Chapter 11, Problem 67P

Effect of By-Product versus Joint Cost Accounting

 Fisher Chemicals processes a liquid into three outputs: Sigma, Tau, and Upsilon. Sigma accounts for 60 percent of the net realizable value at the split-off point, Tau accounts for 30 percent, and Upsilon accounts for the balance. The joint costs total $640,000. If Upsilon is accounted for as a by-product, its $70,000 net realizable value at split-off is credited to the joint manufacturing costs using method 1 described in the text, which credits the by-product’s net realizable value as a reduction in the joint costs.

Required

1. a.      What are the allocated joint costs for the three outputs
   1. 1. If Upsilon is accounted for as a joint product?
   2. 2. If Upsilon is accounted for as a by-product?
2. b.       Management does not understand why joint costs are allocated to Upsilon differently when it is accounted for as a by-product. Write a brief memo explaining why this occurs.