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Raw
materials are put into production in Department X, and at the end of processing in this
department, three products appear. Product A is sold at the split-off point with no further
processing. Products B and C require further processing before they are sold. Product B is
processed in Department Y, and product C is processed in Department Z. The company
uses the estimated net realizable value method of allocating joint production costs.
Following is a summary of costs and other data for the quarter ended June 30.
No inventories were on hand at the beginning of the quarter. No raw material was on
hand at June 30. All units on hand at the end of the quarter were fully complete as to
processing.
.:.
Required
a. Determine the following amounts for each product:
(1) Estimated net realizable value used for allocating joint costs,
(2) Joint costs allocated to each of the three products,
(3) Cost of goods sold, and
(4) Finished goods inventory costs, June 30.
b. Assume that the entire output of product A could be processed further at an additional
cost of $6.00 per pound and then sold for $12.90 per pound. What would have been the
effect on operating profits if all of product A output for the quarter had been further
processed and then sold rather than being sold at the split-off point?
c. Write a memo to management indicating whether the company should process product
A further and why.
SOLUTION:
a.
Departments
Production Costs
X
Y
Raw materials.............................................................
$168,000
Direct labor.................................................................
72,000
$121,350
Manufacturing overhead.............................................
30,000
31,650
Total............................................................................
$270,000
$153,000
$ 287,625
109,875
$397,500
Product B
B: $121,350 + $31,650...........................................
153,000
C: $287,625 + $109,875.........................................
Product C
$5.25
x 110,000
$577,500b
397,500
Total
$180,000
40%
$450,000
100%
= $577,500
=
=
=
$94,500
67,500
108,000
Total Costs
Product A:
Joint costs allocated................................................
$94,500
Sold: (20,000 70,000) x $94,500.......................
Inventory.................................................................
Product B:
Joint costs allocated................................................
$67,500
Separate processing costs........................................
153,000
Total, all sold..............................................................
$220,500
Product C:
Joint costs allocated................................................
$108,000
Separate processing costs........................................
397,500
Total costs of Z.......................................................
$505,500
Sold: (70,000 110,000) x
$505,500..................................................
Inventory.................................................................
__________
Totals..........................................................................
$820,500
Proof of total:
Raw material cost Dept. X......................................
$168,000
Direct labor costX...............................................
72,000
Direct labor costY...............................................
121,350
Direct labor costZ...............................................
287,625
Manufacturing overheadX......................................
30,000
Manufacturing overheadY......................................
31,650
Manufacturing overheadZ.......................................
109,875
Total costs accounted for............................................
$820,500
Cost of
Ending
Goods Sold
Inventory
$27,000
$67,500
220,500
321,682
___________
$569,182
183,818
$251,318
$745,500
420,000
$325,500
c. The memo should recommend that Fletcher process product A further. By doing so,
profit will increase $325,500.