chapter 15 - joint & byproducts

15-1

CHAPTER 15COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS

15-1 Exhibit 15-1 presents nine examples from four different general industries. Theseinclude:

Industry Separable Products at the Splitoff Point

Agriculture:• Lamb • Lamb cuts, tripe, hides, bones, fat• Turkey • Breasts, wings, thighs, poultry mealExtractive:• Petroleum • Crude oil, gas, raw LPG

15-2 A joint cost is a cost of a single production process that yields multiple productssimultaneously. Separable costs are costs incurred beyond the splitoff point that are assignableto one or more individual products.

15-3 The distinction between a joint product and a byproduct is based on relative salesvalue. A joint product is a product that has a relatively high sales value. A byproduct is aproduct that has a relatively low sales value compared to the sales value of the joint (or main)products.

15-4 A product is any output that has a positive sales value (or an output that enables anorganization to avoid incurring costs). In some joint-cost settings, outputs can occur that donot have a positive sales value. The offshore processing of hydrocarbons yields water that isrecycled back into the ocean as well as yielding oil and gas. The processing of mineral ore toyield gold and silver also yields dirt as an output, which is recycled back into the ground.

15-5 The chapter lists the following six reasons for allocating joint costs:

1. Inventory cost and cost-of-goods-sold computations for financial accounting purposesand reports for income tax authorities.

2. Inventory costing and cost-of-goods-sold computations for internal reporting purposes.3. Cost reimbursement under contracts when only a portion of a business' products or

services is sold or delivered to a single customer.4. Insurance settlement computations.5. Rate regulation when one or more of the jointly-produced products or services are

subject to price regulation.6. Litigation in which product cost numbers are key inputs.

15-6 The joint production process yields individual products that are either sold this periodor held as inventory to be sold in subsequent periods. Hence, the joint costs need to beallocated between total production rather than just those sold this period.

15-2

15-7 This situation can occur when a production process yields separable outputs at thesplitoff point that do not have selling prices available until further processing. The result is thatselling prices are not available at the splitoff point to use the sales value at splitoff method.Examples include processing in integrated pulp and paper companies and in petro-chemicaloperations

15-8 Both methods use market selling-price data in allocating joint costs, but they differ inwhich sales-price data they use. The sales value at splitoff method allocates joint costs on thebasis of each product's relative sales value at the splitoff point. The estimated net realizablevalue method allocates joint costs on the basis of the relative estimated net realizable value(expected final sales value in the ordinary course of business minus the expected separablecosts of production and marketing).

15-9 Limitations of the physical measure method of joint-cost allocation include:a. The physical weights used for allocating joint costs may have no relationship to the

revenue-producing power of the individual products.b. The joint products may not have a common physical denominator––for

example, one may be a liquid while another a solid with no readily availableconversion factor.

15-10 The estimated NRV method can be simplified by assuming (a) a standard set of post-splitoff point processing steps, and (b) a standard set of selling prices. The use of (a) and (b)achieves the same benefits that the use of standard costs does in costing systems.

15-11 The constant gross-margin percentage NRV method takes account of the post-splitoff point “profit” contribution earned on individual products, as well as joint costs, whenmaking cost assignments to joint products. In contrast, the sales value at splitoff point and theestimated NRV methods allocate only the joint costs to the individual products.15-12 No. Any method used to allocate joint costs to individual products that is applicableto the problem of joint product-cost allocation should not be used for management decisionsregarding whether a product should be sold or processed further. When a product is aninherent result of a joint process, the decision to process further should not be influenced byeither the size of the total joint costs or by the portion of the joint costs assigned to particularproducts. Joint costs are irrelevant for these decisions. The only relevant items for thesedecisions are the incremental revenue and the incremental costs beyond the splitoff point.

15-13 No. The only relevant items are incremental revenues and incremental costs whenmaking decisions about selling products at the splitoff point or processing them further.Separable costs are not always identical to incremental costs. Separable costs are costsincurred beyond the splitoff point that are assignable to individual products. Some separablecosts may not be incremental costs in a specific setting (e.g., allocated manufacturing overheadthat includes depreciation).

15-14 Two methods to account for byproducts are:a. Production method - recognizes byproducts in the financial statements at the time

production is completed.

15-3

b. Sales method - delays recognition of byproducts until the time of sale.15-15 The sales byproduct method enables a manager to time the sale of byproducts toaffect reported operating income. A manager who was the below targeted operating incomecould adopt a "fire-sale" approach to selling byproducts so that the reported operating incomeexceeds the target. This illustrates one dysfunctional aspect of the sale byproduct method.

15-16 (20-30 min.) Joint cost allocation, insurance settlement.

1. (a) Sales value at splitoff-point method.

Poundsof

Product

WholesaleSelling Priceper Pound

SalesValue

at Splitoff

Weighting:Sales Valueat Splitoff

JointCosts

Allocated

AllocatedCosts per

PoundBreastsWingsThighsBonesFeathers

100204080

10250

$1.100.400.700.200.10

$1108

2816

1163

0.6750.0490.1720.0980.0061.000

$67.504.90

17.209.80

0.60$100.00

0.67500.24500.43000.12250.0600

Costs of Destroyed ProductBreasts: $0.6750 × 20 = $13.50Wings: $0.2450 × 10 = 2.45

$15.95b. Physical measures method

Poundsof

Product

Weighting:Physical

Measures

JointCosts

Allocated

AllocatedCosts per

PoundBreastsWingsThighsBonesFeathers

100204080

10250

0.4000.0800.1600.320

0.040 1.000

$ 40.008.00

16.0032.00

4.00$100.00

$0.4000.4000.4000.4000.400

Costs of Destroyed ProductBreast: $0.40 × 20 = $8Wings: $0.40 × 10 = 4

$12

15-4

15−−16 (Cont’d.)

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

Sales Value atSplitoff Method Physical Measures Method

Product Sales ValueJoint CostsAllocated

Gross Income Joint CostsAllocated

GrossIncome

BreastsWingsThighsBonesFeathers

$1108

28161

$67.504.90

17.209.800.60

$42.503.10

10.806.200.40

$40.008.00

16.0032.004.00

$70.000.00

12.00(16.00)(3.00)

2. The sales-value at splitoff method captures the benefits-received criterion of costallocation. The costs of processing a chicken are allocated to products in proportion to theability to contribute revenue. Chicken Little's decision to process chicken is heavily influencedby the revenues from breasts and thighs. The bones provide relatively few benefits to ChickenLittle despite their high physical volume.

The physical measures method shows profits on breasts and thighs and losses on bonesand feathers. Given that Chicken Little has to jointly process all the chicken products, it isnon-intuitive to single out individual products that are being processed simultaneously asmaking losses while the overall operations make a profit.

15-17 (10 min.) Joint products and byproducts (continuation of 15-16).

1.Ending inventory: Breasts, 10 × $0.6750 $6.7500 Wings, 4 × 0.2450 0.9800 Thighs, 3 × 0.4300 1.2900 Bones, 5 × 0.1225 0.6125 Feathers, 2 × 0.0600 0.1200

$9.7525

2.Joint products Byproducts

Breasts Wings Thigh Bones

Feathers

Revenues of byproducts: Wings $ 8 Bones 16

Feathers 1

15-5

$25

15−−17 (Cont’d.)

Joint costs to be allocated:Joint costs - Revenues of byproducts$100 - $25 = $75

Poundsof

Product

WholesaleSelling Priceper Pound

SalesValue

at Splitoff

Weighting:Sales Valueat Splitoff

JointCosts

Allocated

AllocatedCosts Per

PoundBreast 100 $1.10 $110 110/138 $59.78 $0.5978Thighs 40 0.70 28 28/138 15.22 0.3805

138 $75.00

Ending inventory:Breasts, 10 × $0.5978 $5.9780Thighs, 3 × 0.3805 1.1415

$7.1195

3. Treating all products as joint products does not require judgments as between joint andbyproducts. In contrast, the approach in requirement 2 results in inventory values being shownfor only two of the five products.

15-18 (10 min.) Estimated net realizable value method.

A diagram of the situation is in Solution Exhibit 15-18 (all numbers are in thousands).

Cooking Oil Soap Oil TotalExpected final sales value of production, CO, 1,000 × $50; SO, 500 × $25 $50,000 $12,500 $62,500Deduct expected separable costs to complete and sell 30,000 7,500 37,500Estimated net realizable value at splitoff point $20,000 $ 5,000 $25,000

Weighting $20,000$25,000 = 0.8

$5,000$25,000 = 0.2

Joint costs allocated, CO, 0.8 × $24,000; SO, 0.2 × $24,000

$19,200 $ 4,800 $24,000

15-6

SOLUTION EXHIBIT 15-18

Soap Oil:500units

at $25perunit

CookingOil:1,000units

at $50perunit

Processing$24,000

Processing$30,000

Processing$7,000

SplitoffPoint

Joint Costs Separable Costs

15-7

15-19 (40 min.) Alternative joint-cost-allocation methods, furtherprocess decision.

A diagram of the situation is in Solution Exhibit 15-19.

1. Methanol Turpentine Total

Physical measure of production (gallons) 2,500 7,500 10,000

Weighting 2,50010,000 = 0.25

7,50010,000 = 0.75

Joint costs allocated, M, 0.25 × $120,000; T, 0.75 × $120,000 $ 30,000 $ 90,000 $120,000

2. Methanol Turpentine Total

Expected final sales value of production, M, 2,500 × $21.00; T, 7,500 × $14.00 $ 52,500 $105,000 $157,500Deduct expected separable costs to complete and sell, M, 2,500 × $3.00; T, 7,500 × $2.00 7,500 15,000 22,500Estimated net realizable value at splitoff point $ 45,000 $ 90,000 $135,000

Weighting$ 45,000$135,000 =

13

$ 90,000$135,000 =

23

33

Joint costs allocated, M, 1/3 × $120,000; T, 2/3 × $120,000 $ 40,000 $ 80,000 $120,000

15-8

15-19 (Cont'd.)

3. a. Physical-measure (gallons) method:Methanol Turpentine Total

Sales $52,500 $105,000 $157,500Cost of goods sold: Joint costs 30,000 90,000 120,000 Separable costs 7,500 15,000 22,500 Total costs 37,500 105,000 142,500Gross margin $15,000 $ 0 $ 15,000

b. Estimated net realizable value method:Methanol Turpentine Total

Sales $52,500 $105,000 $157,500Cost of goods sold: Joint costs 40,000 80,000 120,000 Separable costs 7,500 15,000 22,500 Total costs 47,500 95,000 142,500Gross margin $ 5,000 $ 10,000 $ 15,000

4. Wood Alcohol Turpentine TotalExpected final sales value of production, WA, 2,500 × $60.00; T, 7,500 × $14.00 $150,000 $105,000 $255,000Deduct expected separable costs to complete and sell, WA, 2,500 × $12.00 + 0.20 × $150,000; T, 7,500 × $2.00 60,000 15,000 75,000

Estimated net realizable value at splitoff point $ 90,000 $ 90,000 $180,000

Weighting$90,000$180,000 = 0.5 $90,000

$180,000 = 0.5 1.0

Joint costs allocated, WA, 0.5 × $120,000; T, 0.5 × $120,000 $ 60,000 $ 60,000 $120,000

15-9

15-19 (Cont'd.)

An incremental approach demonstrates that the company should use the new process:

Incremental revenue, ($60.00 – $21.00) × 2,500 $ 97,500Incremental costs: Added processing, $9.00 × 2,500 $22,500 Taxes, (0.20 × $60.00) × 2,500 30,000 52,500Incremental operating income from further processing $ 45,000

Proof: Total sales of both products $255,000Joint costs 120,000Separable costs 75,000Cost of goods sold 195,000New gross margin 60,000Old gross margin 15,000Difference in gross margin $ 45,000



Processing$120,000for 10,000

gallons

Processing$2 per gallon

Processing$3 per gallon

7,500gallons

2,500gallons

Methanol:2,500 gallons

at $21 per gallon

Turpentine:7,500 gallons

at $14 per gallon

SplitoffPoint

15-10

15-20 (30 min.) Joint-cost allocation, process further.1.

Joint CostsPurchase Costs +Joint Processing

$1,800

Crude Oil(Non-Salable)

NGL(Non-Salable)

Gas(Non-Salable)

Processing$175

Processing$210

Processing$105

Cruse Oil$2,700

NGL$750

Gas$1,040

SplitoffPoint

2. a. Physical Measure Method

Crude Oil NGL Gas Total1. Physical measures2. Weighting3. Joint costs allocated

(Weights × $1,800)

1500.15

$270

500.05

$90

8000.80

$1,440

1,0001.00

$1,800b. Estimated NRV Method

Crude Oil NGL Gas Total1. Expected final sales value of

production2. Deduct expected separable

costs3. Estimated NRV at splitoff4. Weighting5. Joint costs allocated

(Weights × $1,800)

$2,700

175$2,525

0.63125

$1,136.25

$750

105$645

0.16125

$290.25

$1,040

210$ 830

0.20750

$373.50

$4,490

490$4,0001.000

$1,800

15-11

15-20 (Cont'd.)3. The operating-income amounts for each product using each method is:(a) Physical Measures Method

Crude Oil NGL Gas TotalSalesOperating Costs

Joint costsSeparable costsTotal operating costs

Operating margin

$2,700

270 175 445$2,255

$750

90 105 195$555

$1,040

1,440 210 1,650$ (610)

$4,490

1,800 490 2,290$2,200

(b) Estimated NRV MethodCrude Oil NGL Gas Total

SalesOperating Costs


Operating margin

$2,700.00

1,136.25 175.00 1,311.25$1,388.75

$750.00

290.25 105.00

395.25$354.75

$1,040.00

373.50 210.00 583.50$ 456.50

$4,490.00

1,800.00 490.00 2,290.00$2,200.00

4. Neither method should be used for product emphasis decisions. It is inappropriate to usejoint-cost-allocated data to decide dropping individual products, or pushing individualproducts, as they are joint by definition. Product-emphasis decisions should be made based onrelevant revenues and relevant costs. The con of each method is that either can lead to productemphasis decisions not leading to maximization of operating income.5. A letter to the taxation authorities would stress the conceptual superiority of the estimatedNRV method. Chapter 15 argues that, using a benefits-received cost allocation criterion,market-based joint cost allocation methods are preferable to physical-measure methods. Ameaningful common denominator (revenues) is available when the sales value at splitoff pointmethod is used. The physical-measures method requires non-homogeneous products (liquidsand gases) to be converted to a common denominator.

15-12

15-21 (20 min.) Joint-cost allocation, physical measures method.(continuation of 15-20)

Crude Oil NGL Total1. Expected final sales value of

production2. Deduct expected separable

costs3. Estimated NRV at splitoff4. Weighting5. Joint costs allocated

(Weights × $1,800)

$2,700.00

175.00$2,525.000.796500

$1,433.70

$ 750.00

105.00$ 645.000.203500

$366.30

$ 3,450

280$3,1701.000

$1,800

Crude Oil NGL TotalSalesOperating Costs


Operating margin

$2,700.00

1,433.70 175.00 1,608.70$1,091.30

$750.00

366.30 105.00 471.30$278.70

$3,450

1,800 280 2,080$1,370

2. The State's proposed method results in large profits on crude oil and large losses ongas:

Crude Oil NGL Gas TotalSalesOperating Costs


Operating margin

$2,700

270 175 445$2,255

$750

90 105 195$555

$ 0

1,440 0 1,440$(1,440)

$3,450

1,800 280 2,080$1,370

The main points to note are:a. Gas is not a salable product. It is simply a recycled output that adds no revenues.Indeed, costs are incurred to recycle the gas.b. The physical measure method has all the problems alluded to in the literature––e.g., itignores the revenue earning potential of products, and it may not have a consistentdenominator.

15-13

15-22 (40 min.) Alternative methods of joint-cost allocation,ending inventories.

Total production for the year was:Ending Total

Sold Inventories Production

X 120 180 300Y 340 60 400Z 475 25 500


1. a. Estimated net realizable value (NRV) method:X Y Z Total

Expected final sales value of production,

X, 300 × $1,500; Y, 400 × $1,000;

Z, 500 × $700 $450,000 $400,000 $350,000 $1,200,000Deduct separable costs - - 200,000 200,000Estimated net realizable value at splitoff point $450,000 $400,000 $150,000 $1,000,000

Weighting:$450

$1,000 = 0.45$400

$1,000 = 0.40$150

$1,000 = 0.15 1.0

Joint costs allocated, 0.45, 0.40, 0.15 × $400,000 $180,000 $160,000 $ 60,000 $ 400,000

Ending Inventory Percentages: X Y Z

Ending inventory 180 60 25Total production 300 400 500Ending inventory percentage 60% 15% 5%

15-14

15-22 (Cont'd.)

Income Statement

X Y Z TotalSales, X, 120 × $1,500; Y, 340 × $1,000; Z, 475 × $700 $180,000 $340,000 $332,500 $852,500

Cost of goods sold: Joint costs allocated 180,000 160,000 60,000 400,000 Separable costs - - 200,000 200,000 Cost of goods available for sale 180,000 160,000 260,000 600,000 Deduct ending inventory, X, 60%; Y, 15%; Z, 5% 108,000 24,000 13,000 145,000 Cost of goods sold 72,000 136,000 247,000 455,000Gross margin $108,000 $204,000 $ 85,500 $397,500

Gross-margin percentage 60% 60% 25.71%

b. Constant gross-margin percentage NRV method:

Step 1:Total final sales value, (300 × $1,500) + (400 × $1,000) + (500 × $700) = $1,200,000Deduct joint and separable costs, $400,000 + $200,000 600,000

Gross margin $ 600,000

Gross-margin percentage, $600,000 ÷ $1,200,000 = 50%

X Y Z TotalExpected final sales value of production, X, 300 × $1,500; Y, 400 × $1,000; Z, 500 × $700 $450,000 $400,000 $350,000 $1,200,000

Step 2: Deduct gross margin, using overall gross-margin percentage of sales, 50% 225,000 200,000 175,000 600,000

Step 3: Deduct separable costs - - 200,000 200,000Joint costs allocated $225,000 $200,000 $(25,000) $ 400,000

15-15

15-22 (Cont'd.)

The negative joint-cost allocation to Product Z illustrates one "unusual" feature of theconstant gross-margin percentage NRV method. Some products may receive negative costallocations in order that all individual products have the same gross-margin percentage.

Income Statement X Y Z Total

Sales X, 120 × $1,500; Y, 340 × $1,000; Z, 475 × $700 $180,000 $340,000 $332,500 $852,500

Cost of goods sold: Joint costs allocated 225,000 200,000 (25,000) 400,000 Separable costs - - 200,000 200,000 Cost of goods available for sale 225,000 200,000 175,000 600,000 Deduct ending inventory, X, 60%; Y, 15%; Z, 5% 135,000 30,000 8,750 173,750 Cost of goods sold 90,000 170,000 166,250 426,250Gross margin $ 90,000 $170,000 $166,250 $426,250Gross-margin percentage 50% 50% 50% 50%

Summary X Y Z Total

a. Estimated NRV method:Inventories on balance sheet $108,000 $ 24,000 $ 13,000 $145,000Cost of goods sold on income statement 72,000 136,000 247,000 455,000

$600,000

b. Constant gross-margin percentage NRV method

Inventories on balance sheet $135,000 $ 30,000 $ 8,750 $173,750Cost of goods sold on income statement 90,000 170,000 166,250 426,250

$600,000

2. Gross-margin percentages: X Y Z

Estimated NRV method 60% 60% 25.71%Constant gross-margin percentage NRV 50% 50% 50.00%

15-16

15-22 (Cont'd.)


SplitoffPoint

Processing$200,000

Product Y:400 tons at

$1,000 per ton

Product X:300 tons at

$1,500 per ton

JointProcessing

Costs$400,000

Product Z:500 tons at

$700 per ton


15-17

15-23 (30 min.) Process further or sell, joint-cost allocation.


1. Product A (5,000 units disposed at splitoff point)* Incremental revenues, 5,000 × $0 $ 0 Incremental costs, 5,000 × $0.20 1,000 Incremental operating income $(1,000)

Product A (5,000 units processed further) Incremental revenues, 5,000 × $1.50 $7,500 Incremental processing costs Fixed $6,000 Variable, 5,000 × $0.90 4,500 10,500 Incremental operating income $(3,000)

Product B (15,000 units sold at splitoff point) Incremental revenues, 15,000 × $0.50 $7,500 Incremental processing costs, 15,000 × $0 0 Incremental operating income $7,500

Product B (15,000 units processed further) Incremental revenues, 15,000 × $1.50 $22,500 Incremental processing costs Fixed $1,000 Variable, 15,000 × $1 15,000 16,000 Incremental operating income $ 6,500

Product C (10,000 units disposed of at splitoff) Incremental revenues, 10,000 × $0 $ 0 Incremental costs, 10,000 × $0.90 9,000 Incremental operating income $9,000

Product C (10,000 units processed further) Incremental revenues, 10,000 × $5.40 $54,000 Incremental processing costs Fixed $10,000 Variable, 10,000 × $1.10 11,000 21,000 Incremental operating income $33,000

15-18

15-23 (Cont'd.)

Summary of the alternatives is:

ProductDispose

at SplitoffProcessFurther

PreferredAlternative

A $(1,000) $(3,000) $(1,000)B 7,500 6,500 7,500C (9,000) 33,000 33,000

$(2,500) $36,500 $39,500

2. Revenues Product B, 15,000 × $0.50 $ 7,500 Product C, 10,000 × $5.40 54,000 $61,500 Costs Joint costs, $5,000 + (5,000 × $2) $15,000 Disposal costs, A: 5,000 × $0.20 1,500 Processing costs C: $10,000 + $11,000 21,000 Selling and administrative costs 14,000 51,000 Gross margin $10,500

Solution Exhibit 15-23

Dispose at splitoffSell at splittoffProcess further


Processing$6,000 +

$0.90 per unit

Processing$1,000 +

$1.00 per unit

Processing$10,000 +

$1.10 per unit

$5,000 +$2.00 per unit

B$0.50 per unit

A$0.50 per unit

B$0.50 per unit

C$0.50 per unit

SplitoffPoint

15-19

15-24 (40 min.) Process further or sell, byproduct.

1. The analysis shown below indicates that it would be more profitable for NewcastleMining Company to continue to sell raw bulk coal without further processing. (This analysisignores any value related to coal fines.)

Incremental sales revenues:Sales revenue after further processing (9,500,000 tons × $36) $342,000,000Sales revenue from bulk raw coal (10,000,000 tons × $27) 270,000,000 Incremental sales revenue 72,000,000

Incremental costs:Direct labor 600,000Supervisory personnel 100,000Heavy equipment costs ($25,000 × 12 months) 300,000Sizing and cleaning (10,000,000 tons × $3.50) 35,000,000Outbound rail freight (9,500,000 tons ÷ 60 tons) × $240 per car 38,000,000 Incremental costs 74,000,000Incremental gain (loss) $(2,000,000)

2. The analysis shown below indicates that the potential revenue from the coal finesbyproduct would result in additional revenue, ranging between $5,250,000 and $9,000,000,depending on the market price of the fines.

1. Coal fines = 75% of 5% of raw bulk tonnage= .75 × (10,000,000 × .05)= 375,000 tons

Potential additional revenue:Market price

Minimum Maximum$14 per ton $24 per ton

Additional revenue $5,250,000 $9,000,000

Since the incremental loss is $2 million, as calculated in requirement 1, including thecoal fines in the analysis indicates that further processing provides a positive result and is,therefore, favorable.

15-20

15−−24 (Cont’d.)

3. Other factors that should be considered in evaluating a sell-or-process-further decisioninclude:• Stability of the current customer market 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

of 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.

15-21

15-25 (30 min.) Accounting for a main product and a byproduct.

Method A,Recognized

at Production

Method B,Recognized

at Sale1. Revenues

Main product $160,000a $160,000

Byproduct ---__ 2,800d

Total revenues 160,000 162,800Cost of goods sold Total manufacturing costs 120,000 120,000 Deduct byproduct revenue 4,000

b 0

Net manufacturing costs 116,000 120,000 Deduct main product inventory 23,200

c 24,000

e

Cost of goods sold 92,800 96,000Gross margin $ 67,200 $ 66,800

a. 8,000 × $20.00b. 2,000 × $2.00

c. 200,23$000,116$000,10

000,2=

×

d. 1,400 × $2.00e.

000,24$000,120$000,10

000,2=

×

Method A,Recognized

at Production

Method B,Recognized

at Sale2. Rainbow Dew $23,200 $24,000

Resi-Dew 1,200

a 0

a. Ending inventory shown at unrealized selling price.

BI + Production - Sales = EI 0 + 2,000 - 1,400 = 600Ending inventory = 600 × $2 = $1,200

15-22

15-26 (35-45 min.) Joint costs and byproducts.


1. Computing byproduct deduction to joint costs:

Marketing price of X, 100,000 × $3 $300,000Deduct: Gross margin, 10% of sales 30,000

Marketing costs, 25% of sales 75,000Department 3 separable costs 50,000

Estimated net realizable value of X $145,000

Joint costs $800,000Deduct byproduct contribution 145,000Net joint costs to be allocated $655,000

Deduct Est. NetUnit Final Separable Realizable Allocation ofSales Sales Processing Value at $655,000

Quantity Price Value Cost Splitoff Weighting Joint CostsL 50,000 $10 $ 500,000 $100,000 $ 400,000 40% $262,000W 300,000 2 600,000 - 600,000 60% 393,000Totals $1,100,000 $100,000 $1,000,000 $655,000

Add SeparableJoint Costs ProcessingAllocation Costs Total Costs Units Unit Cost

L $262,000 $100,000 $362,000 50,000 $7.24W 393,000 - 393,000 300,000 1.31Totals $655,000 $100,000 $755,000 350,000

Unit cost for X: $1.45 + $0.50 = $1.95,or $3.00 – $0.30 – $0.75 = $1.95.

15-23

15-26 (Cont'd.)

2. If all three products are treated as joint products:

Deduct Est. NetUnit Final Separable Realizable Allocation ofSales Sales Processing Value at $800,000

Quantity Price Value Cost Splitoff Weighting Joint CostsL 50,000 $10 $ 500,000 $100,000 $ 400,000 40/125 $256,000W 300,000 2 600,000 - 600,000 60/125 384,000X 100,000 3 300,000 50,000 250,000 25/125 160,000Totals $1,400,000 $150,000 $1,250,000 $800,000

Add SeparableJoint Costs ProcessingAllocation Costs Total Costs Units Unit Cost

L $256,000 $100,000 $356,000 50,000 $7.12W 384,000 - 384,000 300,000 1.28X 160,000 50,000 210,000 100,000 2.10Totals $800,000 $150,000 $950,000 450,000

Call the attention of students to the differing unit "costs" between the two assumptionsregarding the relative importance of Product X. The point is that costs of individual productsdepend heavily on which assumptions are made and which accounting methods and techniquesare used.

15-24


Processingof 600,000 lbs:

Processing$50,000

W300,000 pounds

L

X

50,000 pounds

100,000 pounds

Processing$100,000

Separable CostsJoint Costs

SplitoffPoint

15-25

15-27 (40 min.) Alternative methods of joint-cost allocation,product-mix decision.

1. Joint costs = $300,000a. Sales value at splitoff method

Select White Knotty Total1. Sales value at splitoff

(30,000 × $8, 50,000 × $4, 20,000 × $3) $240,000 $200,000 $60,000 $500,0002. Weighting

(240/500, 200/500, 60/500) 0.48 0.40 0.12 1.003. Joint cost allocated

(0.48, 0.40, 0.12 × $300,000) $144,000 $120,000 $36,000 $300,0004. Total cost computation

Joint costs $144,000 $120,000 $36,000 $300,000 Separable processing 60,000 90,000 15,000 165,000 Total costs $204,000 $210,000 $51,000 $465,000 Total units 25,000 40,000 15,000Unit cost $5.76 $5.25 $3.40

b. Physical-measures methodSelect White Knotty Total

1. Physical measure of production(board feet) 30,000 50,000 20,000 100,000

2. Weighting(30/100, 50/100, 20/100) 0.30 0.50 0.20 1.00

3. Joint costs allocated(0.30, 0.50, 0.20 × $300,000) $90,000 $150,000 $60,000 $300,000

4. Total cost computation Joint costs $90,000 $150,000 $60,000 $300,000 Separable processing 60,000 90,000 15,000 165,000 Total costs $150,000 $240,000 $75,000 $465,000 Total units 25,000 40,000 15,000Unit cost $6.00 $6.00 $5.00

15-26

15−−27 (Cont’d.)

c. Estimated net realizable value method

Select White Knotty Total1. Expected final sales value of production

(25,000 × $16, 40,000 × $9, 15,000 × $7) $400,000 $360,000 $105,000 $865,0002. Deduct expected separable costs 60,000 90,000 15,000 165,0003. Estimated NRV at splitoff $340,000 $270,000 $90,000 $700,0004. Weighting (340/700, 270/700, 90/700) 0.4857 0.3857 0.12865. Joint costs allocated

(0.4857, 0.3857, 0.1286 × $300,000) $145,710 $115,710 $38,580 $300,000Total cost computation Joint costs $145,710 $115,710 $38,580 $300,000 Separable processing 60,000 90,000 15,000 165,000 Total costs $205,710 $205,710 $53,580 $465,000Total units 25,000 40,000 15,000Unit cost $8.23 $5.14 $3.57

2. Select White Knotty Totala. Sales value at splitoff

($5.76 × 1,000, $5.25 × 1,000, $3.40 × 500)b. Physical measures $5,760 $5,250 $1,700

($6.00 × 1,000, $6.00 × 2,000, $5.00 × 500)c. Estimated NRV 6,000 12,000 2,500

($8.23 × 1,000, $5.14 × 2,000, $3.57 × 500) 8,230 10,280 1,785

3. Raw to Select OakIncremental revenues: $400,000 - $240,000 $160,000Deduct incremental processing costs 60,000Increase in operating income $100,000

Raw to White OakIncremental revenues: $360,000 - $200,000 $160,000Deduct incremental processing costs 90,000Increase in operating income $ 70,000

Raw to Knotty OakIncremental revenues: $105,000 - $60,000 $ 45,000Deduct incremental processing costs 15,000Increase in operating income $ 30,000

Pacific Lumber is maximizing its total August 2001 operating income by fully processing each raw oakproduct into its finished product form.

15-27

15-28 (40 min.) Alternative methods of joint-cost allocation,product-mix decisions.


1. Computation of joint-cost allocation proportions:

a. Sales Value Allocation of $100,000at Splitoff Proportions Joint Costs

A $ 50,000 50/200 = 0.25 $ 25,000B 30,000 30/200 = 0.15 15,000C 50,000 50/200 = 0.25 25,000D 70,000 70/200 = 0.35 35,000

$200,000 1.00 $100,000

b. Allocation of $100,000Physical Measure Proportions Joint Costs

A 300,000 gallons 300/500 = 0.60 $ 60,000B 100,000 gallons 100/500 = 0.20 20,000C 50,000 gallons 50/500 = 0.10 10,000D 50,000 gallons 50/500 = 0.10 10,000

500,000 gallons 1.00 $100,000

c.

FinalSalesValue

SeparableCosts

EstimatedNet

RealizableValue Proportions

Allocation of$100,000

Joint CostsA $300,000 $200,000 $100,000 100/200 =0.50 $ 50,000B 100,000 80,000 20,000 20/200 = 0.10 10,000C 50,000 – 50,000 50/200 = 0.25 25,000D 120,000 90,000 30,000 30/200 = 0.15 15,000

$200,000 1.00 $100,000

Computation of gross-margin percentages:

a. Sales value at splitoff method:

Super A Super B C Super D TotalSales $300,000 $100,000 $50,000 $120,000 $570,000Joint costs 25,000 15,000 25,000 35,000 100,000Separable costs 200,000 80,000 0 90,000 370,000 Total costs 225,000 95,000 25,000 125,000 470,000Gross margin $ 75,000 $ 5,000 $25,000 $

(5,000)$100,000

Gross-margin percentage 25% 5% 50% (4.17%) 17.54%

15-28

15-28 (Cont'd)

b. Physical-measure method:

Super A Super B C Super D TotalSales $300,000 $100,000 $50,000 $120,000 $570,000Joint costs 60,000 20,000 10,000 10,000 100,000Separable costs 200,000 80,000 0 90,000 370,000 Total costs 260,000 100,000 10,000 100,000 470,000Gross margin $ 40,000 $ 0 $40,000 $ 20,000 $100,000Gross-margin percentage 13.33% 0% 80% 16.67% 17.54%

c. Estimated net realizable value method:

Super A Super B C Super D TotalSales $300,000 $100,000 $50,000 $120,000 $570,000Joint costs 50,000 10,000 25,000 15,000 100,000Separable costs 200,000 80,000 0 90,000 370,000 Total costs 250,000 90,000 25,000 105,000 470,000Gross margin $ 50,000 $ 10,000 $25,000 $ 15,000 $100,000

Gross-margin percentage 16.67% 10% 50% 12.5% 17.54%

Summary of gross-margin percentages:

Joint-CostAllocation Method Super A Super B C Super D

Sales value at splitoff 25.00% 5% 50% (4.17%)

Physical measure 13.33% 0% 80% 16.67%

Estimated net realizable value 16.67% 10% 50% 12.50%

15-29

15-28 (Cont'd.)

2. Further Processing of A into Super A:

Incremental revenue, $300,000 – $50,000 $250,000Incremental costs 200,000Incremental operating income from further processing $ 50,000

Further processing of B into Super B:

Incremental revenue, $100,000 – $30,000 $ 70,000Incremental costs 80,000Incremental operating income from further processing ($ 10,000)

Further Processing of D into Super D:

Incremental revenue, $120,000 – $70,000 $ 50,000Incremental costs 90,000Incremental operating income from further processing $ (40,000)

Operating income can be increased by $50,000 if both B and D are sold at their splitoff point.


Processing$100,000

A, 300,000 gallons$50,000

B, 100,000 gallons$30,000

D, 50,000 gallons$70,000

C, 50,000 gallons$50,000


Processing$200,000

Processing$80,000

Processing$90,000

Super D$120,000

Super D$120,000

Super D$120,000

SplitoffPoint

15-30

15-29 (40-60 min.) Comparison of alternative joint-cost allocationmethods, further process decision, chocolate products.

1. a. Sales value at splitoff method:Chocolate-

PowderMilk-

ChocolateLiquor Base Liquor Base Total

Sales value at splitoff, 200a × $21; 300b × $26 $4,200 $7,800 $12,000

Weighting $4,200$12,000 =

0.35

$7,800$12,000 =

0.65Allocation of joint costs, 0.35 × $10,000; 0.65 × $10,000 $3,500 $6,500 $10,000

a(2,000/200) × 20 b(3,400/340) × 30

b. Physical-measure method: 200 (10 × 20) gallons; 300 (10 × 30) gallons 200 gallons 300 gallons 500 gallons

Weighting200500 = 0.40

300500 = 0.60

Allocation of joint costs, 0.40 × $10,000; 0.60 × $10,000 $4,000 $6,000 $10,000

c. Estimated net realizable value method:Chocolate- Milk-

Powder ChocolateLiquor Base Liquor Base Total

Expected sales value of production, 2,000 × $4; 3,400 × $5 $8,000 $17,000 $25,000Deduct expected separable cost of further processing 4,250 8,750 13,000Estimated net realizable value at splitoff point $3,750 $ 8,250 $12,000

Weighting $3,750$12,000 =

0.3125

$8,250$12,000 =

0.6875Allocation of joint costs, 0.3125 × $10,000; 0.6875 × $10,000 $3,125 $6,875 $10,000

15-31

15-29 (Cont'd.)

d. Constant gross-margin percentage NRV method:

Step 1:

Total final sales value of production, (2,000 × $4) + (3,400 × $5) $25,000Deduct joint and separable costs, ($10,000 + $4,250 + $8,750) 23,000Gross margin $ 2,000

Gross-margin percentage ($2,000 ÷ $25,000) 8%

Step 2:Chocolate- Milk-

Powder ChocolateLiquor Base Liquor Base Total

Expected final sales value of production (2000 × $4); (3,400 × $5) $8,000 $17,000 $25,000Deduct gross margin, using overall gross-margin percentage of sales (8%) 640 1,360 2,000Cost of goods sold 7,360 15,640 23,000

Step 3:

Deduct separable cost of further processing 4,250 8,750 13,000Joint costs allocated $3,110 $ 6,890 $10,000

2. Chocolate- Milk-Powder Chocolate

Liquor Base Liquor Base Total

a. Sales $8,000 $17,000 $25,000Joint costs 3,500 6,500 10,000Separable costs 4,250 8,750 13,000Total costs 7,750 15,250 23,000Gross margin $ 250 $ 1,750 $ 2,000

Gross-margin percentage 3.125% 10.294% 8%

15-32

15-29 (Cont'd.)

b. Sales $8,000 $17,000 $25,000Joint costs 4,000 6,000 10,000Separable costs 4,250 8,750 13,000Total costs 8,250 14,750 23,000Gross margin $ (250) $ 2,250 $ 2,000

Gross-margin percentage (3.125)% 13.235% 8%

c. Sales $8,000 $17,000 $25,000Joint costs 3,125 6,875 10,000Separable costs 4,250 8,750 13,000Total costs 7,375 15,625 23,000Gross margin $ 625 $ 1,375 $ 2,000

Gross-margin percentage 7.812% 8.088% 8%

d. Sales $8,000 $17,000 $25,000Joint costs 3,110 6,890 10,000Separable costs 4,250 8,750 13,000Total costs 7,360 15,640 23,000Gross margin $ 640 $ 1,360 $ 2,000

Gross-margin percentage 8% 8% 8%

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

Incremental revenue, $8,000 – $4,200 $ 3,800Incremental costs 4,250Incremental operating income from further processing $ (450)

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

Incremental revenue, $17,000 – $7,800 $ 9,200Incremental costs 8,750Incremental operating income from further processing $ 450

Roundtree Chocolates could increase operating income by $450 (to $2,450) if chocolate-powder liquor base is sold at the splitoff point and if milk-chocolate liquor base is furtherprocessed into milk chocolate.

15-33

15-30 (30 min.) Joint-cost allocation, process further or sell.

1.a. Relative sales value method at splitoff.

MonthlyUnit

Output

SellingPrice

Per Unit

RelativeSales Valueat Splitoff

% ofSales

AllocatedJoint Costs

Studs (Building) 75,000 $8 $600,000 46.15% $461,539Decorative Pieces 5,000 60 300,000 23.08 230,769Posts 20,000 20 400,000 30.77 307,692Totals $1,300,000 100.00% $1,000,000

b. Physical output (volume) method at splitoff.Physical

UnitVolume

% ofTotal Unit

Volume


Studs (Building) 75,000 75.00% $750,000Decorative Pieces 5,000 5.00 50,000Posts 20,000 20.00 200,000Totals 100,000 100.00% $1,000,000

c. Estimated net realizable value method.

MonthlyUnit

Output

FullyProcessed

SellingPrice

per Unit

EstimatedNet

RealizableValue

% ofSales


Studs (Building) 75,000 $8 $600,000 44.44% $444,445Decorative Pieces 4,500a 100 350,000b 25.93 259,259

Posts 20,000 20 400,000 29.63 296,296Totals $1,350,000 100.00% $1,000,000

Notes:a. 5,000 monthly units of output - 10% normal spoilage = 4,500 good units.b. 4,500 good units X $100 = $450,000 - Further processing costs of $100,000 = $350,000

2. Presented below is an analysis for Sonimad Sawmill Inc. comparing the processing ofdecorative pieces further versus selling the rough-cut product immediately at split-off.

Units DollarsMonthly unit output 5,000Less: Normal further processing shrinkage 500 Units available for sale 4,500Final sales value (4,500 units @ $100 per unit) $450,000Less: Sales value at splitoff 300,000 Differential revenue 150,000Less: Further processing costs 100,000 Additional contribution from further processing $50,000

15-34

15−−30 (Cont’d.)

3. Assuming Sonimad Sawmill Inc. announces that in six months it will sell the rough-cutproduct at split-off, due to increasing competitive pressure, at least three types of likelybehavior that will be demonstrated by the skilled labor in the planing and sizing process includethe following.

• Poorer quality.• Reduced motivation and morale.• 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 thereason for the change in order to better understand the situation and bring out a plan forfuture operation of the rest of the plant.

• The company can offer incentive bonuses to maintain quality and production and alignrewards with goals.

• The company could provide job relocation and internal job transfers.



Processing$1,000

Processing$1,000,000

Studs$8 per unit

Raw DecorativePieces

$60 per unit

Posts$20 per unit

DecorativePieces

$100 per unit

SplitoffPoint

15-35

15-31 (30 min.) Joint and byproducts, estimated net realizablevalue method.


1. Allocate joint costs between Alpha and Gamma

Alpha:Sales value, 46,200 pounds of Alpha × $5 $231,000 (19,800 pounds of Beta × $1.20) $23,760 Deduct marketing costs (Beta) 8,100 Estimated net realizable value (Beta) 15,660Total final sales value 246,660Deduct additional costs: Processing (Department Two) 38,000 Processing (Department Four) 23,660 61,660Estimated net realizable value at splitoff point $185,000

Gamma:Sales value, 40,000 pounds × $12 $480,000Deduct processing (Department Three) 165,000Estimated net realizable value at splitoff point $315,000

Estimated Net Allocation ofRealizable Value Weighting $120,000 Joint Costs

Alpha $185,000 37% $ 44,400Gamma 315,000 63 75,600

$500,000 100% $120,000

15-36

15-31 (Cont'd.)

2. Income Statement through Gross Margin for Alpha:

Sales (38,400 pounds × $5) $192,000Production costs: Allocated joint costs $102,000 Department Two 38,000 Department Four 23,660

Total costs of production 163,660Deduct estimated net realizable value of Beta 15,900Net cost of production 147,760Deduct ending inventory 29,552Cost of goods sold 118,208Gross margin $ 73,792

Estimated net realizable value of Beta equals the revenue from Beta ($24,000) minus its relatedmarketing costs ($8,100). Ending inventory equals the net cost of production ($147,760)times 20%.

15-37

15-31 (Cont'd.)


Joint Costs

Dept. 2Processing

$38,00066,000pounds

Dept. 1Processing of110,000 lbs:

$120,000

44,000 pounds

Gamma:

40,000 poundsa

at $12 a pound

Beta:19,800 pounds

at $1.20 apound

Alpha:46,200 poundsat $5 a pound

Separable Costs

Dept. 3Processing$165,000

SeparableMarketing

$8,100

Dept. 4Processing

$23,660

SplitoffPoint

a. Computation of pounds of Gamma:

Let X = Good output44,000 – 0.1X = XX = 40,000

15-38

15-32 (30 min.) Joint-cost allocation, relevant costs.

1. The "six-day progressive product trimming" ignores the fundamental point that the $300cost to buy the pig is a joint cost. A pig is purchased as a whole. The butcher's challenge is tomaximize the total revenues minus incremental costs (assumed zero) from the sale of allproducts.

At each stage, the decision taken ignores the general rule that product emphasisdecisions should consider relevant relevants and relevant costs. Allocated joint costs are notpart of the relevant cost numbers. For example, the Day I decision to drop pig's feet ignoresthe fact that the $300 point cost has been paid to acquire the who pig. The $15 of revenuesare relevant inflows. This same position also holds for the Day 2 to Day 6 decisions.

2. The revenue amounts are the figures to use in the sales value at splitoff method:

Revenue WeightingJoint CostsAllocated

Pork chops $120 0.2425 $72.75Ham 150 0.3030 90.90Bacon 160 0.3232 96.96Pig's feet 15 0.0303 9.09Hide 50 0.1010 30.30

$495 1.0000 $300.00

3. No. The decision to sell or not sell individual products should consider relevant revenuesand relevant costs. In the butcher's context, the relevant costs would be the additional timeand other incidentals to take each pig part and make it a salable product. The relevantrevenues would be the difference between selling price at the consumer level and what thebutcher may receive for pig parts in unprocessed form.

15-39

15-33 (30 min.) Estimated net realizable value method, byproducts.

1. a. For the month of November, 2000, Princess Corporation's output was:• apple slices 89,100• applesauce 81,000• apple juice 67,500• animal feed 27,000

These amounts were calculated as follows:

Product Input ProportionTotal

PoundsPounds

LostNet

PoundsSlicesSauceJuiceFeed

270,000 lbs.270,000270,000270,000

0.330.300.270.101.00

89,10081,00072,900

27,000270,000

––

5,400 – 5,400

89,10081,000

67,500a

27,000264,600

aNet pounds: = 72,900 – (0.08 × net pounds)1.08 net pounds = 72,900Net pounds = 67,500

b. The estimated net realizable value for each of the three main products is calculatedbelow:

ProductNet

Pounds Price RevenueSeparable

Costs

EstimatedNet

RealizableValue

SlicesSauceJuice

89,10081,00067,500

$0.800.550.40

$ 71,28044,550

27,000$142,830

$11,2808,550

3,000$22,830

$ 60,00036,000

24,000$120,000

15-40

15-33 (Cont'd.)

c. and d.The estimated net realizable value of the byproduct is deducted from the productioncosts prior to allocation to the joint products, as presented below:

Allocation of Cutting Department Coststo Joint Products and Byproducts

Net realizable value(NRV) of byproduct = Byproduct revenue – Separable costs

= $0.10 (270,000 × 10%) – $700= $2,700 – $700= $2,000

Costs to be allocated = Joint costs – NRV of byproduct= $60,000 – $2,000= $58,000

Product RevenueSeparable

CostsJoint

CostsaGross

Margin

SlicesSauceJuice

$ 71,28044,550

27,000$142,830

$11,2808,550

3,000$22,830

$29,00017,400

11,600$58,000

$31,00018,600

12,400$62,000

a. Allocated using estimated NRV of the three joint products from requirement 1(b):Slices ($60,000 ÷ $120,000) x $58,000 = $29,000Sauce ($36,000 ÷ $120,000) x $58,000 = 17,400Juice ($24,000 ÷ $120,000) x $58,000 = 11,600

2. The gross-margin dollar information by main product is determined by the arbitraryallocation of joint production costs. As a result, these cost figures and the resulting gross-margin information are of little significance for planning and control purposes. The allocationis made only for purposes of inventory costing and income determination.

15-41

15-34 (20–30 min.) Joint product/byproduct distinctions, ethics.(continuation of 15-33)

1. The 2000 method gives Princess managers relatively little discretion vis-a-vis the pre-2000 method. The 2000 method recognizes all four products in the accounting system at thetime of production.

The pre-2000 method recognizes only two products (apple slices and applesauce) atthe time of production. Consider the data in the question. The $60,000 of joint costs wouldbe allocated as follows (using the $60,000 and $36,000 estimated NRV amounts):

Apple Slices:$60,000$96,000 × $60,000 = $37,500

Applesauce:$36,000$96,000 × $60,000 = $22,500

The gross margin on each product is:

Apple Slices =($71,280 – $37,500 – $11,280)

$71,280 = 31.57%

Applesauce =($44,550 – $22,500 – $8,550)

$44,550 = 30.30%

The gross margins on the two "byproducts" are:

Apple juice =$27,000 – $3,000

$27,000 = 88.89%

Animal feed =$2,700 – $700

$2,700 = 74.07%

With the pre-2000 method, managers have flexibility as to when to sell the apple juice and theanimal feed. Both are frozen and can be kept in cold storage until needed. If there is a needfor a large "dose" of gross margin at year-end to meet the target ratio, high gross margins fromapple juice or animal feed can be drawn on to help achieve the target.2. The controller could examine the sales patterns of apple juice and animal feed at year-end. Do managers who have ratios from existing sales below the target sell apple juice andanimal feed inventories to achieve the target ratio? Do managers who have ratios above thetarget put apple juice and animal feed production into inventory so as to provide a "cushion"for subsequent years?

One piece of evidence here would be physical inventory-holding patterns on amonthly basis. If there were a different pattern of inventory holding for the two byproductsthan the two joint products, there would be grounds for further investigating whethermanagers are abusing the bonus system.

15-42

15-35 ( 60 min.) Joint-cost allocation, process further or sell byproducts.

1.

Altox

Hycol

Lorex$1,400,000Processing$1,800,000

Altox Lorex Hycol TotalExpected final sales value of

productiona $595,000 $2,500,000 $660,000 $3,755,000Deduct expected separable costs to

complete and sell – 1,400,000 – 1,400,000Estimated net realizable value at

splitoff point $595,000 $1,100,000 $660,000 $2,355,000Weightingb 0.253 0.467 0.280 1.000Joint costs allocatedc $455,400 $840,600 $504,000 $1,800,000

a($3.50 × 170,000); ($5.00 × 500,000); ($2 × 330,000)b($595,000 ÷ 2,355,000); ($1,100,000 ÷ $2,355,000); ($660,000 ÷ $2,355,000)c$1,800,000 × 0.253; 0.467; 0.280

15-43

15-35 (Cont'd.)

2. Further processing AltoxIncremental revenue

($5.50 × 150,000) – ($3.50 × 170,000) $825,000 – $595,000 $230,000Incremental processing cost 250,000Incremental operating income $ (20,000)

Further processing LorexIncremental revenue($5.00 × 500,000) – ($2.25 × 500,000) $2,500,000 – $1,125,000 $1,375,000Incremental processing cost 1,400,000Incremental operating income $ (25,000)

Further processing HycolIncremental revenue($1.80 × (330,000 × 1.25)) – ($2 × 330,000)

$742,500 – $660,000 $82,500Incremental processing cost 75,000Incremental operating income $ 7,500

Current PolicySell Altox at splitoff $ 595,000Process Lorex further 1,100,000Sell Hycol at splitoff 660,000

2,355,000Joint costs 1,800,000Operating income $ 555,000

Preferred OptionsSell Altox at splitoff $ 595,000Sell Lorex at splitoff 1,125,000Process Hycol further 667,500

2,387,500Joint costs 1,800,000Operating income $ 587,500

Goodson is $32,500 better off by changing two of its current policies––it should sell Lorex atsplitoff ($25,000 improvement) and process Hycol further ($7,500 improvement).

15-44

15-35 (Cont'd.)

3. a. Goodson would be better off by $12,000 by selling Dorzine to Dietriech Mills.Further processing Dorzine

Incremental revenue($0.75 × 50,000) + $17,500a $55,000$37,500 + $17,500

Incremental processing cost 43,000Incremental operating income $12,000

aDisposal costs avoided by processing further $0.35 × 50,000 = $17,500

b. The decision to treat Dorzine should not affect decisions as to whether to processfurther or sell at the splitoff point. Accounting decisions about joint product/byproductdistinctions do not affect total revenues or total costs.

chapter 15 - joint & byproducts

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