To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Joint Product and By-Product Costing LEARNING OBJECTIVES Chapter addresses the following questions: Q1 What is a joint process, and what is the difference between a by-product and a main product? Q2 How are joint costs allocated? Q3 What factors are considered in choosing a joint cost allocation method? Q4 What information is relevant for deciding whether to process a joint product beyond the split-off point? Q5 What methods are used to account for the sale of by-products? Q6 How does a sales mix affect joint cost allocation? Q7 What are the uses and limitations of joint cost information? These learning questions (Q1 through Q7) are cross-referenced in the textbook to individual exercises and problems COMPLEXITY SYMBOLS The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems Questions Having a Single Correct Answer: No Symbol This question requires students to recall or apply knowledge as shown in the textbook This question requires students to extend knowledge beyond the applications e shown in the textbook Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10):  Step skills (Identifying)  Step skills (Exploring)  Step skills (Prioritizing)  Step skills (Envisioning) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-2 Cost Management QUESTIONS 9.1 Some goods are produced jointly; many products result from a common process These are called joint products Main products have high sales value relative to other products when split-off occurs By-products have low sales value relative to the main products’ values 9.2 Because all of the other products are sold at $200 or more, the product that sells for only $10 would probably be considered a by-product Main products have relatively high sales values compared to by-products 9.3 There are two methods of recognizing revenue from by-products The revenue can be recognized at the split-off point, or recognized at the time of sale The treatment depends on whether the NRV is positive or negative, and also on whether it is recognized at the time of production or sale Negative NRV is always added to joint costs When positive NRV is recognized at time of production, it is subtracted from joint costs When positive NRV is recognized at time of sale, it may be treated as revenue, treated as non-revenue income, or subtracted from COGS 9.4 Products from any of the following industries would be appropriate: oil and gas, chemical, lumber products, tour companies, meat production, wheat production, milling companies 9.5 Joint costs are product costs that cannot be separately traced to individual products, so they are indirect with respect to individual products Separable costs are the direct costs of producing separate products (but these costs may or may not be direct with respect to individual units) 9.6 The split-off point in a joint process occurs at the point when the individual joint products become separately identifiable All costs incurred up to the split-off point are joint costs and (assuming no further split-off points) the costs that follow are separable costs identifiable with a specific joint product 9.7 Here are a few examples; students may think of others that are also appropriate A professor may some consulting work that simultaneously generates ideas for a journal article (main product), a case for a book (main product), and a problem for an exam (byproduct) A CPA firm may work on client development that simultaneously produces prospective engagements for the auditing and tax services (all probably main products) A research scientist may have an individual project that results in twenty-two patentable items (some may be main products, some may be by-products, and some may be scrapped) 9.8 Once the joint product emerges, the joint cost should be viewed as a "sunk" cost; it is a past cost that should not influence subsequent product decisions Further processing decisions should be made based on the additional revenues obtained in relation to the additional separable costs needed to obtain those revenues To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-3 9.9 If all joint products were sold in the period produced, costs might not need to be allocated But for financial reporting, all production costs must be assigned to cost of goods sold and ending inventories of the joint products to match revenues and expenses 9.10 The contribution of each product is the selling price less separable costs Revenues and separable costs are relatively easy to identify and measure Therefore accountants know each product’s contribution However, if profit is defined to mean accounting income, all costs including fixed and joint costs are allocated To allocate costs, an allocation base must be chosen Different allocation bases result in different profit figures Hence, the profitability of one joint product cannot be uniquely determined, but will vary with different allocation bases 9.11 Because the products have relatively equal value, they should all be treated as main products 9.12 To perform market based joint cost allocations (net realizable value and constant gross margin NRV), an estimate is made of the sales value of each product Common and separable costs are known with reasonable certainty, but price may be estimated If the market for goods is not volatile, the price can be determined from past experience If prices change frequently, information sources such as competitor’s prices or a list of commodity prices could be used for estimates 9.13 Following are qualitative factors that might influence managers to process a joint product beyond the split-off point The organization may offer a product mix, and dropping one of the products could affect sales of other products, so a group of products are always processed further An example of this would be meat related products Even though round steak does not need to be processed further, some people want very lean hamburger and customers may shop elsewhere if lean hamburger is not sold Manager preferences might affect the decision to process further For example, managers of a dairy might have a preference for a particular type of cheese that other dairies not produce, and so they continue producing it even though sales are low and the milk could be used for other products Resource scarcity encourages managers to consider new processes for raw materials such as sawdust and wood chips Environmental issues also influence joint product decisions Sometimes companies choose to convert waste into a by-product that can be sold to avoid contributing to waste disposal Another factor is the effect on employees and local communities Managers may choose to continue additional processing even when the financial results are relatively weak to avoid closing production facilities and laying off employees 9.14 Some by-products are valuable and could be stolen, and so internal controls and records are kept For by-products that are unlikely to be stolen, no controls or records need to be kept An example of a by-product that could be stolen is raw malachite, a by-product of copper production that can be further processed into cabochons for jewelry An example of a by-product that would not need controls is whey from dairy product processing To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-4 Cost Management EXERCISES 9.15 By-Product Further Processing Decision According to the following calculations, the contribution margin is higher if the byproduct is sold at the split-off point rather than processed further Therefore, the byproduct should not be processed further Sold at split-off: 100 x $8 = $800 Processed further: 100 x ($19 - $12) = $700 9.16 Identifying Joint Products A The following are joint products Sand produced with three levels of fineness The sand is produced by processing raw dirt and includes a number of joint costs such as labor and equipment Some of the products are processed further Milk products are joint products because they all come from one liquid that is processed further, depending on the product Airlines could be considered as incurring joint costs because a large proportion of cost is common to all of the products The following are not joint products Automobiles and trucks because either one can be manufactured without producing the other Motorcycles and mopeds because either one can be manufactured without producing the other Clothing can be manufactured in any style without producing other styles and is therefore not a joint product B Two other product groups would include tour services or cruise lines, products manufactured from crude oil such as gasoline, diesel, and heating oil, and many types of food products such as beverage manufacture, cereals, milling operations, and so on To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-5 9.17 Cowboy Cattle Company Joint Separable Joint Joint Separable Separable Joint All cattle require veterinary work, and the cost per specific cow is incurred before the split-off point The cost occurs after the split-off point and can be traced directly to hamburger The cost is incurred before the split-off point The cost is incurred before the split-off point The cost is incurred after the split-off point, specifically for leather The cost is incurred after the split-off point, specifically for steaks and roasts Cost of production incurred before the split-off point 9.18 Deluxe Tours A Number of passengers Revenue Incremental costs Net realizable value Allocated lease cost Margin First-Class 100 $200,000 30,000 170,000 100,000 a $ 70,000 Tourist-Class 200 $200,000 30,000 170,000 100,000 b $ 70,000 a $200,000 lease cost * [$170,000/($170,000+$170,000] = $100,000 b $200,000 lease cost * [$170,000/($170,000+$170,000] = $100,000 B The answer to this question depends upon what is meant by ―the contribution margin generated by first-class passengers.‖ An accountant could determine it is $70,000, the margin after deducting a share of the lease cost However, a more accurate reflection would be $170,000, the revenue generated by first-class passengers, less the incremental costs of serving those passengers An alternative answer is to consider the amount of margin generated by having a separate class of passengers rather than filling the entire cruise ship with tourist-class passengers Assume that 25 tourist-class berths replaced 20 first-class berths (Students could make any reasonable assumption concerning how many tourist-class berths would replace firstclass berths.) So, the trade-off is 25 tourist-class versus 20 first-class berths To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-6 Cost Management Incremental contribution margin if first-class cabins are sold to tourist-class passengers: Contribution per passenger for first-class: $200 - $30 = $170 Contribution per passenger for tourist-class: $100 - $15 = $85 Contribution for 20 first class passengers (20 x $170) Contribution for 25 tourist class passengers (25 x $85) Additional contribution for first class $3,400 2,125 $1,275 C In the example above, no allocated costs were considered because they are essentially sunk costs for the decision to use the space for first-class or tourist class Those costs are incurred either way, so only incremental contribution is analyzed 9.19 The Palm Oil Company A Computation of $100,000 joint-cost allocation using four allocation methods: (1) Sales value at split-off point Sales Value at Product Split-Off Point Soap grade $ 50,000 Cooking grade 30,000 Light moisturizer 50,000 Heavy moisturizer 70,000 $200,000 Proportions 50/200 = 0.25 30/200 = 0.15 50/200 = 0.25 70/200 = 0.35 Allocation of $100,000 $ 25,000 15,000 25,000 35,000 $100,000 (2) Physical volume Soap grade Cooking grade Light moisturizer Heavy moisturizer Physical volume Proportion 100,000 gallons $ 20,000 300,000 gallons 60,000 50,000 gallons 10,000 50,000 gallons 10,000 500,000 gallons Allocation of $100,000 100/500 = 0.20 300/500 = 0.60 50/500 = 0.10 50/500 = 0.10 $100,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-7 (3) Estimated Net Realizable Value Product Fine Soap Superior Cooking Oil Light moisturizer Premium Moisturizer Estimated Net Final Sales Separable Realizable Value Costs Value Proportion $300,000 $200,000 $100,000 100,000 80,000 20,000 50,000 50,000 120,000 90,000 30,000 $200,000 Allocation of $100,000 100/200=0.50 20/200=0.10 50/200=0.25 30/200=0.15 $100,000 (4) Constant Gross Margin Method First calculate the gross profit margin ratio for all products: Product Final Sales Value Fine Soap $300,000 Superior Cooking Oil 100,000 Light Moisturizer 50,000 Premium Moisturizer 120,000 Total $570,000 Less joint costs Gross margin Separable Costs Contribution $200,000 $100,000 80,000 20,000 50,000 90,000 30,000 $370,000 200,000 100,000 $100,000 Gross profit margin ratio = $100,000/$570,000 = 0.175439 Second, apply the gross profit margin ratio to each product to determine cost of goods sold Then subtract separable costs from cost of goods sold to determine the joint cost allocation for each product Product Fine Soap Superior Cooking Oil Light Moisturizer Premium Moisturizer Revenue $300,000 100,000 50,000 120,000 $570,000 Gross Separable Allocation Margin* COGS Costs of $100,000 $ 52,632 247,368 $200,000 $ 47,368 17,544 82,456 80,000 2,456 8,772 1,228 41,228 21,052 948,948 90,000 8,948 $100,000 $100,000 * Gross margin = Revenue x Gross profit margin ratio = Revenue x 0.175439 B Contribution from Processing Soap Grade into Fine Soap: Incremental revenue = $300,000 - 50,000 Incremental costs Incremental operating income $250,000 200,000 $ 50,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-8 Cost Management Contribution from Processing Cooking grade oil into Superior Cooking Oil: Incremental revenue = $100,000 - 30,000 $ 70,000 Incremental costs 80,000 Incremental operating income $(10,000) Contribution from Processing Heavy Moisturizer into Premium Moisturizer: Incremental revenue = $120,000 - 70,000 $ 50,000 Incremental costs 90,000 Incremental operating income $(40,000) Operating income can be increased by $50,000 if both Cooking Grade Oil and Heavy Moisturizers are sold at the split-off point Soap Grade should continue to be processed further 9.20 Flowering Friends A Sales value at split-off point method Premium Regular Allocation of $15,000 $ 4,350 10,650 $15,000 Sales Value at Split-off Point Percent ($5*2,000) $10,000 29% ($3*8,000) 24,000 71 $34,000 100% Physical output method Percent 20% 80 100% Allocation of $15,000 $ 3,000 12,000 $15,000 Net Realizable Value Percent ($25*2,000) $ 50,000 38% ($10*8,000) 80,000 62 $130,000 100% Allocation of $15,000 $ 5,700 9,300 $15,000 Number of Pots 2,000 8,000 10,000 Premium Regular Net realizable value method Premium Regular B Based on a comparison of the contributions for each alternative, the company should process further: Sell as premium Process further ($35 – $20/4 - $3) Extra contribution from processing further $25 27 $ To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-9 9.21 Click and Clack Recyclers A There are no separable costs for these products, so each product’s net realizable value is the revenue per gallon However, one gallon of oil yields 0.7 motor oil and 0.3 fuel oil, so for each gallon of oil produced, the total NRV is $2.55 (0.7*$3 + 0.3*$1.50) The percentage of cost per gallon allocated to residual fuel oil is 0.1324 [(0.3*$1.50)/$2.55 * $0.75] B If allocated cost were based on physical output, the cost per gallon for residual fuel oil is $0.225 (0.3*$0.75) C Special fuel would need to match the contribution for residual fuel oil The contribution for residual fuel oil is $1.50 per gallon The minimum acceptable price for Special Fuel Oil is $1.50 plus the $0.40 per gallon for additional processes or $1.90 per gallon At this price the managers would be indifferent to selling residual oil or processing it further 9.22 Mile High Lumber Mill A Income Statement With By-Product Value Recognized at the Time of Sale Revenue: Lumber (270,000 BF x $3) Scraps (900 logs x $10) Total Revenue Cost of Goods Sold (270,000BF x $2a) Gross Margin a $810,000 9,000 819,000 540,000 $279,000 Cost is calculated as follows: $600,000/300,000 bd ft = $2 per BF Although the problem does not call for this calculation, the ending inventories at March 31 would be: Lumber (30,000 BF x $2) $60,000 An additional inventory of 100 logs’ worth of scrap is on hand at an estimated value of $10 each, or $1,000 total This value is not recognized in the accounting records To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-10 Cost Management B Income Statement With By-Product Value Recognized at the Time of Production Value of inventory for the main product: Joint product costs incurred Less NRV of by-product (1,000 logs x $10) Net joint product cost $600,000 10,000 $590,000 Product cost per board foot ($590,000/300,000 bd ft) $1.966667 Income statement: Revenue (270,000 BF x $3.00) Cost of Goods Sold (270,000 BF x $1.966667) Gross Margin $810,000 531,000 $279,000 Although the problem does not call for this calculation, the ending inventories at March 31 would be: Lumber (30,000 BF x $1.966667) By-product (100 logs x $10) Total Inventory $59,000 1,000 $60,000 Notice that there is no difference between gross margins or total inventory under the two methods This will be true only under rigid conditions: (1) the proportion of main products sold is equal to the proportion of by-products sold during the period, and (2) there is either no beginning inventory or by-products in beginning inventory are sold for the exact amount estimated during the prior period However, as long as by-product values are immaterial, the methods have little effect on the income statement and balance sheet 9.23 The Paint Palette Company A Physical output method: For Premium: (30% * $10,000) For regular: (70% * $10,000) Total allocated $ 3,000 7,000 $10,000 B NRV method For premium [30%*1,000 gallons * ($20 - $4)] For regular [70%*1,000 gallons * ($10 – $1) Total NRV $ 4,800 6,300 $11,100 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-13 B Gross margin if by-product value is recognized at the time of sale Revenues: Smoothies (18,000 * $2.00) Revenues: Compost Total revenue Joint Costs (18,000/20,000)* $12,000 Gross Margin $36,000 2,000 38,000 (10,800) $27,200 C Inventories if by-product value is recognized at the time of production: Smoothies (2,000/20,000 * $10,000) Compost ($2,000/8,000 * 2,000) $1,000 500 Ending Inventories if by-product value is recognized at the time of sale: Smoothies (2,000/20,000)*$12,000 $1,200 Compost To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-14 Cost Management PROBLEMS 9.27 Roses to Go A Roses to Go must pay someone to water and tend to the roses The company must pay for labor to cut the roses It pays for fertilizer and water and depreciation on any buildings used in the production and cutting process If the roses are cooled after cutting, the cost of cooling must be paid All of these are joint costs B Use the physical volume method because it is the most simple and will not distort costs if there is little difference in the packaging and pricing of the products C If there are different prices, the sales value at split-off point method would work best here because the separable costs would be very similar This method is most simple and would be the best choice because it does not distort the costs 9.28 Doe Corporation The following chart traces the physical flow of the products and summarizes cost and sales information Slicing Crushing Juicing Animal Feed Total Weight After Total Weight Evaporation Loss 94,500 lbs (35%*270,000) 75,600 lbs (28%*270,000) 72,900 lbs 67,500 lbs (27%*270,000) (72,900/1.08) 27,000 lbs (10%*270,000) 270,000 lbs Costs $ 4,700 10,580 3,250 700 $19,230 Total Revenue $ 56,700 ($0.60*94,500) 41,580 ($0.55*75,600) 20,250 ($0.30*67,500) 2,700 ($0.10*2,700) $121,230 A The weights are obtained by multiplying the initial 270,000 pounds by the proportion delivered to each department and, in the case of juicing, dividing by 1.08 to account for evaporation The resulting weights are 94,500 lbs for slicing, 75,600 for crushing, 67,500 for juicing and 27,000 for feed B Product Slices Crushed Juice Total Selling price $ 56,700 41,580 20,250 $118,530 Separable cost $ 4,700 10,580 3,250 $18,530 NRV $ 52,000 31,000 17,000 $100,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-15 C None of the costs are assigned to the by-product The allocation of the $60,000 of cutting department costs to the main products is reduced by $2,000 ($2,700 - $700) for the NRV of animal feed (the by-product), so $58,000 is allocated Product Slices Crushed Juice Total NRV $ 52,000 31,000 17,000 $100,000 Sales Joint cost Separable cost Gross margin Slices $56,700 30,160 4,700 $21,840 Proportion 52/100 31/100 17/100 Allocation $30,160 17,980 9,860 $58,000 D Crushed $41,580 17,980 10,580 $13,020 Juice $20,250 9,860 3,250 $ 7,140 Total $118,530 58,000 18,530 $ 42,000 E The gross margin information is of little value to management As long as the overall processing is profitable, the net realizable value approach will show each of the products as valuable For product mix decisions (such as whether to produce more juice and less crushed pineapple), information is needed about incremental revenues and costs rather than gross margin data F The $800 would become an additional joint cost necessary to obtain the three main products (assuming that $700 of chopping costs would not be increased) The $800 would be added to each product in the same proportions as in part C Thus the additional joint costs assigned to each product would be: Slices Crushed Juice Total Additional Cost $416 248 136 $800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-16 Cost Management 9.29 Jumping Juice Ltd A According to the requirements of the problem, the costs of the vat process need to be allocated, which would amount to $30,000 [=$5,000 + $250*100] Allocation base: Volume Relative volume Allocated cost of vat process: Standard (2/3*$30,000) Premium (1/3*$30,000) Standard Grade 20,000 bottles 2/3 Premium Grade 10,000 bottles 1/3 $20,000 $10,000 Cost of handling and bottling: Standard ($1,000+$100*200) Premium ($2,000+$200*100) 21,000 22,000 Total cost $41,000 $32,000 20,000 bottles 10,000 bottles Divided by volume Cost per bottle $2.05 $3.20 B Allocation base: Volume Relative volume Allocated variable cost: Standard (2/3*$250*100) Premium (1/3*$250*100) Standard Grade 20,000 bottles 2/3 Premium Grade 10,000 bottles 1/3 $16,667 $8,333 Variable cost of handling and bottling: Standard ($100*200) Premium ($200*100) 20,000 20,000 Total variable cost $36,667 $28,333 Divided by volume 20,000 bottles 10,000 bottles Variable cost per bottle $1.83 $2.83 Note: While the calculation above would be labeled as a variable cost by most accountants, it really is not a variable cost in the usual sense of the word Of the total ―variable cost per bottle,‖ $1,667 (1/3*5,000) could not be avoided even if no more premium grade cider were produced To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-17 C As Is Production: Standard Grade Premium Grade 20,000 bottles 10,000 bottles Revenue As Is ($3*20,000+$5*10,000) Discontinue Standard ($5*10,000) Discontinue Standard 10,000 bottles $110,000 $50,000 Factory As Is ($5,000+$250*100) Discontinue Premium (30,000) (30,000) Handling and bottling: Standard grade: As Is ($1,000+$100*200) Discontinue Standard (21,000) (0) Premium grade: As Is ($2,000+$200*100) Discontinue Premium (22,000) (22,000) Profit $ 37,000 $ (2,000) Profit would decline by about $39,000 if the premium brand were discontinued D If a special order of premium cider were produced without producing any standard cider, the decision to produce premium would requiring incurring the fixed and variable vat costs, as well as the fixed and variable costs for premium bottling The special order would need to pay for all of these costs 9.30 Champion Chip Company First translate amounts to U.S dollars and total Deluxe Sales value at split-off point If process further: Sales value Separable costs Superior Good Total 400£*2 = $800 3,200 HK$*0.125 = $400 US$200 US$1,400 550£*2=$1,100 200£*2 = $400 4,800 HK$*0.125=$600 800 HK$*0.125=$100 US$800 US$500 US$2,500 US$1,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-18 Cost Management A Sales Joint costs: Deluxe ($800/$1,400)*$1,000 Superior ($400/$1,400)*$1,000 Good ($200/$1,400)*$1,000 Pretax income Deluxe $800 Superior $400 Good $200 Total $1,400 1,000 571 286 $229 $114 143 $ 57 $ 400 B Below is the proforma income statement if only the Deluxe chip is processed further The Deluxe manager will choose to sell at split-off point (income of $229 versus $53) Sales Separable costs Net realizable value Joint costs: Deluxe ($1,100/$1,700)*$1,000 Superior ($400/$1,700)*$1,000 Good ($200/$1,700)*$1,000 Pretax income Deluxe $1,100 400 700 Superior $400 400 Good $200 200 Total $1,700 400 1,300 1,000 647 235 $ 53 $165 118 $ 82 $ 300 Below is the proforma income statement if only the Superior chip is processed further The Superior manager will choose to process further (income of $125 versus $114) Sales Separable costs Net realizable value Joint costs: Deluxe ($800/$1,600)*$1,000 Superior ($600/$1,600)*$1,000 Good ($200/$1,600)*$1,000 Pretax income Deluxe $800 800 Superior $600 100 500 Good $200 200 Total $1,600 1,000 1,500 1,000 500 375 $300 $125 125 $ 75 $ 500 Below is the proforma income statement if only the Good chip is processed further The Good manager will choose to sell at the split-off point (income of $57 versus a loss of $100) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-19 Sales Separable costs Net realizable value Joint costs: Deluxe ($800/$2,000)*$1,000 Superior ($400/$2,000)*$1,000 Good ($800/$2,000)*$1,000 Pretax income Deluxe $800 800 Superior $400 400 Good $800 500 300 Total $2,000 500 1,500 1,000 400 200 $400 $200 400 $(100) $ 500 C The best decisions for the firm are for each division to bring in the highest contribution For Deluxe, selling at the split-off point is best ($800 at split-off point versus $700 if processed further) For Superior, process further ($500 for processing further versus $400 for selling at split-off) For Good, process further ($300 for further processing versus $200 at split-off point) D Below is the proforma income statement if all managers make best decision for their division: Sales Separable costs Net realizable value Joint costs: Deluxe ($800/$1,600)*$1,000 Superior ($600/$1,600)*$1,000 Good ($200/$1,600)*$1,000 Pretax income Deluxe $800 800 Superior $600 100 500 Good $200 200 Total $1,600 100 1,500 1,000 500 375 $300 $125 125 $ 75 $ 500 Below is the proforma income statement if all managers make the optimal decision for overall profitability Sales Separable costs Net realizable value Joint costs: Deluxe ($800/$2,200)*$1,000 Superior ($600/$2,200)*$1,000 Good ($800/$2,200)*$1,000 Pretax income Deluxe $800 800 Superior $600 100 500 Good $800 500 300 Total $2,200 600 1,600 1,000 364 273 $436 $227 363 $ (63) $ 600 Notice that the choice of an accounting procedure encourages the managers to act in their own interest instead of the interest of the firm as a whole To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-20 Cost Management E Note that if the net realizable value method is used to allocate the joint cost, the managers will reach the following stable solution The allocation of joint costs would be Deluxe Superior Good Eventual Selling Separable Price Costs $800 $ 600 100 800 500 Net Realizable Value $ 800 500 300 $1,600 Allocation 8/16(1000) $ 500.00 5/16(1000) 312.50 3/16(1000) 187.50 $1,000.00 Given this allocation, the income statement would be: Sales Joint Further processing Pretax Income Deluxe $800 500 $300 Superior $600 312 100 $188 Good $800 188 500 $112 Total $2,200 1,000 600 $ 600 F Managers often act in the best interest of their divisions If allocations are used to determine the income of divisions, the allocations may distort the profitability of each division, relative to the entire company G Bonuses should be based on a combination of factors, both financial and non-financial, and on the profitability of both divisions and the entire corporation This type of incentive structure encourages managers to maximize efforts that lead to best overall profitability for the entire corporation 9.31 S-T, Inc Physical Flow WIP beginning Started Completed and transferred out Ending WIP batches (30% and 80% converted) 21 batches 20 batches batch (50% converted) Equivalent units and costs under weighted average Remember that under weighted average, beginning inventory is counted as part of units completed Also remember that direct material and conversion costs from work completed on beginning inventory and costs incurred this period are summed Following are the equivalent units and costs under weighted average To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-21 Equivalent Units (Batches) Work performed this period: Materials Conv Costs Units completed 20.0 20.0 Ending inventory (50% complete) 1.0 0.5 Total 21.0 20.5 Costs to account for: Beginning WIP Current costs Total Materials Conv Costs $ 8,550 $ 3,007 71,250 40,740 $79,800 $43,747 Cost per equivalent unit $3,800 $2,134 Total $ 11,557 111,990 $123,547 $5,934 Process Cost Report – Weighted Average Method Units completed ($5,934 x 20) Ending inventory Materials ($3,800 x 1.0) Conversion ($2,134 x 0.5) Total ending WIP Total costs accounted for $118,680 $3,800 1,067 4,867 $123,547 By-product Z is valued at its estimated selling price of $1 per gallon This amount is subtracted from the cost of batches completed to arrive at the net amount of joint costs to be allocated: Cost of goods completed (calculated above) Less by-product sales (20 batches x 100 gal x $1) Net joint cost $118,680 (2,000) $116,680 Note that the firm produced 400 gal x 20 batches = 8,000 gallons of X and 500 gal x 20 batches = 10,000 gallons of Y Given these volumes, the joint costs are allocated to each product as follows under the net realizable value method Gallons Price per gallon Separable costs per gallon Sales revenue Separable costs NRV Product X Product Y 8,000 10,000 $8 $11 $2 $3 $64,000 16,000 $48,000 $110,000 30,000 $ 80,000 Total $174,000 46,000 $128,000 The final step is to calculate the total costs assigned to each product and then calculate the total cost per gallon: To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-22 Cost Management Product X Allocation of joint costs: X: $116,680 x ($48/$128) Y: $116,680 x ($80/$128) Separable costs Total Cost $43,755 Divided by gallons Total Cost per gallon Product Y 16,000 $59,755 $ 72,925 30,000 $102,925 8,000 10,000 $7.47 $10.29 9.32 Hudziak Industries A Allocation of joint costs: Ingredient J-52A Quitoban Total Sales Separable Value Cost $1,500 $150 1,400 250 Net Realizable Value Proportion Allocation $1,350$1,350/$2,500 $1,080 1,150$1,150/$2,500 920 $2,500 $2,000 Income per lot: Sales Joint cost Separable cost Income Per Lot Chemicals Cosmetics $1,500 $1,400 1,080 920 150 250 $ 270 $ 230 Total $2,900 2,000 400 $ 500 B The allocation of the cost of the new material would be: Net Sales Separable Realizable Ingredient Value Cost Value Proportion Allocation J-52A $1,500 $400 $1,100$1,100/$3,850 $ 857 Quitoban 3,000 250 2,750$2,750/$3,850 2,143 Total $3,850 $3,000 The income per lot with the new material is expected to be: Chemicals Cosmetics Sales $1,500 $3,000 Joint cost 857 2,143 Separable cost 400 250 Income Per Lot $ 243 $ 607 Total $4,500 3,000 650 $ 850 Based on the calculations shown above, the gross margin of the Chemicals division is expected to decline by $27 per lot ($270-$243) if the new material is purchased This To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-23 decline is a combination of an increase in separable costs from the additional processing required by the new material, offset by a reduction in allocated joint costs under the NRV method In addition, there may be uncertainties about the specific processing changes needed and costs involved, increasing the manager’s uncertainty about the operating results Assuming that this manager is rewarded based on reported division profit, she or he would not be in favor of purchasing the new material Based on the calculations shown above, the gross margin of the Cosmetics division is expected to increase by $377 per lot ($607-$230) if the new material is purchased This increase is a combination of an increase in expected revenue caused by a selling price increase, offset by an increase in allocated joint costs under the NRV method The manager may face significant uncertainty about whether the price increase can be achieved and how it will affect the volume of sales As long as these risks are not too high and the Cosmetics manager is rewarded based on reported division and/or overall company profit, he/she would be in favor of purchasing the new material Many potential pros and cons could be discussed, including: Pros: Higher expected profit of $300 per lot ($850-$500) Decreased risk from lawsuits related to ingredients in the old raw material Improved product quality, which could improve brand image (as an innovative company, an ethical company, etc.) Cons: Potential conflict of interest between the Chemicals and Cosmetics managers Increased raw material and production costs Possibility that revenue and cost projections may not be met C Many potential uncertainties could be discussed, including: Whether the revenue projections are reasonable: o Will the price increase reduce the quantity demanded? o Will the price increase attract new competition? o Will the new chemical formula lead to additional product opportunities? o Will the ingredient change have any effect on the quality and product demand of J-52A? Whether the cost projections are reasonable: o Will unforeseen production problems occur with the new ingredient? o Will the price and supply of the new ingredient be as stable as that of the old ingredient? o Will changes occur in the quantities of spoilage with the new ingredient? Health effects of the old and new raw material: o Will the new ingredient have fewer or more health risks than the old ingredient? To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-24 Cost Management o Will the old ingredient be found to be safe after all? How might the change in production processes and profits affect the morale and performance of managers and other employees? D Students may propose a variety of incentive solutions, including one or more of the following: Reward managers based on company-wide income Exclude joint cost allocations from individual manager performance evaluation Allocate joint costs using the constant gross margin NRV method Allocate the Chemicals division loss in NRV ($27 per lot) to the Cosmetics division Allocate the increase in the Chemical division’s separable costs ($400-$150 = $250 per lot) to the Cosmetics division Reduce the Chemical division’s target income under the compensation plan to accommodate the change in costs Open communication among division managers and top management to ensure that all parties are adequately informed about the reasons for decisions and the effects on the company as a whole Establish rules for managers to follow (e.g., require managers to purchase the new raw material) E The advantages and disadvantages that students discuss will depend on the option(s) they identify Some of these advantages and disadvantages include the following: Methods that focus on company-wide income encourage managers to consider the overall benefit to the company, but might invite a ―free rider‖ problem Methods that focus on division performance encourage managers to make decisions to maximize division efficiency and income, but might conflict with company-wide interests (see Chapter 15 for more information about incentive problems between managers) Methods that include an allocation of joint costs necessarily involve arbitrary allocations of costs between divisions; in general, it is desirable to eliminate uncontrollable costs from evaluations of individual division performance Methods that focus on communication can improve morale and provide better information for decision making, but may be misunderstood and not necessarily motivate desired actions Methods that focus on rules or instructions work for situations such as the raw material decision, where the best decision for the company can be identified and managers can be told what to However, it is difficult to identify all possible rules that might be needed for other decisions F and G There is no one answer to these parts Sample solutions and a discussion of typical student responses will be included in assessment guidance on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-25 BUILD YOUR PROFESSIONAL COMPETENCIES 9.33 Focus on Professional Competency: Marketing/Client Focus A Accountants provide a service to internal customers It is their job to develop positive relationships with these customers in the same manner that the entire company develops positive relationships with its external customers Relationship building is an open-ended problem because it involves human beings who are not identical and who not always respond in expected ways In addition, accountants have not always been highly oriented toward their internal customers Therefore, accountants may need to overcome negative preconceived ideas about their role and relationships with others Internal customers are most likely to enter into productive working relationships with accounting personnel if they believe they will benefit from the relationship Potential benefits include: Providing relevant and timely information for making decisions Recommending ways to improve efficiency or reduce costs Providing relevant information about the costs and benefits of alternatives Providing relevant information about financial and non-financial performance to help managers better monitor operations Internal customers typically expect to obtain historical financial data from accounting personnel They also expect accountants to focus on minute details and not on the ―big picture.‖ Good working relationships are usually evident through increased requests for services and participation in important decisions However, the accounting department could proactively survey its customers to determine the nature of the relationship Different students will have different answers to this question The purpose is to have students consider the needs of internal customers and develop a viable strategy for helping them avoid misuse of accounting information Their implementation strategy needs to take into account internal customers’ potential responses B The two settings are similar in many ways Individual accountants often find themselves working with internal or external client personnel who may not understand the accountant’s role or perceive it as value-added Other clients, however, have learned to rely on internal or external accountants for advice and information that is useful for decision making One difference in the two settings is the degree of accountant independence Most internal accountants are not expected to be independent (although they are often valued for their ability to analyze problems To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-26 Cost Management objectively), whereas external accountants—particularly auditors—should be independent Another difference is that accountants might be more aware of the need to develop a positive working relationship with external customers than with internal customers Whether auditors are internal or external, their job is to objectively evaluate and report on evidence Their reports may not reflect well on the people with whom they work on an engagement Thus, their need for objectively can prevent them from developing a close working relationship with clients, particularly if those clients dislike being monitored On the other hand, the auditor’s ability to objectively evaluate information and problems can be seen as an important contribution to clients who are interested in working toward improvement 9.34 Integrating Across the Curriculum: Economics and Governmental Regulation A U.S beef by-products might end up in landfills unless some alternative use can be identified B The cost of main products would probably increase because of the loss in revenue from by-product sales and also because of increased waste disposal costs The ban would probably increase the cost of main products in other livestock industries Currently, beef by-products are used as feed in these industries Other sources of feed must currently cost more than beef by-products (otherwise, they would currently be used), and an increase in demand would cause the cost to be even higher C The ban could have both positive and negative effects In the short term, the increase in cost would encourage meat producers to increase prices Consumers might shift their consumption habits to purchase other, less costly sources of meat and protein Some producers might fail financially The ban could also have positive effects In the short term, consumers might shift their consumption away from U.S beef because of higher cost, negative publicity, and concerns about the long time frame for mad cow disease But in the long term, the ban might encourage domestic and international consumers to have greater confidence in the quality of U.S beef, leading to higher prices D Below is a brief description of U.S regulator responsibilities to key stakeholder groups U.S cattle industry: The regulators are responsible for developing standards and ensuring industry compliance When developing standards, the regulators must consider their potential effect on the U.S cattle industry This means that regulators must sometimes weigh the social costs and benefits of its regulations against the impact on the industry To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 9: Joint Product and By-Product Costing 9-27 Other U.S livestock industries, such as pigs and chicken: Regulators have the same responsibility for other livestock industries that they have for the cattle industry Their decisions about beef and other mammal by-products will directly affect the well-being of other livestock industries, in addition to that of the cattle industry Therefore, the regulators have a responsibility to weigh not only the effects of their decisions on the cattle industry but also on the competitor livestock industries Other U.S food manufacturers: Regulator responsibilities extend to other food manufacturers Any shift in the type of food permitted for livestock will affect other types of food manufacturers Thus, the regulators’ responsibilities for other food manufacturers are similar to that for the other livestock industries Consumers of U.S beef: Because of uncertainties about the source of mad cow disease in this case, the degree of risk to consumers was not clear In addition, there were uncertainties about whether there were adverse effects from the use of beef by-products for feed to other livestock or from the use of other mammal byproducts in cattle feed These uncertainties made it difficult for regulators to adopt an appropriate policy on behalf of beef consumers A central part of the regulators’ dilemma was a lack of consensus about the nature of their responsibility to consumers Some people argued that the regulators were responsible for ensuring absolute consumer safety, which meant that regulators should err on the side of safety in cases of uncertainty Others argued that the regulators were responsible only for known safety problems and that it was appropriate to weigh cattle industry and other economic factors against the interests of consumers A further complication was the demand of consumers for low beef prices Questions were raised about whether consumers would be willing to pay for increased safety E The validity of this argument depends on one’s values and on the uncertainties described in the answer to Part D The source of the mad cow infection was unknown, and the extent of potential infections throughout the industry was also unknown Some experts argued that the combined probabilities of mad cow disease and human infection were very low And, there had been no cases of brain-wasting disease related to the consumption of U.S beef Thus, some people argued that no serious risk existed However, both the cattle and human forms of the disease took many years to develop, and at least some risk existed that problems would become evident in the future It was also difficult to define an acceptable level of risk Was it acceptable if only a small number of people were to develop a fatal brain-wasting disease? Or should the target number have been zero? F There is no single answer to this question The goal is for students to synthesize the issues addressed in Parts A through E into a cohesive conclusion Students must also make difficult decisions about how factors should be weighed in light of conflicting interests ... total costs assigned to each product and then calculate the total cost per gallon: To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 9-22 Cost Management. .. Standard Grade 20,000 bottles 2/3 Premium Grade 10,000 bottles 1/3 $20,000 $10,000 Cost of handling and bottling: Standard ($1,000+$100*200) Premium ($2,000+$200*100) 21,000 22,000 Total cost. .. Variable cost of handling and bottling: Standard ($100*200) Premium ($200*100) 20,000 20,000 Total variable cost $36,667 $28,333 Divided by volume 20,000 bottles 10,000 bottles Variable cost