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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

Provide three reasons for allocating joint costs to individual products or services.

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.

Kardash cosmetics purchases flowers in bulk and processes them into perfume. From a certain mix of petals, the firm uses Process A to generate Seduction, its high-grade perfume, as well as a certain residue. The residue is then further treated, using Process \(B\), to yield Romance, a medium-grade perfume. An ounce of residue typically yields an ounce of Romance. In July, the company used 25,000 pounds of petals. Costs involved in Process \(A\), i.e., reducing the petals to Seduction and the residue, were: Direct Materials \(-\$ 440,000 ;\) Direct Labor \(-\$ 220,000 ;\) Overhead costs \(-\$ 110,000\) The additional costs of producing Romance in Process B were: Direct Materials \(-\$ 22,000 ;\) Direct Labor \(-\$ 50,000 ;\) Overhead costs \(-\$ 40,000\) During July, Process A yielded 7,000 ounces of Seduction and 49,000 ounces of residue. From this, 5,000 ounces of Seduction were packaged and sold for \(\$ 109.50\) an ounce. Also, 28,000 ounces of Romance were processed in Process \(\mathrm{B}\) and then packaged and sold for \(\$ 31.50\) an ounce. The other 21,000 ounces remained as residue. Packaging costs incurred were \(\$ 137,500\) for Seduction and \(\$ 196,000\) for Romance. The firm has no beginning inventory on July 1. If it so desired, the firm could have sold unpackaged Seduction for \(\$ 56\) an ounce and the residue from Process A for \(\$ 24\) an ounce. 1\. What is the joint cost of the firm to be allocated to Seduction and Romance? 2\. Under the physical measure method, how would the joint costs be allocated to Seduction and Romance? 3\. Under the sales value at splitoff method, what portion of the joint costs would be allocated to Seduction and Romance, respectively? 4\. What is the estimated net realizable value per ounce of Seduction and Romance? 5\. Under the net realizable value method, what portion of the joint costs would be allocated to Seduction and Romance, respectively? 6\. What is the gross margin percentage for the firm as a whole? 7\. Allocate the joint costs to Seduction and Romance under the constant gross-margin percentage NRV method. 8\. If you were the manager of Kardash cosmetics, would you continue to process the petal residue into Romance perfume? Explain your answer.

SW Flour Company buys 1 input of standard flour and refines it using a special sifting process to 3 cups of baking flour and 9 cups of bread flour. In May \(2017,\) SW bought 12,000 inputs of flour for \(\$ 89,000 .\) SW spent another \(\$ 47,800\) on the special sifting process. The baking flour can be sold for \(\$ 3.60\) per cup and the bread flour for \(\$ 4.80\) per cup. SW puts the baking flour through a second process so it is super fine. This costs an additional \(\$ 1.00\) per cup of baking flour and the process yields \(1 / 2\) cup of super-fine baking flour for every one cup of baking flour used. The super-fine baking flour sells for \(\$ 9.60\) per cup. 1\. Allocate the \(\$ 136,800\) joint cost to the super-fine baking flour and the bread flour using the following: a. Physical-measure method (using cups) of joint-cost allocation b. Sales value at splitoff method of joint-cost allocation c. \(\mathrm{NRV}\) method of joint-cost allocation d. Constant gross-margin percentage NRV method of joint-cost allocation 2\. Each of these measures has advantages and disadvantages; what are they? 3\. Some claim that the sales value at splitoff method is the best method to use. Discuss the logic behind this claim.

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