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Chapter 16: Problem 17

Joint costs of \(\$ 8,000\) are incurred to process \(X\) and \(Y\). Upon splitoff, \(\$ 4,000\) and \(\$ 6,000\) in costs are incurred to produce 200 units of \(X\) and 150 units of \(Y\), respectively. In order to justify processing further at the splitoff point, revenues for product: a. \(X\) must exceed \(\$ 12,000\) b. \(Y\) must exceed \(\$ 14,000\). c. \(X\) must be greater than \(\$ 60\) per unit. d. \(Y\) must be greater than \(\$ 40\) per unit.

Short Answer

Expert verified
The correct option is d) Revenues per unit for product \(Y\) must be greater than \(\$ 40\) per unit.

Step by step solution

01

Calculate the total cost for each product.

First, let's find out the total cost for each product. To do this, we will add the joint cost and the cost after split off. For product \(X\), the total cost is: Total cost of X = Joint cost + Cost after split off Total cost of X = \(\$ 8,000 \times \frac{\$ 4,000}{\$ 4,000 + \$ 6,000} + \$ 4,000\) For product \(Y\), the total cost is: Total cost of Y = Joint cost + Cost after split off Total cost of Y = \(\$ 8,000 \times \frac{\$ 6,000}{\$ 4,000 + \$ 6,000} + \$ 6,000\)
02

Calculate the cost per unit for each product.

Now let's find out the cost per unit for each product by dividing the total cost by the number of units. For product X, cost per unit is: Cost per unit of X = Total cost of X / Number of units of X For product Y, cost per unit is: Cost per unit of Y = Total cost of Y / Number of units of Y
03

Examine each statement.

In order to justify the processing further, we need to determine which option is true by using the cost per unit and the revenue information. a) Revenues for product X must exceed \(\$ 12,000\). b) Revenues for product Y must exceed \(\$ 14,000\). c) Revenues per unit for product X must be greater than \(\$ 60\) per unit. d) Revenues per unit for product Y must be greater than \(\$ 40\) per unit. Now compare each statement's revenue information with their respective cost per unit information to find the correct option.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost Accounting
Cost accounting is a vital part of any business, especially when dealing with joint costs for multiple products.
This aspect of accounting focuses on tracking, analyzing, and reporting costs associated with production.
In the context of joint cost allocation, cost accounting helps businesses allocate costs accurately.
Ensuring each product bears an appropriate portion of the shared expenses incurred during production is crucial.
  • Joint costs are the expenses shared by multiple products that are produced from a common input.
  • Accurate cost accounting ensures that cost allocation reflects the resource usage of each product.
  • This helps in making informed decisions about pricing, production efficiency, and future investment.
Understanding these concepts allows businesses to manage profitability and avoid over-subsidizing one product at the expense of another.
Split-off Point
The split-off point in cost accounting is a key stage in production where joint products can be separately identified.
At this point, products become distinct, and additional processing may occur to transform them into finished goods.
Understanding the split-off point is essential for calculating how joint costs are allocated.
  • Before the split-off point, all costs incurred are considered joint costs.
  • Allocation of these costs requires a clear understanding of the subsequent value added by further processing.
  • The decision to process further should account for whether the resulting revenue justifies the additional costs.
Effectively managing costs at this point can significantly influence the profitability of the products.
Cost per Unit
Determining the cost per unit is an integral part of evaluating the profitability of a product.
This metric involves dividing the total costs allocated to a product by the number of units produced.
It helps in assessing whether a product should continue to be produced or if adjustments are needed.
  • Total cost per unit aids in setting competitive prices that cover costs and provide a margin for profit.
  • In joint cost scenarios, it highlights how effective the cost allocation methods are.
  • The knowledge of cost per unit can help businesses avoid losses and optimize resource usage.
By closely monitoring this metric, companies are better positioned to enhance operational efficiencies.
Revenue Justification
Revenue justification is key when deciding to continue processing a product beyond the split-off point.
The revenue generated from additional processing must outweigh the costs involved to be viable.
This ensures that the company is making a sound economic decision.
  • For product X, revenues must exceed $12,000 to validate the costs beyond the split-off.
  • Similarly, product Y's revenues should be greater than $14,000.
  • Individual product revenue per unit should also be considered, such as X exceeding $60 per unit and Y exceeding $40 per unit.
Evaluating these revenue measures against costs ensures that financial resources are used efficiently, and company goals are met.

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Most popular questions from this chapter

The Tempura Spirits Company produces two products-methanol (wood alcohol) and turpentine- by a joint process. Joint costs amount to \(\$ 124,000\) per batch of output. Each batch totals 9,500 gallons: \(25 \%\) methanol and \(75 \%\) turpentine. Both products are processed further without gain or loss in volume. Separable processing costs are methanol, \(\$ 4\) per gallon, and turpentine, \(\$ 2\) per gallon. Methanol sells for \(\$ 22\) per gallon. Turpentine sells for \(\$ 16\) per gallon. 1\. How much of the joint costs per batch will be allocated to methanol and to turpentine, assuming that joint costs are allocated based on the number of gallons at splitoff point? 2\. If joint costs are allocated on an NRV basis, how much of the joint costs will be allocated to methanol and to turpentine? 3\. Prepare product-line income statements per batch for requirements 1 and 2 . Assume no beginning or ending inventories. 4\. The company has discovered an additional process by which the methanol (wood alcohol) can be made into a pleasant-tasting alcoholic beverage. The selling price of this beverage would be \(\$ 55\) a galIon. Additional processing would increase separable costs \(\$ 12\) per gallon (in addition to the \(\$ 4\) per \(g\) alIon separable cost required to yield methanol). The company would have to pay excise taxes of \(20 \%\) on the selling price of the beverage. Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol (using the NRV method)? Should the company produce the alcoholic beverage? Show your computations.

Distinguish between a joint product and a byproduct.

Give two examples of industries in which joint costs are found. For each example, what are the individual products at the splitoff point?

Describe two major methods to account for byproducts.

Give two limitations of the physical-measure method of joint-cost allocation.
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