9.1 Joint Product and By-Product Costing Flashcards
________ costs are not traceable to the end products so must be allocated.
Joint costs
Direct materials, direct labor, and manufacturing overhead are examples of
Joint costs
Costs incurred beyond the split off point, once they can be identified with a particular joint products and allocated to a specific unit of output
separable costs
products of relatively small total value that are produced simultaneously from a common manufacturing process with products of greater value and quantity
By-products
Accounting for By-Products
Net realizable value =
Selling price - Additional processing costs
separable sales value - costs
Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon for Big and $4 per gallon for Mini. Big can be processed further into 600 gallons of Giant if $1,000 of additional processing costs are incurred. Giant can be sold for $17 per gallon.
If Tucariz uses the net realizable value method to allocate costs to the joint products, the total cost of producing Giant is
A. $5,564
B. $5,520
C. $4,600
D. $5,600
D. $5,600
First, the final sales prices are estimated:
* Giant: 600 gallons at $17 = $10,200
* Mini: 200 gallons at $4 = $800
From these amounts, separable costs are subtracted:
* Giant: $10,200 - 1,000 = $9,200
* Mini: No separable costs
This yields a total NRV for the entire production run of $10,000 (9,200 Giant + $800 Mini). The next step is to allocate the total joint costs of $5,000 ($2,000 input cost + $3,000 processing cost) based on the proportion of the total NRV represented by each product:
- Giant: $5,000 x ($9,200 / 10,000) = $4,600
- Mini: $4,000 x ($800 / 10,000) = $400
The total cost of producing Giant using the estimated NRV method is therefore $5,600 ($4,600 allocated joint cost + $1,000 separable cost).
Petro-Chem, Inc., is a small company that acquires high-grade crude oil from low-volume production wells owned by individuals and small partnerships. The crude oil is processed in a single refinery into Two Oil, Six Oil, and impure distillates. Petro-Chem does not have the technology or capacity to process these products further and sells most of its output each month to major refineries. There were no beginning inventories of finished goods or work-in-process on November 1. The production costs and output of Petro-Chem for November are shown in the next column.
Crude oil acquired and placed
in production: $5,000,000
Direct labor and related costs: 2,000,000
Manufacturing overhead: 3,000,000
Production and sales
* Two Oil, 300,000 barrels produced; 80,000 barrels sold at $20 each
* Six Oil, 240,000 barrels produced; 120,000 barrels sold at $30 each
* Distillates, 120,000 barrels produced and sold at $15 each
The portion of Petro-Chem’s joint production costs assigned to Two Oil based upon the relative sales value of output would be
A. $4,000,000
B. $4,800.000
C. $2,500,000
D. $2,286,000
A. $4,000,000
The total production cost incurred are $10,000,000, consisting of crude oil of $5M, direct labor of $2M and manufacturing overhead of $3M. The total value of the output is as follows:
Two oil (300,000 barrels x $20): $6,000,000
+) Six oil (240,000 barrels x $30): $7,200,000
+) Distillates (120,000 barrels x $15): $1,800,000
= Total sales value 15,000,000
Because Two oil composes 40% of the total sales value, it will be assigned 40% of the $10,000,000 of joint costs, or $4,000,000.
A company manufactures two products that incur joint costs of $60,000. It costs an additional $10,000 to produce 5,000 units of Product 1 and an additional $30,000 to produce 10,000 units of Product 2. Product 1 is sold for $8 per unit, and Product 2 is sold for $10 per unit. If the company uses the net realizable value method to allocate joint costs, the cost per unit of Product 1 is
A. $3.60
B. $5.60
C. $6.00
D. $5.43
B. $5.60
Product 1
Number of units: 5,000
Price per unit: $8
Final sale price: 5,000 x 8 = 40,000
Separable costs: -10,000
NRV = 40,000 - 10,000 = 30,000
Product 2
Number of units: 10,000
Price per unit: $10
Final sale price: 10,000 x 10 = 100,000
Separable costs: -30,000
NRV = 100,000 - 30,000 = 70,000
Total net realizable value (NRV) for the entire production run is $100,000 ($30,000 product 1 + $70,000 product 2). The next step is to allocate the total joint costs of $60,000 based on the proportion of the total NRV represented by each product: Product 1 = 60,000 x (30,000 / 100/000) = 18,000. Product 2 = 60,000 x (70,000 / 100,000) = 42,000. The cost per unit of Product 1 is therefore $2 ($10,000 / 5,000 units) separable costs + 3.60 (18,000 / 5,000 units) joint costs = $5.60
Pickett Manufacturing uses a joint production process that produces three products at the split-off point. Joint production costs during April were $720,000. Product information for April was as follows:
Product R
Units produced: 2,500
Units sold: 2,000
Sales prices
- at split off: $100
- after further processing: $150
costs to process after split-off: $150,000
Product S
Units produced: 5,000
Units sold: 6,000
Sales prices
- at split off: $80
- after further processing: $115
costs to process after split-off: $150,000
Product T
Units produced: 7,500
Units sold: 7,000
Sales prices
- at split off: $20
- after further processing: $30
costs to process after split-off: $100,000
Assume that Product T is treated as a by-product and that the company accounts for the by-product at net realizable value as a reduction of joint cost. Assume also that Products S and T must be processed further before they can be sold. What is Pickett’s total cost of Product R in April if joint cost allocation is based on net realizable values?
A. $370,370
B. $595,000
C. $374,630
D. $220,370
D. $220,370
The NRV method is an appropriate method of allocation when products cannot be sold at split-off.
Further processing of R, which is salable at split-off, is not economical because the cost of $150,000 exceeds benefit [2,500 units x ($150-$100) = 125,000]. Thus, R’s NRV is $250,000 (2,500 units x $100 price at split-off). However, S and T must be processed further. S’s NRV is $425,000 [(5,000 units x $115) - $150,000], and T’s NRV is $125,000 [(7,500 units x $30) - $100,000]. Given that the NRV of T is a reduction of joint cost, the total joint cost to be allocated is therefore $595,000 ($720,000 - $125,000 NRV of T).
Accordingly, based on the NRV method, the joint cost allocated to R is $220,370 {[$250,000 R’s NRV / ($250,000 R’s NRV + $425,000 S’s NRV)] x $595,000 allocable joint costs}. Because further processing of R is uneconomical, the total cost of R is $220,370.
