- Separable Costs Joint Costs $1,800 Crude Oil Processing $175 ICR8 150 barrels @ $18 per barrel NGL Hydrocarbons Processing $105 Processing 50 barrels @ $15 per barrel ING4 Natural Gas Processing $210 800 eqvt. barrels @ $1.30 per eqvt. ХСЕЗ barrel A federal law that has recently been passed taxes crude oil at 30% of operating income. No new tax is to be paid on natural gas liquids or natural gas. Starting August 2017, Sinclair Oil & Gas must report a separate product-line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the joint cost of producing the three separate salable outputs. Assume no beginning or ending inventory. 1. Allocate the August 2017 joint cost among the three products using the following: a. Physical-measure method b. NRV method 2. Show the operating income for each product using the methods in requirement 1. 3. Discuss the pros and cons of the two methods to Sinclair Oil & Gas for making decisions about product emphasis (pricing, sell-or-process-further decisions, and so on). 4. Draft a letter to the taxation authorities on behalf of Sinclair Oil & Gas that justifies the joint-cost- allocation method you recommend Sinclair use. Required
- Separable Costs Joint Costs $1,800 Crude Oil Processing $175 ICR8 150 barrels @ $18 per barrel NGL Hydrocarbons Processing $105 Processing 50 barrels @ $15 per barrel ING4 Natural Gas Processing $210 800 eqvt. barrels @ $1.30 per eqvt. ХСЕЗ barrel A federal law that has recently been passed taxes crude oil at 30% of operating income. No new tax is to be paid on natural gas liquids or natural gas. Starting August 2017, Sinclair Oil & Gas must report a separate product-line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the joint cost of producing the three separate salable outputs. Assume no beginning or ending inventory. 1. Allocate the August 2017 joint cost among the three products using the following: a. Physical-measure method b. NRV method 2. Show the operating income for each product using the methods in requirement 1. 3. Discuss the pros and cons of the two methods to Sinclair Oil & Gas for making decisions about product emphasis (pricing, sell-or-process-further decisions, and so on). 4. Draft a letter to the taxation authorities on behalf of Sinclair Oil & Gas that justifies the joint-cost- allocation method you recommend Sinclair use. Required
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Joint-cost allocation, process further. Sinclair Oil & gas, a large energy conglomerate, jointly processes purchased hydrocarbons to generate three nonsalable intermediate products:ICR8, ING4, and XGE3. These intermediate products are further processed separately to produce crude oil, natural gas liquids(NGL), and natural gas (measured in liquid equivalents).An overview of the process and results for August 2017 are shown here.(Note: The numbers are small to keep the focus on key concepts.)
Transcribed Image Text:- Separable Costs
Joint Costs
$1,800
Crude Oil
Processing
$175
ICR8
150 barrels @
$18 per barrel
NGL
Hydrocarbons
Processing
$105
Processing
50 barrels @
$15 per barrel
ING4
Natural Gas
Processing
$210
800 eqvt. barrels @
$1.30 per eqvt.
ХСЕЗ
barrel
A federal law that has recently been passed taxes crude oil at 30% of operating income. No new tax is to
be paid on natural gas liquids or natural gas. Starting August 2017, Sinclair Oil & Gas must report a separate
product-line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the
joint cost of producing the three separate salable outputs. Assume no beginning or ending inventory.
1. Allocate the August 2017 joint cost among the three products using the following:
a. Physical-measure method
b. NRV method
2. Show the operating income for each product using the methods in requirement 1.
3. Discuss the pros and cons of the two methods to Sinclair Oil & Gas for making decisions about product
emphasis (pricing, sell-or-process-further decisions, and so on).
4. Draft a letter to the taxation authorities on behalf of Sinclair Oil & Gas that justifies the joint-cost-
allocation method you recommend Sinclair use.
Required
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