Chapter 7, Problem 44P

1.

To determine

Calculate the unit cost and gross profit for each commodity if joint manufacturing costs will be distributed by the Company, B in proportion to the relative physical volume of output.

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 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)

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.

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.

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.