Cost Management: A Strategic Emphasis
7th Edition
ISBN: 9780077733773
Author: Edward Blocher, David Stout, Paul Juras, Gary Cokins
Publisher: McGraw-Hill Education
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Question
Chapter 7, Problem 44P
1.
To determine
Calculate the unit cost and gross profit for each commodity if joint
1.
Expert Solution
Explanation of Solution
Cost allocation is the method of defining, collecting and allocating costs to cost items such as divisions, goods, services or a company division. It includes evaluating the cost objects in a business, recognizing the expenses involved by the cost objects and then assigning the cost objects according to different criteria.
The goals of cost allocation are as follows:
- Assess the departmental and product costs correctly.
- Motivate executives to bring a high degree of commitment into achieving top management targets.
- Provide the right opportunity for managers to make decisions in accordance with the Top management priorities.
- Assess fairly the rewards earned by the managers for their contributions and abilities and for the efficacy of their decision making.
A joint production process is one which yields multiple outputs from a common input of resources. Joint goods are products which have fairly significant market prices from the same manufacturing cycle.
The method of physical measurement uses a physical scale, like pounds, gallon, yard, or volume units generated at the split-off point for the allocation of joint costs to joint products.
| Premium | Gourmet | Quality | Total | |||||
| Pounds produced | ||||||||
| Separable | 10,000,000 | 12,000,000 | 2,000,000 | 24,000,000 | ||||
| Pounds sold | 9,000,000 | 7,000,000 | 5,000,000 | $21,000,000 | ||||
| Total joint cost | 10,000,000 | 12,000,000 | 2,000,000 | 24,000,000 | ||||
| Sales price/lb (after additional processing) | $7.00 | $5.00 | $2.00 | $90,000,000 | ||||
| Sales price at split off | 5.00 | 4.00 | 1.00 | |||||
| Sales value after additional processing | $70,000,000 | $60,000,000 | 4,000,000 | 134,000,000 | ||||
| Sales Value at split off | 50,000,000 | 48,000,000 | 2,000,000 | 100,000,000 |
| Premium | Gourmet | Quality | Total | |||||
| Units of production | 10,000,000 | 12,000,000 | 2,000,000 | 24,000,000 | ||||
| % of Total | 41.667 % | 50.0000% | 8.3333% | 100% | ||||
| Joint cost allocation | $37,500,000 | $45,000,000 | $7,500,000 | $90,000,000 | ||||
| Separable processing cost | 9,000,000 | 7,000,000 | 5,000,000 | 21,000,000 | ||||
| Total cost | $46,500,000 | $52,000,000 | $12,500,000 | $111,000,000 | ||||
| Total cost per unit | $4.6500 | $4.3333 | $6.2500 | |||||
| Calculation of Gross Margin | ||||||||
| Sales | $70,000,000 | $60,000,000 | $4,000,000 | $134,000,000 | ||||
| Total cost | $ 46,500,000 | $52,000,000 | $ 2,500,000 | 111,000,000 | ||||
| Gross Margin | $ 23,500,000 | $ 8,000,000 | $ (8,500,000) | $23,000,000 | ||||
| Unit Gross Margin | $ 2.3500 | $ 0.6667 | $ (4.2500) |
2.
To determine
Calculate the unit cost and gross profit for each commodity if joint manufacturing costs will be distributed by the Company, B by using the sales value at the split-off method.
2.
Expert Solution
Explanation of Solution
Cost allocation is the method of defining, collecting and allocating costs to cost items such as divisions, goods, services or a company division. It includes evaluating the cost objects in a business, recognizing the expenses involved by the cost objects and then assigning the cost objects according to different criteria.
The goals of cost allocation are as follows:
- Assess the departmental and product costs correctly.
- Motivate executives to bring a high degree of commitment into achieving top management targets.
- Provide the right opportunity for managers to make decisions in accordance with the Top management priorities.
- Assess fairly the rewards earned by the managers for their contributions and abilities and for the efficacy of their decision making.
A joint production process is one which yields multiple outputs from a common input of resources. Joint goods are products which have fairly significant market prices from the same manufacturing cycle.
The split-off point is the point at which individual goods can be categorized separately in a specific production cycle.
The sales value in the split-off system assigns joint costs to the items at split-off based on their relative selling prices.
| Premium | Gourmet | Quality | Total | |||||
| Pounds produced | ||||||||
| Separable processing cost | 10,000,000 | 12,000,000 | 2,000,000 | 24,000,000 | ||||
| Pounds sold | 9,000,000 | 7,000,000 | 5,000,000 | $21,000,000 | ||||
| Total joint cost | 10,000,000 | 12,000,000 | 2,000,000 | 24,000,000 | ||||
| Sales price/lb (after additional processing) | $7.00 | $5.00 | $2.00 | $90,000,000 | ||||
| Sales price at split off | 5.00 | 4.00 | 1.00 | |||||
| Sales value after additional processing | $70,000,000 | $60,000,000 | 4,000,000 | 134,000,000 | ||||
| Sales Value at split off | 50,000,000 | 48,000,000 | 2,000,000 | 100,000,000 |
| Premium | Gourmet | Quality | Total | |||||
| Units of production | 10,000,000 | 12,000,000 | 2,000,000 | 24,000,000 | ||||
| % of Total | 41.667 % | 50.0000% | 8.3333% | 100% | ||||
| Joint cost allocation | $37,500,000 | $45,000,000 | $7,500,000 | $90,000,000 | ||||
| Separable processing cost | 9,000,000 | 7,000,000 | 5,000,000 | 21,000,000 | ||||
| Total cost | $46,500,000 | $52,000,000 | $12,500,000 | $111,000,000 | ||||
| Total cost per unit | $4.6500 | $4.3333 | $6.2500 | |||||
| Calculation of Gross Margin | ||||||||
| Sales | $70,000,000 | $60,000,000 | $4,000,000 | $134,000,000 | ||||
| Total cost | $ 46,500,000 | $52,000,000 | $ 2,500,000 | 111,000,000 | ||||
| Gross Margin | $ 23,500,000 | $ 8,000,000 | $ (8,500,000) | $23,000,000 | ||||
| Unit Gross Margin | $ 2.3500 | $ 0.6667 | $ (4.2500) |
3.
To determine
Mention that the Company, B. will sell any of its products after further processing.
3.
Expert Solution
Explanation of Solution
Cost allocation is the method of defining, collecting and allocating costs to cost items such as divisions, goods, services or a company division. It includes evaluating the cost objects in a business, recognizing the expenses involved by the cost objects and then assigning the cost objects according to different criteria.
The goals of cost allocation are as follows:
- Assess the departmental and product costs correctly.
- Motivate executives to bring a high degree of commitment into achieving top management targets.
- Provide the right opportunity for managers to make decisions in accordance with the Top management priorities.
- Assess fairly the rewards earned by the managers for their contributions and abilities and for the efficacy of their decision making.
A joint production process is one which yields multiple outputs from a common input of resources. Joint goods are products which have fairly significant market prices from the same manufacturing cycle.
A product's Net Realizable Value (NRV) is the actual value of the sales value calculated at the split-off point is determined by excluding the separable manufacturing and distribution costs from the expected final sales value of the product at the split-off point.
Calculate net value of additional processing:
| Premium | Gourmet | Quality | Total | |||||
| Sales Value (after additional processing) | $70,000,000 | $60,000,000 | $4,000,000 | $134,000,000 | ||||
| Sales price at split off | 50,000,000 | 48,000,000 | 2,000,000 | 100,000,000 | ||||
| Separable processing cost | 9,000,000 | 7,000,000 | 5,000,000 | 21,000,000 | ||||
| Sales Value plus Sep. cost | $59,000,000 | $55,000,000 | $7,000,000 | $121,000,000 | ||||
| Net Value of sep. processing | $11,000,000 | $5,000,000 | $(3,000,000) | $13,000,000 |
Regardless of the incremental value of $11,000,000, and $5,000,000 respectively, the firm will offer Premium and Gourmet after more processing. The Quality product will not be further processed due to the negative net value of ($3,000,000) extra production.
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Chapter 7 Solutions
Cost Management: A Strategic Emphasis
Ch. 7 - Prob. 1QCh. 7 - Explain the difference between joint products and...Ch. 7 - Prob. 3QCh. 7 - What are the three methods of departmental cost...Ch. 7 - Prob. 5QCh. 7 - Prob. 6QCh. 7 - Prob. 7QCh. 7 - Prob. 8QCh. 7 - Prob. 9QCh. 7 - Prob. 10Q
Ch. 7 -
What is the amount of service department cost...Ch. 7 - Prob. 12BECh. 7 - Prob. 13BECh. 7 - Prob. 14BECh. 7 - Prob. 15BECh. 7 - Prob. 16BECh. 7 - Prob. 17BECh. 7 - Prob. 18BECh. 7 - Prob. 19BECh. 7 - Brief Exercises 7-17 through 7-20 require the...Ch. 7 - Prob. 21ECh. 7 - Prob. 22ECh. 7 - Prob. 23ECh. 7 - Prob. 24ECh. 7 - Prob. 26ECh. 7 - Prob. 27ECh. 7 - Prob. 28ECh. 7 - Robinson Products Company has two service...Ch. 7 - Donation of blood through the American Red Cross...Ch. 7 - Tango Company produces joint products M, N, and T...Ch. 7 - Prob. 32ECh. 7 - Webster Company produces 25,000 units of product...Ch. 7 - Prob. 34PCh. 7 - Prob. 35PCh. 7 - Prob. 36PCh. 7 - Prob. 37PCh. 7 - Solexx Corporation allocates its service...Ch. 7 - Prob. 39PCh. 7 - Prob. 40PCh. 7 - Prob. 41PCh. 7 - Prob. 42PCh. 7 - Prob. 43PCh. 7 - Prob. 44PCh. 7 - Prob. 45PCh. 7 - Prob. 46PCh. 7 - Prob. 47PCh. 7 - Prob. 48PCh. 7 - Prob. 49PCh. 7 - Prob. 50P
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