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11-1.
Companies allocate costs to estimate or assess the costs of their activities (products,
processes, etc.). It is an estimate and subject to the problem that cost allocation
contains an arbitrary element. Not allocating costs, however, is also an estimate—an
estimate of zero. This may be appropriate for some decisions, but not for others.
Some of the disadvantages (costs) include:
(1) Additional bookkeeping;
(2) Additional management costs in selecting allocation methods and allocation
bases;
(3) Costs of making the wrong decision if the allocations provide misleading
information.
Some of the advantages (benefits) of cost allocation include:
(1) Instilling responsibility for all costs of the company in the division managers;
(2) Relating indirect costs to contracts, jobs, and products;
(3) Constructing performance measures (“net profit”) for a division that may be more
meaningful to management than contribution margins.
11-2.
The three methods of allocating service department costs are the (1) direct method, (2)
step method, and (3) reciprocal method.
11-3.
The essential difference is the allocation of costs among service departments. The
direct method makes no inter-service-department allocation, the step method makes a
partial inter-service-department allocation, while the reciprocal solution method fully
recognizes inter-service-department activities. All three methods allocate costs to the
production departments based on the production department’s relative use.
11-5.
The direct method ignores any use of one service department by another.
11-6.
The step method ignores any reciprocal (simultaneous) use of two or more service
departments.
11-7.
Joint cost allocations are usually made to assign a cost to a product after the split-off
point. This is usually done for external reporting, tax, or rate-making purposes or to
satisfy contract requirements. Because the joint costs are common to the outputs, it is
not possible to find a direct way of relating the costs. Rather, the costs are related to
economic benefits on the basis of some measure of relative outputs.
11-8.
Because net realizable values of the output provide a measure of the economic benefit
received from each output from the production process, this method is usually preferred
when it can be implemented. Further, the physical quantities may be difficult to compare
(e.g., weights versus volumes).
11-9.
It could be preferable to use a physical quantities measure if it reflects the economic
benefit ultimately obtainable from the production process, particularly if there is no
objective selling price for joint products. Some examples include public utility rate
setting, energy price regulation, new market setting, and new product price setting. In all
of these cases, it is not possible to use the relative sales value method. Of course, the
physical quantity measure used must make sense. Thus, ounces of lead should not be
added to ounces of silver for joint cost allocation purposes.
11-11.
The joint costs of the product are irrelevant to this decision. Using the principle of
differential costs, the joint costs are not differential in this decision. They are sunk costs,
because they must be incurred under either decision.
11-12.
Management might believe there are benefits to the use of allocated costs. An
awareness of total costs may influence managerial behavior and decision making. For
example, management might want to make division managers aware of common costs
of divisions that must be covered by division margins before the company as a whole
earns a profit.
Allocated costs are also used for contractual and regulatory purposes. Many of the
exact reasons for the continued use of information based on allocated costs are still
unknown. However, its widespread usage by management would indicate the
information is beneficial.
11-13.
Allocating zero costs is another allocation method. It, too, is an arbitrary method.
However, an advantage of not allocating costs is that the time saved reduces the
expenses of cost allocation. A disadvantage is that common costs must be covered
before the company as a whole earns a profit. Cost allocation can make managers
more aware of common costs affecting long-run profitability.
11-14.
As with all cost allocation methods, there is a cost-benefit trade-off to be made. If the
allocations using the reciprocal method are similar to the allocations using the direct or
step method, it may not be worth using the reciprocal method. The costs are not simply
computation costs, which are relatively small. The method has to be documented and
explained so managers believe that the results are useful for decision-making.
11-15.
The concepts of direct and indirect are related to a specific cost object within the
organization. Costs that can be attributed to a cost object and can, in both a physical
and practical sense, be related to the cost object with no intermediate allocations are
considered direct. Thus, at the first stage, the costs of supplies can be directly identified
with the department that requisitioned them and used them in production. However, the
costs of the purchasing department, which represents a service used by many different
departments, cannot be traced directly to a product, or to a specific manufacturing
department. At the second stage, the supplies are an indirect cost, because they cannot
be identified with a specific cost object.
11-16.
The reciprocal method takes into account all of the services rendered among the
service departments. It is preferred (assuming cost-effectiveness) because it results in
an allocation scheme that reflects the total cost of the use of each service.
11-18.
The addition of an employee in one department will increase the allocation base and,
therefore, reduce the allocation to the department that does not add the employee. The
manager of the department that does not add the employee benefits from the actions of
the other department. An example may serve to highlight the point. If each producing
department has one employee and service department costs total $24,000, then the
allocation would be: To P1: 1 employee x ($24,000 2 employees) = $12,000. This
would be the same as the allocation to P2. Now if P1 adds an employee, the allocation
would be:
11-19.
Answers will vary. Before deciding to outsource a service department, a company would
want to consider some of the following. (1) Will the quality of service be the same?
Quality includes many things including accuracy, timeliness, and customer service
(where the customers are the other service departments and the production
departments). (2) Will company information (for example, pay data) be secure with an
outside vendor? (3) Will the company lose control over critical services by relying on an
outside vendor?
11-20.
Answers will vary. First, it is useful to consider whether there are any reciprocal
services. Both the Library and Career Development make use of Computer Support, but
Computer Support probably uses little or no service from the other two. This suggests a
step method might be appropriate. It is more difficult to determine the appropriate
allocation base. The number of students is one choice, but executive education
students make little or no use of Career Development. The number of students that use
Career Development (measured, perhaps, by interviews) is a better choice for Career
©The McGraw-Hill Companies, Inc., 2017
Solutions Manual, Chapter 11 523
Development. Records of Library use are often difficult to collect, but again, students in
the three programs will make different demands on the Library. Computer support might
best be allocated by number of students. The point of this question is that it is difficult to
identify good allocation bases, but business school deans, as other managers, have to
make decisions, and good cost information helps.
11-21.
Some managers use fully allocated cost numbers for long-run pricing and other long-run
decisions. Allocated joint costs are used to compute the costs of department and
divisional activities. These costs can be a factor in evaluating managerial performance,
as we discuss in chapter 12. Joint cost allocations often arise as an issue in lawsuits in
which opposing parties have the rights to earnings of joint products.
11-22.
The two situations are similar in that the conceptual treatment of the allocation problem
is the same: the costs cannot be separately identified for each department or product;
therefore, an allocation method must be chosen which reflects to the best possible
extent a matching of the costs incurred with the benefits received. The resulting
allocated costs must be used with care, if at all, in any decision-making context.
11-23.
Examples include timber, livestock, petroleum, real estate development (produces lots),
railroad (many cars on the same train), and many other processing industries.
11-24.
The allocation of joint cost is similar to that of fixed costs in the sense that if I sell less of
one of the products, the cost to be allocated does not change (assuming free disposal).
It is different in the sense that if I produce more of one product, the cost to be allocated
does change.
Direct Method:
To
From Machining Assembly
Maintenance .................................... $25,000a $15,000
Cafeteria .......................................... 16,000b 16,000
Total Costs....................................... $41,000 $31,000
a $25,000
0.5
= x $40,000
0.5 + 0.3
b $16,000
0.1
= x $32,000
0.1 + 0.1
(Note that the use of Maintenance’s costs by Cafeteria and the use of Cafeteria
costs by Maintenance are ignored.)
Machining .......................................................
$41,000 ÷ 270 machine-hours = $151.85 per machine-hour
Assembly ........................................................
$31,000 ÷ 330 labor-hours = $93.94 per labor-hour
a 1,000
$ 1,250 = x $5,000
(1,000 + 3,000)
3,000
$ 3,750 = x $5,000
(1,000 + 3,000)
b 500
$2,400 = x $12,000
(500 + 2,000)
2,000
$9,600 = x $12,000
(500 + 2,000)
To
From Maintenance Cafeteria Machining Assembly
Service department costs ...................................
$40,000 $32,000
a
Maintenance .....................................................
(40,000) 8,000 $20,000 $12,000
b
Cafeteria ...........................................................
________ (40,000) 20,000 20,000
$ –0– $
Total Costs ......................................................... –0– $40,000 $32,000
a $8,000 = 20% x $40,000; $20,000 = 50% x $40,000;
To
From Cafeteria Maintenance Machining Assembly
Service department costs ...................................
$32,000 $40,000
a
Cafeteria ...........................................................
(32,000) 25,600 $ 3,200 $ 3,200
b
Maintenance .....................................................
________ (65,600) 41,000 24,600
$ –0–
Total Costs .........................................................
$ –0– $44,200 $27,800
a $25,600 = 80% x $32,000; $3,200 = 10% x $32,000; $3,200 = 10% x $32,000
b $65,600 = $40,000 direct costs + $25,600 from Cafeteria
0.5
$41,000 = x $65,600
(0.5 + 0.3)
0.3
$24,600 = x $65,600
(0.5 + 0.3)
Using this method, more costs ($50) are allocated to the Developing Department than
by using the direct method.
Allocations
Allocations
The variable cost savings are the first two terms and equal $27,300 (= $14,500 +
$12,800). The avoidable cost from outsourcing Maintenance is $36,300(= $9,000
avoidable fixed costs + $27,300 avoidable variable costs).
The variable cost savings are the first two terms and equal $7,600 (= $7,000 + $600).
The avoidable cost from outsourcing Personnel is $11,600 (= $4,000 avoidable fixed
costs + $7,600 avoidable variable costs).
$640,000
x $432,000 = $345,600
($640,000 + $160,000)
To Output P-12:
$160,000
x $432,000 = $86,400
($640,000 + $160,000)
The diagram can be used to help organize the solution, which follows:
Lead Copper Manganese Total
Selling price .......................................................
$40,000 $80,000 $60,000 $180,000
Additional processing .........................................
(12,000) (10,000) (18,000) (40,000)
Approximate sales value at
split-off ...............................................................
$28,000 $70,000 $42,000 $140,000
% of total sales values at
split-offa ..............................................................
20% 50% 30% 100%
Cost Allocation:
20% x $100,000 ...............................................
$20,000
50% x $100,000 ............................................... $50,000
30% x $100,000 ............................................... $30,000
Check:
Total allocated = $100,000 = $20,000 + $50,000 + $30,000
a 20% =
$28,000 $70,000 $42,000
; 50% = ; 30% =
$140,000 $140,000 $140,000
$75,600
x TC = $45,500
$75,600 + $32,400
So, solving for TC, we obtain:
$75,600
x TC = $45,500
$75,600 + $32,400
0.70 x TC = $45,500
TC = $65,000
$292,500
x $250,000 = $162,500
$292,500 + $157,500
11-41. (10 min.) Net Realizable Value Method with By-Products: Butterfly
Company.
The net realizable value method allocates joint costs in proportion to the net realizable
value of the individual products. Given total joint costs of $400,000 and the total sales
value at split-off for main products of $700,000 ($420,000 product M1 + $280,000
product M2), the calculation is:
$420,000
x $400,000 = $240,000
$420,000 + $280,000
a.
Total units of KA .................. = 84,000 units
Total units produced ............ = 168,000 units
Joint product costs ............... = $189,000
Amount allocated from joint costs:
84,000
x $189,000 = $94,500
168,000
Additional processing costs ...............................
54,000
Total costs of Product KA ..................................
$148,500
b.
Net realizable value of KB at split-off ........ = $210,000
Total net realizable value at split-off ......... = 600,000
Joint product costs .................................... = 189,000
a.
When KC can no longer be sold and must be disposed of, the disposal costs become
part of the joint cost of production for KA and KB. Using the physical units method,
the allocated costs are:
Total units of KA .................. = 84,000 units
Total units produced ............ = 144,000 Units (= 84,000 + 60,000)
Joint product costs ............... = $360,000 (= $189,000 + $171,000)
Amount allocated from joint costs to KA:
84,000
x $360,000 = $210,000
144,000
Similarly,
Amount allocated from joint costs to KB:
60,000
x $360,000 = $150,000
144,000
b. Neither product should be sold at split-off. The new allocation is irrelevant to the
question. For both products, the additional costs to process further are less than the
additional sales value from processing further.
34,000 units
x $330,000 = $132,000
34,000 units + 51,000 units
To Grade-B Lumber:
51,000 units
x $330,000 = $198,000
34,000 units + 51,000 units
11-48. (50 min.) Step Method With Three Service Departments: Model, Inc.
a. To facilitate the solution, reduce the different allocation bases to proportions used by
departments other than the same department.
Proportion Used By
Administration Accounting Maintenance Molding Painting
—a .06b
Building Area ...................................................... .04b .72 .18
.09c —a
Employees ......................................................... .06c .35 .50
.01d .20d
Equipment Value ................................................ —a .52d .27
a Self-usage is ignored
b Basis is 500,000 square feet, which ignores Administration: .06 = 30,000 500,000;
.04 = 20,000 500,000; etc.
c Basis is 200 employees, which ignores Accounting: .09 = 18 200; .06 = 12 200;
etc.
d Basis is $600, which ignores Maintenance: .01 = $6 $600; .20 = $120 $600;
.52 = $312 $600; etc.
To
Maintenance Accounting Administration Molding Painting
Direct Costs .......................................................
$200,000 $400,000 $250,000 $687,500 $485,000
FROM
Maintenancea .....................................................
(200,000) 40,000 2,000 104,000 54,000
b
Accounting ........................................................
(440,000) 42,128 163,830 234,042
Administration c ________ _______ (294,128) 235,302 58,826
–0– –0–
Totals ............................................................. –0– $1,190,632 $831,868
a .20
$40,000 = x $200,000;
(.01 + .20 + .52 + .27)
.01
$2,000 = x $200,000, etc.
(.01 + .20 + .52 + .27)
b .09
$42,128 = x $440,000;
(.09 + .35 + .50)
.35
$163,830 = x $440,000, etc.
(.09 + .35 + .50)
c .72
$235,302 = x $294,128;
(.72 + .18)
.18
$58,826 = x $294,128
(.72 + .18)
$1,190,632 + 831,868 = $2,022,500 which is the total of the direct costs for all service
and producing departments.
a. Direct Method:
Administration Accounting Domestic International
Department costs ...............................................
$360,000 $144,000 $936,000 $3,600,000
a
Administration allocation ...................................
(360,000) NA 72,000 288,000
b
Accounting allocation ........................................
NA (144,000) 28,800 115,200
–0–
Total costs allocated .......................................... –0– $1,036,800 $4,003,200
a 45
$ 72,000 = x $360,000
(45 + 180)
180
$288,000 = x $360,000
(45 + 180)
b 20,000
$28,800 = x $144,000
(20,000 + 80,000)
80,000
$115,200 = x $144,000
(20,000 + 80,000)
b. Step Method—Administration First:
To
From Admin Accounting Domestic International
Department costs...............................................
$360,000 $144,000 $936,000 $3,600,000
Administration
allocationa ..........................................................
(360,000) 36,000 64,800 259,200
Accounting allocationb .......................................
(180,000) 36,000 144,000
–0–
Total Costs......................................................... –0– $1,036,800 $4,003,200
a 25
$ 36,000 = x $360,000
(25 + 45 + 180)
45
$64,800 = x $360,000
(25 + 45 + 180)
180
$259,200 = x $360,000
(25 + 45 + 180)
b $180,000 = $144,000 direct costs + $36,000 from Administration.
20,000
$36,000 = x $180,000
(20,000 + 80,000)
80,000
$144,000 = x $180,000
(20,000 + 80,000)
Allocations:
Administration Accounting Domestic International
Costs ................................. $360,000 $144,000 $936,000 $3,600,000
a
Administration ...................................................
(396,735) 39,674 71,412 285,649
b
Accounting ........................................................
36,735 (183,674) 29,388 117,551
Total ..............................................................
$ 0 $ 0 $1,036,800 $4,003,200
a $39,674 = 0.10 x $396,735; $71,412 = 0.18 x $396,735; $285,649 = 0.72 x $396,735.
b $36,734 = 0.20 x $183,673; $29,388 = 0.16 x $183,673; $117,551 = 0.64 x $183,673.
d.
Regardless of the allocation method used, the final allocations are the same. The
reason is that both operating departments (Domestic and International) use both service
departments in the same proportion. No matter how the service department costs are
passed to one another, eventually they are allocated to Domestic and International
based on the proportion of 1:4 (either 20,000 transactions to 80,000 transactions or 45
employees to 180 employees).
a. Since the direct method is used, Operations Support’s (S2’s) costs are allocated
only to P1 and P2, not to S1.
b. .5
Amount allocated from S2 to P1 = $45,000 = ( x $72,000 )
.5 + .3
From To
P1 P2
–0–
S1 ......................................................................
$48,000
S2 ......................................................................
$45,000 $27,000
c. All of S1’s costs were allocated to P1 and none were allocated to P2.
a. $250,000.
The company uses the step method allocating from S1 to the other three
departments first. The costs allocated from S1 to S2 in November were $50,000
and S2 used 20% of S1’s services. This implies that S1 costs were:
b. $350,000.
Using the same logic, S2 costs (including those allocated from S1) were
allocated to P1 and P2 based on relative usage. The costs allocated were
$100,000 and the relative usage was 25% (= 20% ÷ [20% + 60%]). Therefore the
costs allocated from S2 to P1 and P2 were:
From part (a) we know that $50,000 was allocated from S1 to S2, so the total
incurred by S2 (before any allocations) must be $350,000 (= $400,000 –
$50,000).
a. The company considered only the direct costs of the electric generating plant. It did
not include the costs of the steam plant or other indirect costs.
Allocation:
To Department:
(Direct Costs Shown Below Department)
S4 S2 S3 P1 P2
$144 $90 $240 $1,800.00 $1,320.00
Amount to
From department: be allocated
Steam generation
(S1)a..................................................................
$ 210 84 21.00 105.00
Equipment
maintenance (S4)b ............................................
144 (144) 18 9 90.00 27.00
Electric
generating—fixed
(S2)c ...................................................................
108 (108) 0 40.50 67.50
Electric
generating—
variable (S3)d .....................................................
333 (333) 215.47 117.53
Total ...........................................................
$0 $0 $0 $0 $2,166.97 $1,637.03
aS1 allocation: $84 = $210 x .40; $21 = $210 x .10; $105 = $210 x .50
b .10 .05
S4 allocation: $18 = x $144; $9 = x $144; etc.
.10 + .05 + .50 + .15 .80
cS2 allocation:
.30 .50
$40.5 = x $108; 67.50 = x $108
(.30 + .50) (.30 + .50)
dS3 allocation:
.55 .30
$215.47 = x $333; $117.53 = x $333
(.55 + .30) (.55 + .30)
which is greater than the proposed $480,000 electric company rates. Of course,
management might want to consider other factors when making this decision.
aThe $174,000 from the sale of steam is an opportunity cost. If Steamco produces its
own electricity, it loses $174,000 in potential sales of steam.
b $27,000 = $18,000 + $9,000 allocated from equipment maintenance.
The total costs of the two producing departments include their direct costs. The
allocated costs, therefore, are:
($2,148.85 – $1,800.00) =
Alpha .................................................................. $348.85
($1,655.15 – $1,320.00) =
Beta .................................................................. 335.15
Total service department costs .......................... $684.00
b. This is exactly the same as you would get using the step method because of the
pattern of usage.
The key to this problem is to write out the equations expressing the usage:
Administration = $171,000 + 0.5 x Engineering + 0.2 x Maintenance
Engineering = $36,000 + 0.2 x Administration
Maintenance = $45,000 + 0.10 x Administration
Substituting the equations for Engineering and Maintenance into the equation for
Administration yields:
Administration = $171,000 + $18,000 + 0.1 x Administration + $9,000
+ 0.02 x Administration
Allocated to:
Costs Fabrication Assembly
Engineering $81,000 $8,100 $32,400
(10%) (40%)
Administration 225,000 112,500 45,000
(50%) (20%)
Maintenance $67,500 20,250 33,750
(30%) (50%)
Total $140,850 $111,150
a. $175,000
210
$175,000 = x $300,000
(210 + 150)
b. $87,500
350,000
$87,500 = x $200,000
(450,000 + 350,000)
c. $7,320
13,440
$7,320 = x $254,000
(4,900 + 13,440 + 246,400 + 201,600)
d. $0.
There is no allocation of costs back to the department after costs have been
allocated from it. Facilities costs have already been allocated from it to other
departments.
a. Direct Method:
Member Commercial
Department Department Total
Accounting ................ $8,000a $8,000a $16,000
Computer Services .... 12,320b 49,280c 61,600
Total....................... $20,320 $57,280 $77,600
a .40
$8,000 = x $16,000
(.40 + .40)
b .10
$12,320 = x $61,600
(.10 + .40)
c .40
$49,280 = x $61,600
(.10 + .40)
b. This is clearly unethical and likely fraudulent.
c. The answer to this question depends, at least in part, on the reason for the change.
If there is evidence that the support from accounting is related to the wages of the
employees, for example, if the accounting staff has more paperwork because of the
higher wages, then this request is not unethical. If it is done simply to shift cost to the
one department, it seems to be unethical.
d. Step Method:
Allocations
f. This appears to be unethical. The controller could argue correctly that the reciprocal
method better assigns costs because of the heavy use of computer services by
accounting. What raises ethical issues would be using the result of the allocation to
determine the method of allocation.
b. Using the same approach, the avoidable cost from outsourcing Accounting is
$69,000 (= $36,000 + $15,000 + $18,000 avoidable fixed costs).
Total service Direct costs of Cost Allocated
department costs = the service + to the Service
department Department
S1 (Administration) = $150,000 + 0.20 S2
S2 (Accounting) = 36,000 + 0.10 S1
Substituting, the first equation into the second yields,
S2 = $36,000 + 0.10 ($150,000 + 0.20 S2)
S2 = $36,000 + $15,000 + 0.02 S2
c. The avoidable costs from outsourcing both the Administration and Accounting
Departments is $264,000 (= $78,000 avoidable fixed costs in both departments +
$186,000 avoidable variable costs in both departments). You cannot add the
amounts found in the reciprocal analysis, because there is double counting. For
example, in requirement (a) we saved all the variable cost in Administration plus
some amount of variable cost in Accounting.
Maintenance = $120,000
b. (4) Generally, the savings from eliminating more than one service department will
be less than the sum of the savings of eliminating the individual departments.
However, if there are no reciprocal services, the savings will be equal to the sum.
b. $1,050,000.
The joint costs to be allocated are all costs up to split-off, that is, all costs in
Department 1.
Cost of Alpha-11 ................................................
$720,000
Direct labor ........................................................
180,000
Overhead ...........................................................
150,000
Total ...............................................................
$1,050,000
c. $705,000.
$375,000a
Net realizable value of Beta-1 ............................
225,000b
Net realizable value of Beta-2 ............................
525,000c
Net realizable value of Beta-3 ............................
Total ...............................................................
$1,125,000
a From requirement a.
b $720,000 – $337,500 – $157,500 = $225,000
c $1,063,125
x 720,000 units – $487,500 – $405,000 = $525,000
540,000 units
Allocation of joint costs to Beta-2:
$225,000
x $1,050,000 = $210,000
$1,125,000
Additional processing costs:
Direct labor ........................................................
337,500
Overhead ...........................................................
157,500
Total cost of Beta-2 ........................................
$705,000
d. $140,000.
Using information from c above, the allocation to Beta-1 is:
$375,000
x $1,050,000 = $350,000
$1,125,000
c. The memo should recommend that Fletcher process product A further. By doing so,
profit will increase $325,500.
Spartan must be using the net realizable value method because the ratio of G-1’s joint
costs to the total does not equal the ratio of G-1’s physical units to the total.
11-64. (35 min.) Find Missing Data—Net Realizable Value: Blaine, Inc.
Blaine must be using the net realizable value method because the ratio of Argon’s joint
costs to the total does not equal the ratio of Argon’s physical units to the total.
a. $150. The contribution from further processing is $0, so the sales value at split
off must be equal to the sales value from processing less the additional
processing costs, or $150 (= $300 – $150).
It is helpful to diagram the flow of units before attempting to solve the problem.
The next step is to determine the net realizable values of Super and Deluxe at the first
split-off.
Super Deluxe
$1,386,000a
Sales value after completion .............................. $2,880,000b
Sales revenue from Generic ..............................249,480c
Separate processing costs:
Department B ...................................................
$ (228,000)
Department C................................................... (990,000)
Department D...................................................
(98,880)
Additional processing cost for Generic .............(48,600) _________
Approximate net realizable values ................... $1,260,000 $1,890,000
a (= 138,600 @ $10)
b (= 120,000 @ $24)
c (= 59,400 @ $4.20)
To Super: $1,260,000
x $783,000 = $313,200
$1,260,000 + $1,890,000
To Deluxe: $1,890,000
x $783,000 = $469,800
$1,260,000 + $1,890,000
b. Given the current product mix (60,000 units of product delta and 16,000 units of
product omega), Ticon should pay no more than $27.50 per unit of material. If the
materials price exceeds this amount, the company will incur an operating loss.
See calculations in (a) for further detail.
b. The net realizable value of the by-product (Upsilon) reduces the joint costs of the
other two products. Thus, an amount of joint cost equal to the net realizable value of
Upsilon is essentially allocated to the by-product; there is no need to allocate
additional joint costs to it.
Grade A:
6,000
x $27,392 = $6,848
6,000 + 18,000
Grade B:
18,000
x $27,392 = 20,544
6,000 + 18,000
$27,392
Grade A:
$44,800
x $27,392 = $23,968
$44,800 + $6,400
Grade B:
$6,400
x $27,392 = 3,424
$44,800 + $6,400
$27,392
11-69. (60 min.) Effect of Cost Allocation on Pricing and Make versus Buy
Decisions: Ag-Coop
a. Output:
Output Mix Kwh per lb. Kwh per 100 lbs. Input
Greenup .............................................................
50% 32 1,600
Maintane ............................................................
30 20 600
Winterizer...........................................................
20 40 800
3,000
$81,250 25,000 =
Fixed cost allocation .......................................... $3.25 per lb.
Feedstock cost................................................... 1.50
Joint costs .......................................................... $4.75 per lb.
Allocated cost per lb. = $4.75 for Greenup, Maintane, and Winterizer.
750,000 kwh
Pounds of input processed = = 22,590 pounds
3,320 kwh per hundred pounds
Amount of Greenup produced = 22,590 x .6 = 13,554
Amount of Maintane produced = 22,590 x .1 = 2,259
Amount of Winterizer produced = 22,590 x .3 = 6,777
22,590
The margin under alternate production schedule B is:
($8.40 x 13,554) + ($7.20 x 2,259) + ($8.32 x 6,777) – ($1.50 x 22,590) – $81,250
= $113,853.60 + $16,264.80 + $56,384.64 – $33,885 – $81,250 = $71,368.04
Therefore, current production schedule A yields a higher operating profit of $81,850
versus $71,368.04 for schedule B.
d. The decision would not be different, even if joint costs are allocated based on the net
realizable value method. Given the production schedule, the realizable values and
the joint costs are the same for either allocation method. Therefore, the better
production schedule will not depend on the choice of the allocation method.