales value of Alpha, 46,200 pounds $5 Sales value of Beta 19,800 pounds $1.20 Deduct marketing costs of Beta Net realizable value Beta Final sales value of total production Deduct separable costs Processing (Department Two) Processing (Department Four) Net realizable value at splitoff point $231,000 $23,760 8,100 15,660 246,660 38,000 23,660 Gamma: Final sales value of prodn., 40,000 pounds $12 Deduct separable costs to complete and sell (Dept 3) Net realizable value at splitoff point Alpha Gamma Net Realizable Value at Splitoff $185,000 315,000 $500,000 Weighting 37% 63 100% 61,660 $185,000 $480,000 165,000 $315,000 Allocation of $120,000 Joint Costs $ 44,400 75,600 $120,000 Income Statement through Gross Margin for Alpha: Revenues (38,400 pounds $5) Costs of goods sold Allocated joint costs Department Two Department Four Total production costs Deduct net realizable value of Betaa Net production cost Deduct ending inventoryb Cost of goods sold Gross margin $192,000 $102,000 38,000 23,660 163,660 15,900 147,760 29,552 118,208 $ 73,792 aNet realizable value of Beta equals the revenue from Beta ($24,000 = 20,000 $1.20) minus its related marketing costs ($8,100) bEnding inventory equals the net manufacturing cost of $147,760 20% = $29,552 16-33 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 16-31 Joint Costs $120,000 Separable Costs Dept Processing $23,660 66 000 pounds Dept Processing $38,000 Separable Marketing $8,100 Dept Processing of 110,000 lbs 44,000 pounds Splitoff Point a Alpha: 46,200 pounds at $5 a pound Computation of pounds of Gamma: Let X = Good output 44,000 – 0.1X = X X = 40,000 16-34 Dept Processing $165,000 Beta: 19,800 pounds at $1.20 a pound Gamma: a 40,000 pounds at $12 a pound To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-32 1.a (30 min.) NRV method, byproducts For the month of November 2006, Purity Corporation's output was: apple slices 89,100 lbs applesauce 81,000 lbs apple juice 67,500 lbs animal feed 27,000 lbs These amounts were calculated as follows: Product Slices Sauce Juice Feed a Input Proportion 270,000 lbs 0.33 270,000 0.30 270,000 0.27 270,000 0.10 1.00 Net pounds: 1.08 net pounds Net pounds b = = = Total Pounds 89,100 81,000 72,900 27,000 270,000 Pounds Lost – – 5,400 – 5,400 Net Pounds 89,100 81,000 67,500a 27,000 264,600 72,900 – (0.08 net pounds) 72,900 72,900 1.08 = 67,500 The net realizable value for each of the three main products is calculated below: Product Slices Sauce Juice Net Pounds 89,100 81,000 67,500 Price per Pound $1.60 1.10 0.80 Sales Value of Total Production $ 142,560 89,100 54,000 $285,660 16-35 Separable Net Realizable Costs Value at Splitoff $22,560 $ 120,000 17,100 72,000 6,000 48,000 $45,660 $240,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com c and d The net realizable value of the byproduct is deducted from the production costs prior to allocation to the joint products, as presented below: Allocation of Preparation Department Costs to Joint Products and Byproducts Net realizable value (NRV) of byproduct Costs to be allocated Product Slices Sauce Juice a Sales Value of Total Production $ 142,560 89,100 54,000 $285,660 = = = = Byproduct revenue – Separable costs $0.20 (27,000 lbs) – $1,400 $5,400 – $1,400 $4,000 = Joint costs – NRV of byproduct = $120,000 – $4,000 = $116,000 Separable Costs $22,560 17,100 6,000 $45,660 Joint Costs Allocateda $58,000 34,800 23,200 $116,000 Gross Margin $62,000 37,200 24,800 $124,000 Allocated using NRV of the three joint products from requirement 1b: Slices ($120 000 $240 000) $116 000 = $58 000 Sauce ($72 000 $240 000) $116 000 = 34,800 Juice ($48 000 $240 000) $116 000 = 23,200 The gross-margin dollar information by main product is determined by the arbitrary allocation of joint production costs As a result, these cost figures and the resulting gross-margin information are of little significance for planning and control purposes The allocation is made only for purposes of inventory costing and income determination 16-36 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-33 (40 min.) Process further or sell, byproduct The analysis shown below indicates that it would be more profitable for Newcastle Mining Company to continue to sell bulk raw coal without further processing This analysis ignores any value related to coal fines It also assumes that the costs of loading and shipping the bulk raw coal on river barges will be the same whether Newcastle sells the bulk raw coal directly or processes it further Incremental sales revenues: Sales revenue after further processing (9,400,000a tons $36) Sales revenue from bulk raw coal (10,000,000 tons $27) Incremental sales revenue Incremental costs: Direct labor Supervisory personnel Heavy equipment costs ($25,000 12 months) Sizing and cleaning (10,000,000 tons $3.50) Outbound rail freight (9,400,000 tons 60 tons) Incremental costs Incremental gain (loss) a 10,000,000 tons $240 per car $338,400,000 270,000,000 68,400,000 800,000 200,000 300,000 35,000,000 37,600,000 73,900,000 $(5,500,000) (1– 0.06) The cost of producing the raw coal is irrelevant to the decision to process further or not As we see from requirement 1, the cost of producing raw coal does not enter any of the calculations related to either the incremental revenues or the incremental costs of further processing The answer would the same as in requirement 1: not process further 16-37 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The analysis shown below indicates that the potential revenue from the coal fines byproduct would result in additional revenue, ranging between $4,950,000 and $9,900,000, depending on the market price of the fines Coal fines = = = 75% of 6% of raw bulk tonnage 0.75 (10,000,000 06) 450,000 tons Potential incremental income from preparing and selling the coal fines: Incremental income per ton (Market price – Incremental costs) Incremental income ($11; $22 450,000) Minimum $11 ($15 – $4) $4,950,000 Maximum $22 ($24 – $2) $9,900,000 The incremental loss from sizing and cleaning the raw coal is $5,500,000, as calculated in requirement Analysis indicates that relative to selling bulk raw coal, the effect of further processing and selling coal fines is only slightly negative at the minimum incremental gain ($4,950,000 – $5,500,000 = – $550,000) and very beneficial at the maximum incremental gain ($9,900,000 – $5,500,000 = $4,400,000) NMC will benefit from further processing and selling the coal fines as long as its incremental income per ton of coal fines is at least $12.22 ($5,500,000 450,000 tons) Hence, further processing is preferred Note that other than the financial implications, some factors that should be considered in evaluating a sell-or-process-further decision include: Stability of the current customer market for raw coal and how it compares to the market for sized and cleaned coal Storage space needed for the coal fines until they are sold and the handling costs of coal fines Reliability of cost (e.g., rail freight rates) and revenue estimates, and the risk of depending on these estimates Timing of the revenue stream from coal fines and impact on the need for liquidity Possible environmental problems, i.e., dumping of waste and smoke from unprocessed coal 16-38 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-34 (20 min.) Byproduct, disposal costs, ethics The comparative analysis prepared by the management accountant is flawed In the process further alternative, he or she has erroneously included the $250,000 allocated joint costs Allocated joint costs are irrelevant because they are not incremental costs of the alternative being considered If the joint costs allocated are taken out, it becomes clear that financially it would be to the advantage of the company to further process the TXT45 as it would actually increase the operating income by $150,000 [$600,000 – ($400,000 + $50,000)] Furthermore, the dumping alternative does not consider potential future costs that may arise from environmental liabilities It appears that there would be no legal ramifications if the company decided to dump TXT45 into the ocean The country either may have no laws against such dumping, or even if they exist, they are not enforced in accordance with the government policy A more important consideration, however, is the ethical implications To knowingly dump a hazardous material into the ocean would certainly result in water pollution This is an unacceptable action from a societal standpoint It is important to remember that an act that does not violate any laws is not necessarily an ethical act Ethical considerations go beyond legal considerations In different parts of the world, legal systems are imperfect and not comprehensive It is the responsibility of top management to take a broader, societal view when making decisions In other words, a business should take its social responsibility seriously, by making it an integral part of the decision-making process In the long run it is in the best interest of all stakeholders as well as the business itself 16-39 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-35 (50 min.) Joint-cost allocation, process further or sell Joint costs $1,800,000 Separable Costs Altox Further Processing $1,400,000 Processing Lorex Hycol Splitoff point a Final sales value of total production Deduct separable costs Net realizable value at splitoff point Weightingb Joint costs allocatedc Altox $595,000 — $595,000 0.253 $455,400 a $3.50 × 170,000; $5.00 × 500,000; $2 × 330,000 $595,000; $1,100,000; $660,000 ữ $2,355,000 c $1,800,000 ì 0.253; $1,800,000 ì 0.467; $1,800,000 × 0.280 b 16-40 Lorex $2,500,000 1,400,000 $1,100,000 0.467 $ 840,600 Hycol $660,000 — $660,000 0.280 $504,000 Total $3,755,000 1,400,000 $2,355,000 1.000 $1,800,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Further processing Altox Incremental revenue ($5.50 × 150,000) – ($3.50 × 170,000) Incremental processing cost Incremental operating income/(loss) Further processing Lorex Incremental revenue ($5.00 × 500,000) – ($2.25 × 500,000) Incremental processing cost Incremental operating income/(loss) Further processing Hycol Incremental revenue ($1.80 × (330,000 × 1.25)) – ($2 × 330,000) Incremental processing cost Incremental operating income Current Policy NRV (from requirement 1): Sell Altox at splitoff Process Lorex further Sell Hycol at splitoff $ 230,000 250,000 $ (20,000) $1,375,000 1,400,000 $ (25,000) $ $ 82,500 75,000 7,500 $ 595,000 1,100,000 660,000 2,355,000 1,800,000 $ 555,000 Joint costs Operating income Preferred Options Sell Altox at splitoff Sell Lorex at splitoff ($1,100,000 + $25,000 incremental optg inc.) Process Hycol further ($660,000 + $7,500 incremental optg inc.) Joint costs Operating income $ 595,000 1,125,000 667,500 2,387,500 1,800,000 $ 587,500 Goodson is $32,500 better off by changing two of its current policies—it should sell Lorex at splitoff ($25,000 improvement) and process Hycol further ($7,500 improvement) 16-41 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 16 Case The Memory Manufacturing Company case can only be discussed using the textbook case writeup The case questions challenge students to apply the concepts learned in the chapter to a specific business situation MEMORY MAUFACTURING COMPANY: Joint Cost Allocation (a) The Net Realizable Value Method allocates joint costs on the basis of the relative net realizable value (final sales value minus the separable costs of production and marketing) Joint costs would be allocated as follows: Final sales value of total production Deduct separable costs Net realizable value at splitoff point Weighting ($23,500; $7,500 ÷ $31,000) Joint costs allocated (0.7581; 0.2419 × $24,000) Total production costs ($18,194 + $1,500; $5,806 + $1,000) Production costs per unit ($19,694; $6,806 ÷ 500 units) Deluxe Module $25,000 1,500 $23,500 0.7581 $18,194 Standard Module $ 8,500 1,000 $ 7,500 0.2419 $ 5,806 $19,694 $ 6,806 $ 39.39 $ 13.61 Total $33,500 2,500 $31,000 $24,000 $26,500 (b) The constant gross-margin percentage NRV method allocates joint costs in such a way that the overall gross-margin percentage is identical for all individual products as follows: Step Final sales value of total production: (Deluxe, $25,000; Standard, $8,500) Deduct joint and separable costs (Joint, $24,000 + Separable Deluxe, $1,500 + Separable Standard, $1,000) Gross margin Gross-margin percentage ($7,000 ÷ $33,500) 16-42 $33,500 26,500 $ 7,000 20.8955% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Step Final sales value of total production Deduct gross margin using overall gross margin percentage (20.8955%) Total production costs Step Deduct separable costs Joint costs allocated Production costs per unit ($19,776; $6,724 ÷ 500 units) Deluxe Module $25,000 Standard Module $8,500 Total $33,500 5,224 19,776 1,776 6,724 7,000 26,500 1,500 $18,276 1,000 $5,724 2,500 $24,000 $ 39.55 $13.45 (c) The physical measure method allocates joint costs on the basis of the relative proportions of total production at the splitoff point, using a common physical measure such as the number of bits produced for each type of module Allocation on the basis of the number of bits produced for each type of module follows: Physical measure of total production (bits) Weighting (500,000; 250,000 ÷ 750,000) Joint costs allocated (0.6667; 0.3333 × $24,000) Total production costs ($16,000 + $1,500; $8,000 + $1,000) Production costs per unit ($17,500; $9,000 ÷ 500 units) Deluxe Module 500,000 0.6667 $16,000 Standard Module 250,000 0.3333 $ 8,000 $17,500 $ 9,000 $ 35.00 $18.00 Total 750,000 $24,000 $26,500 Each of the methods for allocating joint costs has weaknesses Because the costs are joint in nature, managers cannot use the cause-and-effect criterion in making this choice Managers cannot be sure what causes the joint costs attributable to individual products The net realizable value (NRV) method (or sales value at splitoff method) is widely used when selling price data are available The NRV method provides a meaningful common denominator to compute the weighting factors It allocates costs on the ability to pay principle It is probably preferred to the constant gross-margin percentage method which also uses sales values to allocate costs to products That’s because the constant gross-margin percentage method makes the further tenuous assumption that all products have the same ratio of cost to sales value The physical measure method bears little relationship to the revenue-producing power of the individual products Several physical measures could be used such as the number of chips and the number of good bits In each case, the physical measure only relates to one aspect of the chip that contributes to its value The value of the module as determined by the marketplace is a function of multiple physical features Another key question is whether the physical measure chosen portrays the amount of joint resources used by each product It is possible that the resources required by each type of module depend on the number of good bits produced during chip manufacturing But this cause-and-effect relationship is hard to establish MMC should use the NRV method But the choice of method should have no effect on their current control and measurement systems 16-43 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The correct approach in deciding whether to process further and make DRAM modules from the standard modules is to compare the incremental revenue with the incremental costs: Incremental revenue from making DRAMs ($26 × 400) – ($17 × 500) Incremental costs of DRAMs, further processing Incremental operating income from converting standard modules into DRAMs $1,900 1,600 $ 300 A total income computation of each alternative follows: Alternative 1: Sell Deluxe and Standard Total revenues ($25,000 + $8,500) $33,500 Total costs 26,500 Operating income $ 7,000 Alternative 2: Sell Deluxe and DRAM Difference ($25,000 + $10,400) $35,400 ($26,500 + $1,600) 28,100 $ 7,300 $1,900 1,600 $ 300 It is profitable to extend processing and to incur additional costs on the standard module to convert it into a DRAM module as long as the incremental revenue exceeds incremental costs The amount of joint costs incurred up to splitoff ($24,000)––and how these joint costs are allocated to each of the products––are irrelevant to the decision of whether to process further and make DRAMS That’s because the joint costs of $24,000 remain the same whether or not further processing is done on the standard modules Joint-cost allocations using the physical measure method (on the basis of the number of bits) may mislead MMC, if MMC uses unit-cost data to guide the choice between selling standard modules versus selling DRAM modules In requirement 2, allocating joint costs on the basis of the number of good bits yielded a cost of $16,000 for the Deluxe modules and $8,000 for the Standard modules A product-line income statement for the alternatives of selling Deluxe modules and DRAM modules would appear as follows: Deluxe Module Revenues Cost of goods sold Joint costs allocated Separable costs Total cost of goods sold Gross margin DRAM Module $25,000 $10,400 16,000 1,500 17,500 $ 7,500 8,000 2,600* 10,600 $ (200) *Separable costs of $1,000 to manufacture the Standard module and further separable costs of $1,600 to manufacture the DRAM module This product-line income statement would erroneously imply that MMC would suffer a loss by selling DRAMs, and as a result, it would suggest that MMC should not process further to make and sell DRAMs This occurs because of the way the joint costs are allocated to the two products As mentioned earlier, the joint-cost allocation is irrelevant to the decision On the basis of the incremental revenues and incremental costs, MMC should process the Standard modules into DRAM modules 16-44 ... Revenues Main product Byproduct Total revenues $160 ,000a — 160 ,000 $160 ,000 2,800d 162 ,800 Cost of goods sold Total manufacturing costs Deduct byproduct revenue Net manufacturing costs Deduct main... on which assumptions are made and which accounting methods and techniques are used 16- 20 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16- 26... realizable value method: Revenues Cost of goods sold: Joint costs Separable costs Total cost of goods sold Gross margin 16- 6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com