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CHAPTER 16

COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS


16-16

(20-30 min.) Joint-cost allocation, insurance settlement.

1.

(a)

Breasts
Wings
Thighs
Bones
Feathers

Sales value at splitoff method:


Pounds
of
Product
100
20
40
80
10
250

Wholesale
Selling Price
per Pound
$0.55
0.20
0.35
0.10
0.05

Sales
Value
at Splitoff
$55.00
4.00
14.00
8.00
0.50
$81.50

Weighting:
Sales Value
at Splitoff
0.675
0.049
0.172
0.098
0.006
1.000

Joint
Costs
Allocated
$33.75
2.45
8.60
4.90
0.30
$50.00

Allocated
Costs per
Pound
0.3375
0.1225
0.2150
0.0613
0.0300

Costs of Destroyed Product


Breasts: $0.3375 per pound 40 pounds = $13.50
Wings: $0.1225 per pound 15 pounds =
1.84
$15.34
b.
Physical measure method:

Breasts
Wings
Thighs
Bones
Feathers

Pounds
of
Product
100
20
40
80
10
250

Weighting:
Physical
Measures
0.400
0.080
0.160
0.320
0.040
1.000

Costs of Destroyed Product


Breast: $0.20 per pound 40 pounds
Wings: $0.20 per pound 15 pounds

Joint
Costs
Allocated
$20.00
4.00
8.00
16.00
2.00
$50.00
=
=

Allocated
Costs per
Pound
$0.200
0.200
0.200
0.200
0.200

$ 8
3
$11

Note: Although not required, it is useful to highlight the individual product profitability figures:

Product

Sales
Value

Sales Value at
Splitoff Method
Joint Costs
Gross
Allocated
Income

16-1

Physical
Measures Method
Joint Costs
Gross
Allocated
Income

Breasts
Wings
Thighs
Bones
Feathers

$55.00
4.00
14.00
8.00
0.50

$33.75
2.45
8.60
4.90
0.30

$21.25
1.55
5.40
3.10
0.20

16-2

$20.00
4.00
8.00
16.00
2.00

$35.00
0.00
6.00
(8.00)
(1.50)

2.
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. Quality Chickens decision to process
chicken is heavily influenced by the revenues from breasts and thighs. The bones provide
relatively few benefits to Quality Chicken despite their high physical volume.
The physical measures method shows profits on breasts and thighs and losses on bones
and feathers. Given that Quality Chicken 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. Quality Chicken 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).
1.

Ending inventory:
Breasts
15
Wings
4
Thighs
6
Bones
5
Feathers
2

$0.3375 =
0.1225 =
0.2150 =
0.0613 =
0.0300 =

$5.0625
0.4900
1.2900
0.3065
0.0600
$7.2090

2.
Joint products
Breasts
Thighs

Byproducts

Net Realizable Values of


byproducts:
Wings
$ 4.00
Bones
8.00
Feathers
0.50
$12.50

Wings
Bones
Feathers

Joint costs to be allocated:


Joint costs Net Realizable Values of byproducts = $50 $12.50 = $37.50

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

$0.55
0.35

$55
14
$69

55 69
14 69

$29.89
7.61
$37.50

$0.2989
0.1903

Ending inventory:
Breasts 15 $0.2989
Thighs 6 0.1903

$4.4835
1.1418
$5.6253

3.
Treating all products as joint products does not require judgments as to whether a product
is a joint product or a byproduct. Joint costs are allocated in a consistent manner to all products
for the purpose of costing and inventory valuation. In contrast, the approach in requirement 2
lowers the joint cost by the amount of byproduct net realizable values and results in inventory
values being shown for only two of the five products, the ones (perhaps arbitrarily) designated as
being joint products.
16-3

16-18 (10 min.) Net realizable value method.


A diagram of the situation is in Solution Exhibit 16-18.
Final sales value of total production,
12,500 $50; 6,250 $25
Deduct separable costs
Net realizable value at splitoff point
Weighting, $250,000; $62,500 $312,500
Joint costs allocated, 0.8; 0.2 $325,000

Corn Syrup

Corn Starch

$625,000
375,000
$250,000
0.8
$260,000

$156,250
93,750
$ 62,500
0.2
$ 65,000

Total
$781,250
468,750
$312,500
$325,000

SOLUTION EXHIBIT 16-18 (all numbers are in thousands)


Joint Costs

Separable Costs
Processing
$375,000

Corn Syrup:
12,500 cases at
$50 per case

Processing
$93,750

Corn Starch:
6,250 cases at
$25 per case

Processing
$325000

Splitoff
Point

16-4

16-19 (40 min.) Alternative joint-cost-allocation methods, further-process decision.


A diagram of the situation is in Solution Exhibit 16-19.
1.
Physical measure of total production (gallons)
Weighting, 2,500; 7,500 10,000
Joint costs allocated, 0.25; 0.75 $120,000
2.
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
3.

Methanol
2,500
0.25
$ 30,000

Turpentine
7,500
0.75
$ 90,000

Total
10,000
$120,000

Methanol

Turpentine

Total

$ 52,500

$105,000

$157,500

7,500
$ 45,000

15,000
$ 90,000

22,500
$135,000

1/3

2/3

$ 40,000

$ 80,000

$120,000

Methanol
$52,500

Turpentine
$105,000

Total
$157,500

30,000
7,500
37,500
$15,000

90,000
15,000
105,000
$
0

120,000
22,500
142,500
$ 15,000

Methanol
$52,500

Turpentine
$105,000

40,000
7,500
47,500
$ 5,000

80,000
15,000
95,000
$ 10,000

a. Physical-measure (gallons) method:


Revenues
Cost of goods sold:
Joint costs
Separable costs
Total cost of goods sold
Gross margin
b. Estimated net realizable value method:
Revenues
Cost of goods sold:
Joint costs
Separable costs
Total cost of goods sold
Gross margin

16-5

Total
$157,500
120,000
22,500
142,500
$ 15,000

4.
Alcohol Bev.

Turpentine

$150,000

$105,000

$255,000

60,000
$ 90,000
0.50
$ 60,000

15,000
$ 90,000
0.50
$ 60,000

75,000
$180,000

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

Total

$120,000

An incremental approach demonstrates that the company should use the new process:
Incremental revenue,
($60.00 $21.00) 2,500
$ 97,500
Incremental costs:
Added processing, $9.00 2,500
$22,500
Taxes, (0.20 $60.00) 2,500
30,000
(52,500)
Incremental operating income from
further processing
$ 45,000
Proof:

Total sales of both products


Joint costs
Separable costs
Cost of goods sold
New gross margin
Old gross margin
Difference in gross margin

$255,000
120,000
75,000
195,000
60,000
15,000
$ 45,000

SOLUTION EXHIBIT 16-19


Joint Costs

Separable Costs
2500
gallons

Processing
$3 per gallon

Methanol:
2500 gallons
at $21 per gallon

7500
gallons

Processing
$2 per gallon

Turpentine:
7500 gallons
at $14 per gallon

Processing
$120000
for 10000
gallons

Splitoff
Point

16-6

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.


1.

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

Total

$400,000

$400,000

$350,000
200,000
$150,000

$1,200,000
200,000
$1,000,000

0.40

0.15

$180,000

$160,000

$ 60,000

X
180
300
60%

Y
60
400
15%

$450,000

$450,000
0.45

$ 400,000

Ending Inventory Percentages:


Ending inventory
Total production
Ending inventory percentage

Z
25
500

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

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%

16-7

b.

Constant gross-margin percentage NRV method:

Step 1:
Final sales value of prodn., (300 $1,500) + (400 $1,000) + (500 $700)
Deduct joint and separable costs, $400,000 + $200,000
Gross margin
Gross-margin percentage, $600,000 $1,200,000

$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
200,000
Joint costs allocated

Total

$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

200,000
$225,000
$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

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%

16-8

Summary
X
a.
NRV method:
Inventories on balance sheet
Cost of goods sold on income statement
b.

Total

$108,000
72,000

$ 24,000
136,000

$ 13,000
247,000

$145,000
455,000
$600,000

$135,000
90,000

$ 30,000
170,000

$173,750
426,250
$600,000

Constant gross-margin
percentage NRV method

Inventories on balance sheet


Cost of goods sold on income statement
2.

8,750
166,250

Gross-margin percentages:
X
60%
50%

NRV method
Constant gross-margin percentage NRV

Y
60%
50%

Z
25.71%
50.00%

SOLUTION EXHIBIT 16-20

Joint Costs

Separable Costs
Product X:
300 tons at
$1,500 per ton

Joint
Processing
Costs
$400,000

Product Y:
400 tons at
$1,000 per ton

Processing
$200000
Splitoff
Point

16-9

Product Z:
500 tons at
$700 per ton

16-21 (30 min.) Joint-cost allocation, process further.

Joint Costs =
$1800

ICR8
(Non-Saleable)

Processing
$175

Crude Oil
150 bbls $18 / bbl =
$2700

ING4
(Non-Saleable)

Processing
$105

NGL
50 bbls $15 / bbl =
$750

XGE3
(Non-Saleable)

Processing
$210

Gas
800 eqvt bbls
$1.30 / eqvt bbl =
$1040

Splitoff
Point
1a.

Physical Measure Method

1. Physical measure of total prodn.


2. Weighting (150; 50; 800 1,000)
3. Joint costs allocated (Weights $1,800)
1b.
1.
2.
3.
4.
5.

Crude Oil
150
0.15
$270

NGL
50
0.05
$90

Crude Oil
$2,700
175
$2,525
0.63125
$1,136.25

NGL
$750
105
$645
0.16125
$290.25

Gas
800
0.80
$1,440

Total
1,000
1.00
$1,800

NRV Method
Final sales value of total production
Deduct separable costs
NRV at splitoff
Weighting (2,525; 645; 830 4,000)
Joint costs allocated (Weights $1,800)

16-10

Gas
$1,040
210
$ 830
0.20750
$373.50

Total
$4,490
490
$4,000
$1,800

2.

The operating-income amounts for each product using each method is:

(a)

Physical Measure Method

Revenues
Cost of goods sold
Joint costs
Separable costs
Total cost of goods sold
Gross margin
(b)

Crude Oil
$2,700

NGL
$750

Gas
$1,040

Total
$4,490

270
175
445
$2,255

90
105
195
$555

1,440
210
1,650
$ (610)

1,800
490
2,290
$2,200

NRV Method

Revenues
Cost of goods sold
Joint costs
Separable costs
Total cost of goods sold
Gross margin

Crude Oil
$2,700.00

NGL
$750.00

Gas
$1,040.00

Total
$4,490.00

1,136.25
175.00
1,311.25
$1,388.75

290.25
105.00
395.25
$354.75

373.50
210.00
583.50
$ 456.50

1,800.00
490.00
2,290.00
$2,200.00

3. Neither method should be used for product emphasis decisions. It is inappropriate to use
joint-cost-allocated data to make decisions regarding dropping individual products, or pushing
individual products, as they are joint by definition. Product-emphasis decisions should be made
based on relevant revenues and relevant costs. Each method can lead to product emphasis
decisions that do not lead to maximization of operating income.
4. Since crude oil is the only product subject to taxation, it is clearly in Sinclairs best interest to
use the NRV method since it leads to a lower profit for crude oil and, consequently, a smaller tax
burden. A letter to the taxation authorities could stress the conceptual superiority of the NRV
method. Chapter 16 argues that, using a benefits-received cost allocation criterion, market-based
joint cost allocation methods are preferable to physical-measure methods. A meaningful common
denominator (revenues) is available when the sales value at splitoff point method or NRV
method is used. The physical-measures method requires nonhomogeneous products (liquids and
gases) to be converted to a common denominator.

16-11

16.22 (30 min.) Joint-cost allocation, sales value, physical measure, NRV methods.
1a.
PANEL A: Allocation of Joint Costs using Sales Value at
Splitoff Method
Sales value of total production at splitoff point
(10,000 tons $10 per ton; 20,000 $15 per ton)
Weighting ($100,000; $300,000 $400,000)
Joint costs allocated (0.25; 0.75 $240,000)
PANEL B: Product-Line Income Statement for June 2009
Revenues
(12,000 tons $18 per ton; 24,000 $25 per ton)
Deduct joint costs allocated (from Panel A)
Deduct separable costs
Gross margin
Gross margin percentage

Special B/
Beef
Ramen

Special S/
Shrimp
Ramen

$100,000
0.25
$60,000

$300,000
0.75
$180,000

Special B

Special S

$216,000
60,000
48,000
$108,000
50%

$600,000
180,000
168,000
$252,000
42%

$816,000
240,000
216,000
$360,000
44%

Special B/
Beef
Ramen
10,000
33%
$80,000

Special S/
Shrimp
Ramen
20,000
67%
$160,000

Total
30,000
$240,000

Special B

Special S

Total

Total
$400,000
$240,000
Total

1b.
PANEL A: Allocation of Joint Costs using Physical-Measure
Method
Physical measure of total production (tons)
Weighting (10,000 tons; 20,000 tons 30,000 tons)
Joint costs allocated (0.33; 0.67 $240,000)
PANEL B: Product-Line Income Statement for June 2009
Revenues
(12,000 tons $18 per ton; 24,000 $25 per ton)
Deduct joint costs allocated (from Panel A)
Deduct separable costs
Gross margin
Gross margin percentage

$216,000
80,000
48,000
$ 88,000
41%

$600,000
160,000
168,000
$272,000
45%

$816,000
240,000
216,000
$360,000
44%

Special B

Special S

Total

1c.
PANEL A: Allocation of Joint Costs using Net Realizable
Value Method
Final sales value of total production during accounting period
(12,000 tons $18 per ton; 24,000 tons $25 per ton)
Deduct separable costs
Net realizable value at splitoff point
Weighting ($168,000; $432,000 $600,000)
Joint costs allocated (0.28; 0.72 $240,000)
PANEL B: Product-Line Income Statement for June 2009
Revenues (12,000 tons $18 per ton; 24,000 tons $25 per ton)
Deduct joint costs allocated (from Panel A)
Deduct separable costs
Gross margin
Gross margin percentage

16-12

$216,000
48,000
$168,000
28%
$67,200

$600,000
168,000
$432,000
72%
$172,800

$816,000
216,000
$600,000

Special B
$216,000
67,200
48,000
$100,800
46.7%

Special S
$600,000
172,800
168,000
$259,200
43.2%

Total
$816,000
240,000
216,000
$360,000
44.1%

$240,000

2.
Sherrie Dong probably performed the analysis shown below to arrive at the net loss of
$2,228 from marketing the stock:
PANEL A: Allocation of Joint Costs using
Sales Value at Splitoff
Sales value of total production at splitoff point
(10,000 tons $10 per ton; 20,000 $15 per
ton; 4,000 $5 per ton)
Weighting
($100,000; $300,000; $20,000 $420,000)
Joint costs allocated
(0.238095; 0.714286; 0.047619 $240,000)
PANEL B: Product-Line Income Statement
for June 2009
Revenues
(12,000 tons $18 per ton; 24,000 $25 per ton;
4,000 $5 per ton)
Separable processing costs
Joint costs allocated (from Panel A)
Gross margin
Deduct marketing costs
Operating income

Special B/
Beef
Ramen

Special S/
Shrimp
Ramen

Stock

$100,000

$300,000

$20,000

$420,000

23.8095%

71.4286%

4.7619%

100%

$57,143

$171,429

$11,428

$240,000

Special S

Stock

$600,000
168,000
171,429
$260,571

$20,000
0
11,428
8,572
10,800
$ (2,228)

Special B
$216,000
48,000
57,143
$110,857

Total

Total
$836,000
216,000
240,000
380,000
10,800
$369,200

In this (misleading) analysis, the $240,000 of joint costs are re-allocated between Special B,
Special S, and the stock. Irrespective of the method of allocation, this analysis is wrong. Joint
costs are always irrelevant in a process-further decision. Only incremental costs and revenues
past the splitoff point are relevant. In this case, the correct analysis is much simpler: the
incremental revenues from selling the stock are $20,000, and the incremental costs are the
marketing costs of $10,800. So, Instant Foods should sell the stockthis will increase its
operating income by $9,200 ($20,000 $10,800).

16-13

16-23 (20 min.) Joint cost allocation: sell immediately or process further.
1.
a. Sales value at splitoff method:
Cookies/
Soymeal
Sales value of total production at splitoff,
500lbs $1; 100 gallons $4
Weighting, $500; $400 $900
Joint costs allocated,
0.556; 0.444 $500

Soyola/
Soy Oil

Total

$500
0.556

$400
0.444

$900

$278

$222

$500

Cookies

Soyola

Total

$1,200
300
$ 900
0.75

$500
200
$300
0.25

$1,700
500
$1,200

$ 375

$125

$ 500

b. Net realizable value method:


Final sales value of total production,
600lbs $2; 400qts $1.25
Deduct separable costs
Net realizable value
Weighting, $900; $300 $1,200
Joint costs allocated,
0.75; 0.25 $500
2.
Revenue if sold at splitoff
Process further NRV
Profit (Loss) from processing further

Cookies/Soy Meal
$500a
900 c
$400

Soyola/Soy Oil
$ 400 b
300 d
$(100)

500 lbs $1 = $500


100 gal $4 = $400
c
600 lbs $2 $300 = $900
d
400 qts $1.25 $200 = $300
a

ISP should process the soy meal into cookies because it increases profit by $400 (900-500).
However, they should sell the soy oil as is, without processing it into the form of Soyola, because
profit will be $100 (400-300) higher if they do. Since the total joint cost is the same under both
allocation methods, it is not a relevant cost to the decision to sell at splitoff or process further.

16-14

16-24 (30 min.) Accounting for a main product and a byproduct.

1.

Production
Method

Sales
Method

Revenues
Main product
Byproduct
Total revenues

$640,000a
__
640,000

$640,000
28,000d
668,000

Cost of goods sold


Total manufacturing costs
Deduct value of byproduct production
Net manufacturing costs
Deduct main product inventory
Cost of goods sold
Gross margin

480,000
40,000b
440,000
88,000c
352,000
$288,000

480,000
0
480,000
96,000e
384,000
$284,000

32,000 $20.00
8,000 $5.00
c
(8,000/40,000) $440,000 = $88,000
a

2.
a

5,600 $5.00
(8,000/40,000) $480,000 = $96,000

Production
Method
$88,000
12,000a

Main Product
Byproduct

Ending inventory shown at unrealized selling price.


BI + Production Sales = EI
0 + 8,000 5,600 = 2,400 pounds
Ending inventory = 2,400 pounds $5 per pound = $12,000

16-15

Sales
Method
$96,000
0

16-25 (35-45 min.) Joint costs and byproducts.


1.

A
B
Totals

A
B
Totals

Computing byproduct deduction to joint costs:


Revenues from C, 20,000 $3
Deduct:
Gross margin, 10% of revenues
Marketing costs, 25% of revenues
Peanut Butter Department separable costs
Net realizable value (less gross margin) of C

$ 60,000

Joint costs
Deduct byproduct contribution
Net joint costs to be allocated

$160,000
29,000
$131,000

Quantity
10,000
60,000

Unit
Sales
Price
$10
2

Joint Costs
Allocation
$ 52,400
78,600
$131,000

Deduct
Final Separable
Sales Processing
Value
Cost
$100,000
$20,000
120,000

$220,000
$20,000
Add Separable
Processing
Costs
$20,000

$20,000

6,000
15,000
10,000
$ 29,000

Net
Realizable
Allocation of
Value at
$131,000
Splitoff
Weighting
Joint Costs
$ 80,000
40%
$ 52,400
120,000
60%
78,600
$200,000
$131,000

Total Costs
$ 72,400
78,600
$151,000

Units
10,000
60,000
70,000

Unit Cost
$7.24
1.31

Unit cost for C: $1.45 ($29,000 20,000) + $0.50 ($10,000 20,000) = $1.95,
or
$3.00 $0.30 (10% $3) $0.75 (25% $3) = $1.95.

16-16

2.

If all three products are treated as joint products:

A
B
C
Totals

A
B
C
Totals

Quantity
10,000
60,000
20,000

Unit
Sales
Price
$10
2
3

Joint Costs
Allocation
$ 54,468
81,702
23,830
$160,000

Final
Sales
Value
$100,000
120,000
60,000
$280,000

Deduct
Separable
Processing
Cost
$20,000

25,000
$45,000

Add Separable
Processing
Costs
$20,000

10,000
$30,000

Net
Realizable
Value at
Splitoff
$ 80,000
120,000
35,000
$235,000

Total Costs
$ 74,468
81,702
33,830
$190,000

Weighting
80 235
120 235
35 235

Units
10,000
60,000
20,000
90,000

Allocation
of $160,000
Joint Costs
$ 54,468
81,702
23,830
$160,000

Unit Cost
$7.45
1.36
1.69

Call the attention of students to the different unit costs resulting from the two assumptions
about the relative importance of Product C. The point is that costs of individual products depend
heavily on which assumptions are made and which accounting methods and techniques are used.
16-26 (25 min.) Accounting for a byproduct.

1. Byproduct recognized at time of production:


Joint cost = $1,500
Joint cost to be charged to main product = Joint Cost - NRV of Byproduct = $1,500 - (50 lbs. $1.20)
= $1,440
Inventoriable cost of main product = = $3.60 per container
Inventoriable cost of byproduct = NRV = $1.20 per pound
Gross Margin Calculation under Production Method
Revenues
Main product: Water (600/2 containers $8)
Byproduct: Sea Salt
Cost of goods sold
Main product: Water (300 containers $3.60)
Gross margin
Gross-margin percentage ($1,320 $2,400)

2.

Inventoriable costs (end of period):


Main product: Water (100 containers $3.60) = $360
Byproduct: Sea Salt (10 pounds $1.20) = $12
Byproduct recognized at time of sale:

16-17

$2,400
0
2,400
1,080
$1,320
55.00%

Joint cost to be charged to main product = Total joint cost = $1,500


Inventoriable cost of main product = = $3.75 per container
Inventoriable cost of byproduct = $0
Gross Margin Calculation under Sales Method
Revenues
Main product: Water (600/2 containers $8)
$2,400
Byproduct: Sea Salt (40 pounds $1.20)
48
2,448
Cost of goods sold
Main product: Water (300 containers $3.75)
1,125
Gross margin
$1,323
Gross-margin percentage ($1,323 $2,448)
54.04%
Inventoriable costs (end of period):
Main product: Water (100 containers $3.75) = $375
Byproduct: Sea Salt (10 pounds $0) = $0
3. The production method recognizes the byproduct cost as inventory in the period it is
produced. This method sets the cost of the byproduct inventory equal to its net realizable
value. When the byproduct is sold, inventory is reduced without being expensed through the
income statement. The sales method associates all of the production cost with the main
product. Under this method, the byproduct has no inventoriable cost and is recognized only
when it is sold.

16-18

16-27 (40 min.) Alternative methods of joint-cost allocation, product-mix decisions.


A diagram of the situation is in Solution Exhibit 16-27.
1.

Computation of joint-cost allocation proportions:


a.

Sales Value of
Total Production
at Splitoff
A
$ 50,000
B
30,000
C
50,000
D
70,000
$200,000

Weighting
50 200 = 0.25
30 200 = 0.15
50 200 = 0.25
70 200 = 0.35
1.00

Allocation of $100,000
Joint Costs
$ 25,000
15,000
25,000
35,000
$100,000

Weighting
300 500 = 0.60
100 500 = 0.20
50 500 = 0.10
50 500 = 0.10
1.00

Allocation of $100,000
Joint Costs
$ 60,000
20,000
10,000
10,000
$100,000

b.
A
B
C
D

Physical Measure
of Total Production
300,000 gallons
100,000 gallons
50,000 gallons
50,000 gallons
500,000 gallons

c.
Final Sales
Value of
Total
Separable
Production
Costs
Super A $300,000
$200,000
Super B 100,000
80,000
C
50,000

Super D 120,000
90,000

Net
Realizable
Value at
Splitoff
$100,000
20,000
50,000
30,000
$200,000

16-19

Weighting
100 200 = 0.50
20 200 = 0.10
50 200 = 0.25
30 200 = 0.15
1.00

Allocation
of
$100,000
Joint Costs
$ 50,000
10,000
25,000
15,000
$100,000

Computation of gross-margin percentages:


a. Sales value at splitoff method:
Revenues
Joint costs
Separable costs
Total cost of goods sold
Gross margin

Super A Super B
$300,000 $100,000
25,000
15,000
200,000
80,000
225,000
95,000
$ 75,000 $ 5,000

Gross-margin percentage

25%

5%

C
$50,000
25,000
0
25,000
$25,000
50%

Super D
$120,000
35,000
90,000
125,000
$
(5,000)
(4.17%)

Total
$570,000
100,000
370,000
470,000
$100,000
17.54%

b. Physical-measure method:
Revenues
Joint costs
Separable costs
Total cost of goods sold
Gross margin
Gross-margin percentage

Super A Super B
$300,000 $100,000
60,000
20,000
200,000
80,000
260,000
100,000
$ 40,000 $
0
13.33%
0%

C
$50,000
10,000
0
10,000
$40,000
80%

Super D
Total
$120,000 $570,000
10,000
100,000
90,000
370,000
100,000
470,000
$ 20,000 $100,000
16.67%
17.54%

c. Net realizable value method:


Revenues
Joint costs
Separable costs
Total cost of goods sold
Gross margin
Gross-margin percentage

Super A
$300,000
50,000
200,000
250,000
$ 50,000

Super B
$100,000
10,000
80,000
90,000
$ 10,000

C
$50,000
25,000
0
25,000
$25,000

Super D
Total
$120,000 $570,000
15,000 100,000
90,000 370,000
105,000 470,000
$ 15,000 $100,000

16.67%

10%

50%

12.5%

Super B
5%
0%
10%

C
50%
80%
50%

Super D
(4.17)%
16.67%
12.50%

Summary of gross-margin percentages:


Joint-Cost
Allocation Method
Sales value at splitoff
Physical measure
Net realizable value

Super A
25.00%
13.33%
16.67%

16-20

17.54%

2.

Further Processing of A into Super A:


Incremental revenue, $300,000 $50,000
Incremental costs
Incremental operating income from further processing

$250,000
200,000
$ 50,000

Further processing of B into Super B:


Incremental revenue, $100,000 $30,000
Incremental costs
Incremental operating loss from further processing

$ 70,000
80,000
$ (10,000)

Further Processing of D into Super D:


Incremental revenue, $120,000 $70,000
Incremental costs
Incremental operating loss from further processing

$ 50,000
90,000
$ (40,000)

Operating income can be increased by $50,000 if both B and D are sold at their splitoff point
rather than processed further into Super B and Super D.
SOLUTION EXHIBIT 16-27
Revenues at Splitoff
and Separable Costs

Joint Costs

A, 300000 gallons
Revenue = $50000

Processing
$100000

B, 100000 gallons
Revenue = $30000

Processing
$200000

Super A
$300000

Processing
$80000

Super B
$100000

Processing
$90000

Super D
$120000

C, 50000 gallons
Revenue = $50000
D, 50000 gallons
Revenue = $70000

Splitoff
Point

16-21

16-28 (4060 min.) Comparison of alternative joint-cost allocation methods, furtherprocessing decision, chocolate products.

Joint Costs
$30,000

Separable Costs
ChocolatePowder Liquor
Base

Cocoa
Beans

Processing
$12,750

Chocolate
Powder

Processing

Milk-Chocolate
Liquor Base

Processing
$26,250

Milk
Chocolate

SPLITOFF
POINT

1a.

Sales value at splitoff method:

Sales value of total production at splitoff,


600 $21; 900 $26
Weighting, $12,600; $23,400 $36,000
Joint costs allocated,
0.35; 0.65 $30,000

ChocolatePowder/
Liquor Base

MilkChocolate/
Liquor Base

$12,600
0.35

$23,400
0.65

$36,000

$10,500

$19,500

$30,000

600 gallons
0.40

900 gallons
0.60

1,500 gallons

$12,000

$18,000

$30,000

Total

1b.
Physical-measure method:
Physical measure of total production
(15,000 1,500) 60; 90
Weighting, 600; 900 1,500
Joint costs allocated,
0.40; 0.60 $30,000

16-22

1c.

Net realizable value method:

Final sales value of total production,


6,000 $4; 10,200 $5
Deduct separable costs
Net realizable value at splitoff point
Weighting, $11,250; $24,750 $36,000
Joint costs allocated,
0.3125; 0.6875 $30,000
d.

ChocolatePowder

MilkChocolate

$24,000
12,750
$11,250
0.3125

$51,000
26,250
$24,750
0.6875

$75,000
39,000
$36,000

$ 9,375

$20,625

$30,000

Total

Constant gross-margin percentage NRV method:

Step 1:
Final sales value of total production, (6,000 $4) + (10,200 $5)
Deduct joint and separable costs, ($30,000 + $12,750 + $26,250)
Gross margin
Gross-margin percentage ($6,000 $75,000)

$75,000
69,000
$ 6,000
8%

Step 2:
Final sales value of total production,
6,000 $4; 10,200 $5
Deduct gross margin, using overall
gross-margin percentage of sales (8%)
Total production costs

ChocolatePowder

MilkChocolate

Total

$24,000

$51,000

$75,000

1,920
22,080

4,080
46,920

6,000
69,000

12,750
$ 9,330

26,250
$20,670

39,000
$30,000

Step 3:
Deduct separable costs
Joint costs allocated

16-23

2.
a.

b.

c.

Revenues
Joint costs
Separable costs
Total cost of goods sold
Gross margin

ChocolatePowder
$24,000
10,500
12,750
23,250
$ 750

MilkChocolate
$51,000
19,500
26,250
45,750
$ 5,250

Total
$75,000
30,000
39,000
69,000
$ 6,000

Gross-margin percentage

3.125%

10.294%

8%

Revenues
Joint costs
Separable costs
Total cost of goods sold
Gross margin

$24,000
12,000
12,750
24,750
$ (750)

$51,000
18,000
26,250
44,250
$ 6,750

$75,000
30,000
39,000
69,000
$ 6,000

Gross-margin percentage

(3.125)%

13.235%

8%

Revenues
Joint costs
Separable costs
Total cost of goods sold
Gross margin

$24,000
9,375
12,750
22,125
$ 1,875

$51,000
20,625
26,250
46,875
$ 4,125

$75,000
30,000
39,000
69,000
$ 6,000

Gross-margin percentage
d.

3.

7.812%

8.088%

8%

Revenues
Joint costs
Separable costs
Total cost of goods sold
Gross margin

$24,000
9,330
12,750
22,080
$ 1,920

$51,000
20,670
26,250
46,920
$ 4,080

$75,000
30,000
39,000
69,000
$ 6,000

Gross-margin percentage

8%

8%

8%

Further processing of chocolate-powder liquor base into chocolate powder:


Incremental revenue, $24,000 $12,600
$11,400
Incremental costs
12,750
Incremental operating income from further processing
$ (1,350)
Further processing of milk-chocolate liquor base into milk chocolate:
Incremental revenue, $51,000 $23,400
$27,600
Incremental costs
26,250
Incremental operating income from further processing
$ 1,350

Chocolate Factory could increase operating income by $1,350 (to $7,350) if chocolate-powder
liquor base is sold at the splitoff point and if milk-chocolate liquor base is further processed into
milk chocolate.
16-24

16-29 (30 min.) Joint-cost allocation, process further or sell.


A diagram of the situation is in Solution Exhibit 16-29.
1.
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
$ 8
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

Net
Realizable
Value at
Splitoff
$ 600,000
350,000b
400,000
$1,350,000

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.

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
$ 8
100
20

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

2.
Presented below is an analysis for Sonimad Sawmill, Inc., comparing the processing of
decorative pieces further versus selling the rough-cut product immediately at splitoff:
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

16-25

Units
5,000
500
4,500

Dollars

$450,000
300,000
150,000
100,000
$ 50,000

3.
Assuming Sonimad Sawmill, Inc., announces that in six months it will sell the rough-cut
product at splitoff 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


SeparableCosts

Joint Costs
$1,000,000

Studs
$8 per unit

Raw Decorative
Pieces
$60 per unit

Processing

Posts
$20 per unit

Splitoff
Point

16-26

Processing
$100000

Decorative
Pieces
$100 per unit

16-30 (40 min.) Joint-cost allocation.


1.
Joint Costs
$20,000

Separable Costs
Butter

Milk

Processing
$0.50 per
pound

Spreadable
Butter

Processing

Processing
$0.25 per
pint

Buttermilk

Buttermilk

SPLITOFF
POINT

a.
Physical-measure method:
Physical measure of total production
(10,000 lbs 2; 20,000 qts 4)
Weighting, 20,000; 80,000 100,000
Joint costs allocated,
0.20; 0.80 $20,000

Butter

Buttermilk

Total

20,000 cups
0.20

80,000 cups
0.80

100,000 cups

$4,000

$16,000

$20,000

Butter

Buttermilk

Total

$20,000
0.40

$30,000
0.60

$50,000

$ 8,000

$12,000

$20,000

b. Sales value at splitoff method:


Sales value of total production at splitoff,
10,000 $2; 20,000 $1.5
Weighting, $20,000; $30,000 $50,000
Joint costs allocated,
0.40; 0.60 $20,000

16-27

c.

Net realizable value method:


Butter

Final sales value of total production,


20,000 $2.50; 20,000 $1.50
Deduct separable costs
Net realizable value
Weighting, $45,000; $30,000 $75,000
Joint costs allocated,
0.60; 0.40 $20,000
d.

Buttermilk

Total

$50,000
5,000
$45,000
0.60

$30,000
0
$30,000
0.40

$80,000
5,000
$75,000

$12,000

$ 8,000

$20,000

Constant gross-margin percentage NRV method:

Step 1:
Final sales value of total production,
Deduct joint and separable costs, ($20,000 + $5,000)
Gross margin
Gross-margin percentage ($55,000 $80,000)

$80,000
25,000
$55,000
68.75%

Step 2:
Final sales value of total
production (see 1c.)
Deduct gross margin, using overall
gross-margin percentage of sales (68.75%)
Total production costs

Butter

Buttermilk

Total

$50,000

$30,000

$80,000

34,375
15,625

20,625
9,375

55,000
25,000

5,000
$10,625

0
$ 9,375

5,000
$20,000

Step 3:
Deduct separable costs
Joint costs allocated

16-28

2.

Advantages and disadvantages:

- Physical-Measure
Advantage: Low information needs. Only knowledge of joint cost and physical
distribution is needed.
Disadvantage: Allocation is unrelated to the revenue-generating ability of products.
- Sales Value at Splitoff
Advantage: Considers market value of products as basis for allocating joint cost. Relative
sales value serves as a proxy for relative benefit received by each product from the joint
cost.
Disadvantage: Uses selling price at the time of splitoff even if product is not sold by the
firm in that form. Selling price may not exist for product at splitoff.
- Net Realizable Value
Advantages: Allocates joint costs using ultimate net value of each product; applicable
when the option to process further exists
Disadvantages: High information needs; Makes assumptions about expected outcomes of
future processing decisions
- Constant Gross-Margin percentage method
Advantage: Since it is necessary to produce all joint products, they all look equally
profitable.
Disadvantages: High information needs. All products are not necessarily equally
profitable; method may lead to negative cost allocations so that unprofitable products are
subsidized by profitable ones.
3. When selling prices for all products exist at splitoff, the sales value at split off method is the
preferred technique. It is a relatively simple technique that depends on a common basis for cost
allocation revenues. It is better than the physical method because it considers the relative
market values of the products generated by the joint cost when seeking to allocate it (which is a
surrogate for the benefits received by each product from the joint cost). Further, the sales value
at splitoff method has advantages over the NRV method and the constant gross margin
percentage method because it does not penalize managers by charging more for developing
profitable products using the output at splitoff, and it requires no assumptions about future
processing activities and selling prices.

16-29

16-31 (10 min.) Further processing decision (continuation of 16-30).


1.and 2. The decision about which combination of products to produce is not affected by the
method of joint cost allocation. For both the sales value at splitoff and physical measure
methods, the relevant comparisons are as shown below:
Revenue if sold at splitoff
Process further NRV
Profit (Loss) from processing further

Butter
$20,000 a
45,000 c
$25,000

Buttermilk
$30,000 b
26,000 d
$(4,000)

10,000 lbs $2 = $20,000


20,000 qts $1.5 = $30,000
c
20,000 tubs $2.5 10,000lbs $.5 = $45,000
d
40,000 pints $.9 40,000 pints $.25 = $26,000
b

To maximize profits, Elsie should process butter further into spreadable butter. However, Elsie
should sell the buttermilk at the splitoff point in quart containers. The extra cost to convert to
pint containers ($0.25 per pint 2 pints per quart = $0.50 per quart) exceeds the increase in
selling price ($0.90 per pint 2 pints per quart = $1.80 per quart $1.50 original price = $0.30
per quart) and leads to a loss of $4,000.
3.
The decision to sell a product at split off or to process it further should have nothing to do
with the allocation method chosen. For each product, you need to compare the revenue from
selling the product at split off to the NRV from processing the product further. Other things
being equal, management should choose the higher alternative. The total joint cost is the same
regardless of the alternative chosen and is therefore irrelevant to the decision.

16-30

16-32 (20 min.) Joint-cost allocation with a byproduct.


1. Sales value at splitoff method: Byproduct recognized at time of production method
Joint cost to be charged to joint products = Joint Cost NRV of Byproduct
= $10,000 1000 tons 20% 0.25 vats $60
= $10,000 50 vats $60
= $ 7,000

Sales value of coal at splitoff,


1,000 tons 0.4 $100; 1,000 tons 0.4 $60
Weighting, $40,000; $24,000 $64,000
Joint costs allocated,
0.625; 0.375 $7,000
Gross margin (Sales revenue Allocated cost)

Grade A
Coal

Grade B
Coal

Total

$40,000
0.625

$24,000
0.375

$64,000

$ 4,375
$35,625

$ 2,625
$21,375

$ 7,000
$57,000

2. Sales value at splitoff method: Byproduct recognized at time of sale method


Joint cost to be charged to joint products = Total Joint Cost = $10,000

Sales value of coal splitoff,


1,000 tons .4 $100; 1,000 tons .4 $60
Weighting, $40,000; $24,000 $64,000
Joint costs allocated,
0.625; 0.375 $10,000
Gross margin (Sales revenue Allocated cost)

Grade A
Coal

Grade B
Coal

Total

$40,000
0.625

$24,000
0.375

$64,000

$ 6,250
$33,750

$ 3,750
$20,250

$10,000
$54,000

Since the entire production is sold during the period, the overall gross margin is the same
under the production and sales methods. In particular, under the sales method, the $3,000
received from the sale of the coal tar is added to the overall revenues, so that Cumberlands
overall gross margin is $57,000, as in the production method.
3. The production method of accounting for the byproduct is only appropriate if
Cumberland is positive they can sell the byproduct and positive of the selling price.
Moreover, Cumberland should view the byproducts contribution to the firm as material
enough to find it worthwhile to record and track any inventory that may arise. The sales
method is appropriate if either the disposition of the byproduct is unsure or the selling price
is unknown, or if the amounts involved are so negligible as to make it economically
infeasible for Cumberland to keep track of byproduct inventories.

16-31

16-33 (15 min.) Byproduct journal entries (continuation of 16-32).


1. Byproduct production method journal entries
i) At time of production:
Work-in-process Inventory
Accounts Payable, etc.

10,000
10,000

For byproduct:
Finished Goods Inv Coal tar
Work-in-process Inventory

3,000

For Joint Products


Finished Goods Inv Grade A
Finished Goods Inv Grade B
Work-in-process Inventory

4,375
2,625

3,000

7,000

ii) At time of sale:


For byproduct
Cash or A/R
3,000
Finished Goods Inv Coal Tar
For Joint Products
Cash or A/R
Sales Revenue Grade A
Sales Revenue Grade B

64,000

Cost of goods sold - Grade A


4,375
Cost of goods sold - Grade B
2,625
Finished Goods Inv Grade A
Finished Goods Inv Grade B

16-32

3,000

40,000
24,000

4,375
2,625

2. Byproduct sales method journal entries


i) At time of production:
Work-in-process Inventory
Accounts Payable, etc.

10,000
10,000

For byproduct:
No entry
For Joint Products
Finished Goods Inv Grade A
Finished Goods Inv Grade B
Work in process inventory
ii) At time of sale
For byproduct
Cash or A/R
Sales Revenue Coal Tar
For Joint Products
Cash or A/R
Sales Revenue Grade A
Sales Revenue Grade B

6,250
3,750
10,000
3,000
3,000
64,000

Cost of goods sold - Grade A


6,250
Cost of goods sold - Grade B
3,750
Finished Goods Inv Grade A
Finished Goods Inv Grade B

16-33

40,000
24,000

6,250
3,750

16-34 (40 min.) Process further or sell, byproduct.


1. 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

$338,400,000
270,000,000
68,400,000

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) $240 per car
Incremental costs
Incremental gain (loss)

800,000
200,000
300,000
35,000,000
37,600,000
73,900,000
$ (5,500,000)

10,000,000 tons (1 0.06)

2. 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: do not process further.
3. 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)

Maximum
$22 ($24 $2)

$4,950,000

$9,900,000

The incremental loss from sizing and cleaning the raw coal is $5,500,000, as calculated in
requirement 1. 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
16-34

($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.
16-35 (30 min.) Accounting for a byproduct.
1.

Byproduct recognized at time of production:


Joint cost = ($300 50) + $10,000 = $25,000
Joint cost charged to main product = Joint cost NRV of byproduct
= $25,000 (6 50 scarves $25)
= $25,000 (300 scarves $25)
= $17,500
Inventoriable cost of main product =

$17,500
= $11.67 per blouse
1,500 blouses

Inventoriable cost of byproduct = NRV = $25 per scarf


Gross Margin Calculation under Production Method
Revenues
Main product: Blouses (1,200 blouses $90)
Byproduct: Scarves
Cost of goods sold
Main product: Blouses (1,200 blouses $11.67)
Gross margin
Gross-margin percentage ($94,000 $108,000)
Inventoriable costs (end of period):
Main product: Blouses (300 blouses $11.67) = $3,500
Byproduct: Scarves (40 scarves $25) = $1,000

16-35

$108,000
0
108,000
14,000
$ 94,000
87.04%

2.

Byproduct recognized at time of sale:


Joint cost to be charged to main product = Total joint cost = $25,000
$25,000
Inventoriable cost of main product =
= $16.67 per blouse
1,500 blouses
Inventoriable cost of byproduct = $0
Gross Margin Calculation under Sales Method
Revenues
Main product: Blouses (1,200 blouses $90)
Byproduct: Scarves (260 scarves $25)

$108,000
6,500
114,500

Cost of goods sold


Main product: Blouses (1,200 blouses $16.67)
Gross margin
Gross-margin percentage ($94,500 $114,000)

20,000
$ 94,500
82.89%

Inventoriable costs (end of period):


Main product: Blouses (300 blouses $16.67) = $5,000
Byproduct: Scarves (40 scarves $0) = $0
3. (a) Byproduct production method journal entries
i) At time of production:
Work-in-process Inventory
Accounts Payable, etc.

25,000
25,000

For byproduct:
Finished Goods Inv Scarves
Work-in-process Inventory
For main product
Finished Goods Inv Blouses
Work-in-process Inventory
ii) At time of sale:
For byproduct
Cash or A/R
Finished Goods Inv Scarves
For main product
Cash or A/R
Sales Revenue Blouses

7,500
7,500
17,500
17,500

6,500
6,500
108,000

Cost of goods sold - Blouses


14,000
Finished Goods Inv Blouses

16-36

108,000
14,000

(b) Byproduct sales method journal entries


i) At time of production:
Work-in-process Inventory
Accounts Payable, etc.

25,000
25,000

For byproduct:
No entry
For Joint Product
Finished Goods Inv Blouses
Work-in-process Inventory
ii) At time of sale:
For byproduct
Cash or A/R
Sales Revenue Scarves
For Joint Product
Cash or A/R
Sales Revenue Blouses

25,000
25,000

6,500
6,500
108,000

Cost of goods sold - Blouses


20,000
Finished Goods Inv Blouses

16-37

108,000
20,000

Collaborative Learning Problem


16-36 (60 min.) Joint Cost Allocation
1.
(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:

Module
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

Standard

Module
$25,000
1,500
$23,500
0.7581
$18,194

Total
$ 8,500
1,000
$ 7,500
0.2419
$ 5,806

$19,694

$ 6,806

$ 39.39

$ 13.61

$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 1
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)

$33,500
26,500
$ 7,000
20.8955%

Step 2
Module
Final sales value of total production
Deduct gross margin using overall gross
margin percentage (20.8955%)
Total production costs

Deluxe

Standard

Module
$25,000

Total
$8,500

$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

Step 3
Deduct separable costs
Joint costs allocated

16-38

Production costs per unit ($19,776;


$6,724 500 units)

$ 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/
Chips

Standard
Module/
Chips

500,000
0.6667
$16,000

250,000
0.3333
$ 8,000

750,000

$17,500

$ 9,000

$26,500

$ 35.00

$18.00

Total

$24,000

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. Thats 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.
2.
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)

16-39

$1,900

Incremental costs of DRAMs, further processing


Incremental operating income from converting standard modules
into DRAMs

1,600
$ 300

A total income computation of each alternative follows:


Sell Deluxe

Alternative 1:
Sell Deluxe

Alternative 2:

and Standard

and DRAM

Difference

Total revenues ($25,000 + $8,500) $33,500


($25,000 + $10,400) $35,400
Total costs
26,500
($26,500 + $1,600)
28,100
Operating income
$ 7,000
$ 7,300

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 productsare irrelevant to the decision of whether to process further and
make DRAMS. Thats because the joint costs of $24,000 remain the same whether or not further
processing is done on the standard modules.
Jointcostallocationsusingthephysicalmeasuremethod(onthebasisofthenumberof
bits) may mislead MMC, if MMC uses unitcost data to guide the choice between selling
standardmodulesversussellingDRAMmodules.Inrequirement2,allocatingjointcostsonthe
basisofthenumberofgoodbitsyieldedacostof$16,000fortheDeluxemodulesand$8,000for
theStandardmodules.AproductlineincomestatementforthealternativesofsellingDeluxe
modulesandDRAMmoduleswouldappearasfollows:
Deluxe Module

DRAM Module

Revenues
Cost of goods sold
Joint costs allocated
Separable costs
Total cost of goods sold
Gross margin

$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.

16-40