Chapter 11 COST ACCOUNTING.doc

Chapter 11

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‘CHAPTER 11 COST ALLOCATION FOR JOINT PRODUCTS AND BY-PRODUCT/SCRAP QUESTIONS 1.

Joint processing output is classified based on the relative sales value of each type of output. Joint products are those outputs that have the largest sales value. By­products are those   outputs   that   have   some   sales   value,   but   not   a   sufficient   amount   to   justify undertaking the joint process simply to obtain those outputs. Scrap is output that has no or very little sales value. Usually, the output classification is determined before production. Management decides whether a joint process output is a joint product, a by­product, or scrap based on the judgment of the relative sales value of each type of output. However, in unusual cases, the actual outputs of the joint process may not result as planned. In such cases, management may classify the output differently than was originally intended.

2.

Processing of the outputs of a joint production process does not always stop at the split­off point. Some products may not be able to be sold at that point and, as such, must be processed further before they can be sold. Other products may have a sales value at split­off but further processing might result in sufficiently greater profitability to justify the additional costs.

3.

Three of the decision points are (1) before the joint process is undertaken, (2) at the split­off point, and (3) after the split­off point. The criterion for proceeding at any of these three points is whether the anticipated incremental revenues will exceed the anticipated incremental   costs.   A   fourth   decision   point,   occurring   between   (1)   and   (2),   assesses whether this particular process is the best use of the facilities; the criteria for this decision is whether the incremental benefit from this process exceeds the incremental benefit of the best alternative facility usage.

4.

Cost allocation refers to the assignment of an indirect cost to a cost object using some reasonable  method.  Accountants   allocate   fixed   production  costs  to   products   produced within  a period,  and allocate  certain  plant  and  equipment  costs  (through depreciation charges) to the time periods during which those assets are used and, in a manufacturing company, to the goods produced during a period. Since the production costs incurred in a joint process produce several outputs, those costs are indirect to the individual output produced and must, because of the cost principle, be assigned to the various outputs. Allocation is necessary to have appropriate inventory (and cost of goods sold) valuations for the joint products produced in the joint process.

5.

The   two   primary   approaches   to   allocating   joint   process   costs   are   those   using   (1) physical measures and (2) monetary measures. Physical measures (such as tons, barrels, © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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linear feet, etc.) are unchanging yardsticks; monetary measures change over time because of general and specific price level changes. Physical measures treat each physical unit of output as equally desirable by assigning a uniform amount of joint process cost to every unit of output produced. In contrast, monetary measures assign joint process costs to joint products   proportionately   to   relative   sales   value.   In   most   instances,   because   physical measures ignore the relative sales value of products, a monetary measure is deemed more appropriate. 6.

Use of approximated net realizable values are necessary when some or all of the joint products cannot be sold at the split­off point. An approximated net realizable value is calculated by subtracting the incremental separate costs incurred between split­off and point   of   sale   from   the   expected   final   sales   price   of   the   product.   Thus,   to   use   the approximated   NRV   method,   managers   must   make   estimates   of   final   sales   prices   and incremental separate costs.

7.

One approach is to ignore by­product/scrap inventory completely until it is sold. At that   point,   the   revenue   generated   by   the   sale   of   that   inventory   “acknowledges”   the existence of the by­product/scrap. This revenue is shown on the income statement as an increase to net income. This method is the realized value method. The second approach is to record the final net realizable value of the by­product/scrap recovered at the split­off point. The NRV is credited as a reduction of the joint process costs   that   gave   rise   to   the   by­product.   On   one   hand,   this   approach   is   theoretically preferable because it matches the benefit (NRV of by­product/scrap) with the source of the benefit (the joint process costs that were incurred to produce the by­product/scrap). However, on the other hand, it is possible that use of this method will overstate the value of the by­product inventory (especially if it is never sold) and understate the cost of the joint products.  Thus, the realizable value method is more likely to raise the potential for misleading earnings management.

8.

If a company using job order costing produces by­product/scrap continuously from normal production, the net realizable value of that by­product/scrap should be considered in setting the predetermined overhead rate. The estimated NRV of the by­product/scrap should be deducted from total estimated overhead costs in setting the rate. That deduction causes the overall overhead allocation rate for all products to be reduced. When the by­ product or scrap is actually sold, its net realizable value is credited to Manufacturing Overhead. If  a   company  using  job   order  costing   only  produces  by­product/scrap  items  during  a particular job, then the NRV of the by­product/scrap should not be considered in setting the predetermined overhead rate. The NRV should be credited to the particular job that gave rise to the by­product/scrap.

9.

For a not­for­profit organization to appropriately evaluate the uses of its resources, the AICPA   requires   that   multipurpose   costs   be   allocated   between   program   and   support categories. Program expenses are those that are directly aimed at the accomplishment of the organization’s charitable objectives and are considered a more valid use of resources. Comparison   of   support   expenses   to   total   expenses   may   suggest   a   measure   of © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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organizational efficiency. The AICPA is concerned with donors having knowledge of the relative and absolute magnitude of funds spent on fundraising.

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EXERCISES 10.

Each student will have a different answer. No solution is provided.

11. a. In a poultry processing plant, the joint input would be chickens and/or turkeys. The primary questions to be asked follow. (1)

What specific poultry will be used; what customers will be served; and what is the estimated   profitability   of   the   business?   The   answer   to   these   questions   will determine what inputs will be purchased and, to some extent, what production processes   will   be   performed.   It   also   will   help   determine   whether   the   process should be undertaken at all.

(2)

What specific cuts of poultry should be selected from the poultry inputs? The answer to this question will determine how the inputs are cut into salable parts.

(3) How will the joint process output be classified: joint product, by­product, scrap, or waste? The answer to this question determines which output is allocated part of the joint cost. (4)

How much processing should be done to the individual cuts? The answer to this question   will   determine   what   specific   processes   will   be   necessary   beyond   the split­off point and what types of equipment the poultry processing plant must have to   execute   the   required   conversion   operations.   To   answer   this   question,   the incremental   costs   and   benefits   must   be   compared   before   undertaking   any additional processing.

b.

In a poultry processing plant, the way joint cost is allocated can affect many decisions. For example, allocating joint cost to by­product/scrap would likely cause it to be seen as a “money loser,” and as such, it might simply be disposed of as waste. Joint  cost  allocation  is   also  important   for reporting   requirements,   such  as  income determination and inventory valuation for IRS reporting purposes. Joint cost is also relevant  in determining  whether production  should occur.  However,  once split­off point is reached, joint cost is irrelevant in deciding whether additional conversion should be performed.

c.

Four   categories   of   output   may   be   obtained   from   joint   production.   Joint products are the primary products and are distinguished from other outputs by their relatively   greater   sales   value.   At   the   opposite   end   of   the   continuum,   waste   is incidental output of a joint production process and has no value. By­product and scrap have   some  value,   but  the   value   is   substantially  below  that  of  joint  products.   By­ product has a somewhat greater market value than scrap.

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 12. Products Boco Loco Roco Soco Moco Coco Doco Joco Voco

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# of Units 1,200 1,000 5,000 3,800 4,100 200 300 1,000 6,000

SV at Split­Off $6.000 $1.750 $2.500 $4.200 $1.900 $0.250 $1.800 $0.020 $0.001

Total SV $  7,200 $  1,750 $12,500 $15,960 $  7,790 $       50 $     540 $       20 $         6

Classification Joint product By­product Joint product Joint product Joint product Scrap Scrap Scrap Waste

All classifications are based on the respective proportional sales values. It is even possible that Coco and Joco would be considered waste. A further consideration would be any selling or disposal costs that would affect the net inflows to Triscuit Co. 13. a. Allocation rate = $16,200,000 ÷ 36,000,000 feet = $0.45 per foot Grade A: $0.45  27,000,000 = $12,150,000 Grade B: $0.45  9,000,000 = $4,050,000 b. Incremental revenue (27,000,000  $0.80) Incremental costs (27,000,000  $0.75) Increase in income (27,000,000  $0.05)

$ 21,600,000   (20,250,000)    $   1,350,000

Based on the incremental change in net income, the company should process Grade A lumber further. 14. a. JP­4539 JP­4587 JP­4591 b. JP­4539 JP­4587 JP­4591 JP­4539 JP­4587 JP­4591

4,500 18,000 13,500 36,000

0.125  $558,000 = 0.500  $558,000 = 0.375  $558,000 = 1.000   4,500  $14 = $  63,000 18,000  $  8 =   144,000 13,500  $18 =   243,000                         $450,000

$  69,750 279,000       209,250 $558,000     0.14  $558,000 = $  78,120    0.32  $558,000 =   178,560    0.54  $558,000 =   301,320     1.00                        $558,000

4,500  ($24 – $4) = $  90,000 0.17  $558,000 = $  94,860 18,000  ($15 – $5) =   180,000    0.33  $558,000 =   184,140 13,500  ($22 – $2) =   270,000    0.50  $558,000 =   279,000                         $540,000      1.00                       $558,000

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15. a.    Final Product Butter Jam Syrup

 Sales  Value $ 6.00 14.00 3.60

Split­Off Sales Value $4.00 6.40 3.00

Increm. Revenue $2.00 7.60 0.60

Increm. Cost $3.00 4.00 0.40

Increm. Profit $(1.00) 3.60 0.20

Only jam and syrup should be processed beyond the split­off point.   b. Joint cost Less NRV of syrup ($3.60 – $0.40) × 1,000 Joint cost to be allocated

$123,200         3,200 $120,000

Unit­based allocation: Butter (10,000 ÷ 30,000) × $120,000 Jam (20,000 ÷ 30,000) × $120,000 Total

$  40,000          80,000 $120,000

Weight­based allocation: Butter (10,000 × 16 ounces) Jam (20,000 × 8 ounces) Total product weight

160,000   160,000      320,000   

Butter (0.50  $120,000) Jam (0.50  $120,000) Total

$  60,000          60,000 $120,000

Sales value at split­off allocation [from (a)] Butter (10,000  $4.00) Jam (20,000  $6.40) NRV

$  40,000   128,000     $168,000

Butter (0.24  $120,000) Jam (0.76  $120,000) Total

$  28,800       91,200 $120,000

16. a.  Product  Steaks  Roasts  Ground Beef   Total

# of Pounds Proportion 3,312 24% 6,210        45   4,278            31 13,800        100%

Joint Cost $26,400 26,400   26,400

50%   50%    100%

24%   76%    100%

Allocated Joint Cost $  6,336 11,880       8,184 $26,400

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The   problem   with   this   method   is   that   the   joint   cost   assigned   to   each   product   is approximately $1.91 per pound, which makes every pound of ground beef sold appear to lose $1.01. b. # of SV at Total Allocated  Product Pounds Split Off SV Percent Joint Cost  Steaks 3,312 $4.25 per lb. $14,076 34% $  8,976  Roasts 6,210  $3.80 per lb. 23,598 57 15,048  Ground Beef  4,278  $0.90 per lb.       3,850 9       2,376  Total $41,524 $26,400 The problem mentioned in (a) is corrected with this method because the joint cost assigned to each pound of ground beef sold is now only $0.56. c. Selling price Allocated joint cost Special label Profit desired Allowable separate cost

 $ 2.10 (0.56) (0.15)    (0 .40)  $ 0 .99

The $0.40 per pound should not be considered a “real”  profit amount because the allocated   joint   cost   would   change   simply   based   on   the   allocation   method   chosen. However, the sausage sale would be profitable because the incremental revenue of $1.20 ($2.10 – $0.90) is greater than the incremental cost of $1.14 ($0.15 + $0.99).   17. a. Revenues Separate costs NRV

               Games      News             $ 34,040,000 $ 30,720,000                  (31,040,000)  (16,320,000)             $   3,000,000 $ 14,400,000 

% of $96,000,000 total

3%

15%

Joint cost allocation: Games ($24,000,000 × 0.03) News ($24,000,000 × 0.15) Documentary ($24,000,000 × 0.82) Total Revenues Separate costs Allocated costs Net profit     b.

82% $     720,000 3,600,000   19,680,000    $24,000,000

 Games News $ 34,040,000 $ 30,720,000  (31,040,000) (16,320,000)           (720,000)       (3,600,000) $   2,280,000 $ 10,800,000 

Games Revenues $34,040,000 % of $254,080,000 total          13%

  Documentaries $ 189,320,000   (110,720,000)    $   78,600,000

News $30,720,000               12%

Documentaries $ 189,320,000 (110,720,000)       (19,680,000) $   58,920,000 Documentaries $189,320,000                 75%

Joint cost allocation: © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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Games ($24,000,000 × 0.13) News ($24,000,000 × 0.12) Documentaries ($24,000,000 × 0.75) Total Revenues Separate costs Allocated costs Net profit

   Games   $ 34,040,000    (31,040,000)          (3,120,000)  $    (120,000)

$  3,120,000 2,880,000   18,000,000    $24,000,000     News  Documentaries $ 30,720,000 $ 189,320,000 (16,320,000)      (110,720,000)       (2,880,000)             (18,000,000) $ 11,520,000 $   60,600,000

c. As the manager of the Games Group, I would be very concerned about the effects of allocating joint cost using the method in (b). The result of the allocation is to make the Games Group appear to be unprofitable. Points (some of which could be rebutted) students might make in their presentations include: (1)   The   allocation   of   joint   cost   is   totally   arbitrary;   there   is   no   cause   and   effect relationship represented in the allocations in (b). (2) The Games Group appears to have a different degree of facilities utilization than the News and Documentaries, given the high relationship of its separate costs to the separate costs of the other two groups. The allocations in (b) fail to consider this fact. (3) The Games Group could be a start­up division and, as such, may be incurring substantially higher costs and may not have begun to reach its revenue potential. 18. a. Units of output allocation: Total bottles = 20,000 + 32,000 + 28,000 = 80,000 Perfume [(20,000 ÷ 80,000) × $1,080,000] Eau de Toilette [(32,000 ÷ 80,000) × $1,080,000] Body Splash [(28,000 ÷ 80,000) × $1,080,000] Total

$   270,000 432,000           378,000 $1,080,000

Weight­based allocation: Total weight = (20,000 × 1) + (32,000 × 2) + (28,000 × 3) = 168,000 Perfume = 20,000 ÷ 168,000 = 12% Eau de Toilette = 64,000 ÷ 168,000 = 38% Body Splash = 84,000 ÷ 168,000 = 50% Perfume ($1,080,000 × 0.12) Eau de Toilette ($1,080,000 × 0.38) Body Splash ($1,080,000 × 0.50) Total Approximated NRV computation: Perfume [20,000 × ($16.50 – $2.50)] Eau de Toilette [32,000 × ($13.00 – $1.50)] Body Splash [28,000 × ($12.00 – $2.00)]

$   129,600 410,400        540,000 $1,080,000 $280,000 368,000       280,000

30% 40%   30%   

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Total Approximated NRV allocation: Perfume ($1,080,000 × 0.3) Eau de Toilette ($1,080,000 × 0.4) Body Splash ($1,080,000 × 0.3) Total b.

$928,000

100%

 $   324,000       432,000           324,000  $1,080,000

Cost assigned to inventory = Allocated joint cost + Separate costs Units of output allocation: Perfume [$270,000 + ($2.50 × 20,000)] $   320,000 Eau de Toilette [$432,000 + ($1.50 × 32,000)] 480,000 Body Splash [$378,000 + ($2.00 × 28,000)]           434,000 Total $1,234,000 Ending inventory valuation based on units of output: Perfume [$320,000 × (600 ÷ 20,000)] Eau de Toilette [$480,000 × (1,600 ÷ 32,000)] Body Splash [$434,000 × (1,680 ÷ 28,000)] Total

Ending inventory valuation based on weight: Perfume ($129,600 + $50,000) = $179,600 total cost  $179,600 ÷ 20,000 ounces = $8.98 per ounce 600 bottles  1 ounce  $8.98 = Eau de Toilette ($410,400 + $48,000) = $458,400 total cost $458,400 ÷ 64,000 ounces = $7.16 per ounce 1,600 bottles × 2 ounces  $7.16 = Body Splash ($540,000 + $56,000) = $596,000 total cost $596,000 ÷ 84,000 ounces = $7.10 per ounce 1,680  3 ounces  $7.10 = Total Ending   inventory   valuation  based   on  approximated  NRV: Perfume ($324,000 + $50,000) = $374,000 total cost $374,000 ÷ 20,000 ounces = $18.70 per ounce 600 bottles  1 ounce  $18.70 = Eau de Toilette ($432,000 + $48,000) = $480,000 total cost $480,000 ÷ 64,000 ounces = $7.50 per ounce 1,600 bottles  2 ounces  $7.50 = Body Splash ($324,000 + $56,000) = $380,000 total cost

$  9,600 24,000       26,040 $59,640

$  5,388

22,912

      35,784 $64,084

$11,220

24,000

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$380,000 ÷ 84,000 = $4.52 per ounce 1,680  3 ounces  $4.52 = Total c.

      22,781 $58,001

Relative to all of the products, once the joint cost is assigned and a cost per ounce is computed, Scent of Money does not appear to be selling its products at high enough prices. Per­unit product losses of $2.20 are being generated on the sale of each bottle of perfume, $2.00 per bottle of eau de toilette, and $1.56 per bottle of body splash.     Fabric $ 540,000   (360,000)    $ 180,000   (120,000)    $   60,000

21. a.  Final revenues Revenues at split­off Incremental revenues Incremental costs Net benefit (cost) of further processing

 Yarn $ 420,000     (300,000) $ 120,000     (102,000) $   18,000

Both products should be processed further. b. The irrelevant item is the $120,000 joint cost.

22. Product JP#1 JP#2 JP#3

Increm. Revenues $50 $40 $65

Increm. Costs $55 $25 $45

Benefit/(Loss) $ (5) $15 $20

Process Further? No Yes  Yes

22. Two ounces of each 16 ounces (or 12.5 percent) are lost to waste, leaving 87.5 percent of total lbs. available. a.

Joint Products Fish Oil Meal 

Unit Weight 0.500 0.250 0.125 0.875

Total Pounds 75,000 75,000 75,000

Joint Products Fish Oil Meal

Lbs. of Product 37,500 18,750 9,375

Selling Price per Lb. $4.50 6.50 2.00

Lbs. of Product 37,500 18,750       9,375 65,625

Percent 57 29   14    100

Allocated Joint Cost $  81,396 41,412          19,992 $142,800

b. Total $168,750 121,875       18,750 $309,375

Percent 55 39       6 100

Allocated Joint Cost $  78,540 55,692         8,568 $142,800

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           Yh6nc. Although an unchanging measure, the physical measure of pounds treats all products as equally valuable. Because of inflation and market price variability, sales value is a changing measure;  however, this method  is a better  way of matching  joint cost to the benefits   from the   production  process  because  of  the  substantial   differences  in  per  pound prices among the three products. 23. a. Sales value of milk Sales value of sour cream Total sales value

$377,400 (68%)   177,600 (32%)    $555,000

Since the milk represents 68 percent of the total sales value at split­off, $125,800 represents 68 percent of the total joint cost. Total joint cost for June is ($125,800 ÷ 0.68) or $185,000. (5)

190,000 pints = 95,000 quarts of sour cream Quarts of milk Quarts of sour cream Total quarts

   240,000 (72%)       95,000 (28%)    335,000

Since the milk represents 72 percent of the total physical quantity produced, $125,800 represents 72 percent of the total joint costs. Total joint cost is ($125,800 ÷ 0.72) or $174,722. 19. a. Product Candied    apples Apple    jelly Apple    jam

Final Revenues

Split­Off Sales Value

Increm. Revenue

Increm. Costs

Increm. Profit

$690,000

$670,000

$20,000

$26,000 

$(6,000)

775,000

730,000

45,000

32,000 

13,000

271,000

260,000

11,000

15,000 

(4,000)

Management should not have further processed candied apples and apple jam because the   incremental   costs   from   further   processing   were   greater   than   the   incremental revenues. These products should have been sold at the split­off point. b. Candied apples additional profit

$6,000

21. a.                           Sales value of blouses  =      Joint cost of blouse                                               Total sales value         Total allocated joint cost    $80,000 ÷ $600,000 = X ÷ 360,000 $600,000X = ($80,000)($360,000) $600,000X = $2,880,000,000,000  X = $48,000 for blouses Total joint cost Joint cost for jackets and blouses ($138,000 + $48,000)

$ 360,000           (186,000)

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Joint cost assigned to dresses b.

c.

$ 174,000

Joint cost = $138,000 ÷ $230,000 = 60% of relative sales value at split­off amounts $174,000 = 0.6X X = $290,000 sales value at split­off for dresses Final sales value Sales value at split off Increase in value Additional costs Incremental benefit (loss)

Dresses $300,000       290,000 $  10,000      (26,000) $ (16,000)

Jackets $268,000   230,000    $  38,000      (20,000) $  18,000

Blouses $210,000      80,000 $130,000      (78,000) $  52,000

Jackets and blouses should be processed beyond split­off.

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Chapter 11

d. Joint cost allocated to jackets Additional costs Total cost for 16,000 jackets Sales (12,000  $16.75*) Cost for 12,000 jackets (0.75  $158,000) Gross profit

71

$  138,000         20,000 $  158,000 $  201,000      (118,500) $    82,500

*$268,000 ÷ 16,000 = $16.75 per jacket 25. a. If the by­product is accounted for at the time of production, by­product inventory is recorded at its net realizable value and that amount reduces the joint cost included in the gasoline’s cost of sales. Therefore, cost of sales of the by­product would be zero. Cost of sales for gasoline: Beginning inventory of gasoline Production costs to split­off point Less NRV of by­product Sales of by­product $ 60,000 Production & Marketing   (50,000)    Current manufacturing costs of gasoline Ending inventory of gasoline Cost of sales for gasoline

$    0    240,000      (10,000) $230,000      (30,000) $200,000

        b. If Go­Go had reduced the gasoline’s joint cost, the average cost per gallon of gasoline would   have   been   decreased.   Thus,   the   ending   inventory   value   would   have   been slightly less, and the gross margin would have been slightly more.          (CPA adapted) 26. a. b. c. d. e. f. g. h. i. j. k. l. m.

2 2 2 1 1 1 2 2 2 1 1 1 1

                        $337,500 27. Joint process cost Less net realizable value of by­product inventory        (65,000) Amount to be allocated                         $272,500

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Proration of amount to be allocated based on weight: Product Bushels Proportion Allocation Premium 16,500 0.25 $  68,125 Good 43,560 0.66 179,850 Fair   5,940    0.09       24,525 66,000 1.00 $272,500 28. a. Joint cost Less NRV of by­product [2,000 × ($1.50 – $0.30)] Joint cost to be allocated

$142,000                 (2,400) $139,600

Approx. NRV of Fillet [18,000 × ($16 – $3)] Approx. NRV of Smoked [20,000 × ($13.00 – $5.20)] Total NRV Cost allocation: Fillet (0.6  $139,600) Smoked (0.4  $139,600) Total cost allocation b.

Separate costs for Fillet Separate costs for Smoked Joint cost  Separate costs  Total costs  Divide by pounds  Cost per pound (rounded)

$234,000 60%   156,000    40% $390,000

$  83,760       55,840 $139,600 = 18,000  $3.00 = $ 54,000 = 20,000  $5.20 = $104,000      Fillet $  83,760       54,000 $137,760  ÷ 18,000 $      7.65

Inventory values: Fillet (4,000  $7.65) Smoked (2,400  $7.99) Remnants (350  $1.20) Total inventory value

   Smoked $  55,840       104,000 $159,840    ÷ 20,000 $      7.99 $30,600 19,176             420 $50,196

29. Because the by­product has substantial value, the by­product should be accounted for using NRV rather than realized value, which would result in distorted cost information. Whether the direct or indirect method is used would be dependent on the timing of the sale of by­product and joint products. If both product groups sell shortly after they are produced, then the choice of method is less important. However, if the by­product tends to sell in a different period than the related joint products, use of the direct method would provide a stronger match between costs and benefits. 30. a. Total joint cost Revenue from tours

$20,000,000 $ 800,000

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Expenses of tours Joint cost to be allocated

73

                 (480,000)

               (320,000) $19,680,000

Greedy CEOs $10,000,000      (6,800,000) $  3,200,000

         Sequel $ 58,000,000   (41,200,000)    $ 16,800,000

Gross revenues Separate costs Net realizable value Joint cost allocation: Greedy CEOs  Sequel 

      NRV $  3,200,000   16,800,000    $20,000,000

b. Gross revenues Separate costs Net realizable value Joint cost Net profit

16%   84%    100%

      Allocation $   3,148,800      16,531,200 $ 19,680,000

Greedy CEOs $10,000,000      (6,800,000) $  3,200,000      (3,148,800) $       51,200

31. Total sales value (1,200 × $335)  Less costs (1,200 × $250)  Reduction of joint cost

       Sequel $ 58,000,000   (41,200,000)    $ 16,800,000   (16,531,200)    $      268,800

 $ 402,000   (300,000)                $ 102,000

The gross margin for the major products will decrease by $102,000, but net income will remain the same. 32. a. Sales of lumber (160,000 × $10) Cost of sales: Production costs By­product revenue (40,000 pounds ÷ 100 = 400 bags; 400  $4) Gross margin b.

$1,600,000 $664,000          (1,600)

Sales would increase to $1,601,600 while cost of sales would be $664,000, resulting in the same gross margin of $937,600.

33.  Sales of by­product  Cost of by­product sales (135,000  $0.06)  Net realizable value of by product a.

         (662,400) $   937,600

                                                    Zeena Foods Income Statement   For Month Ended May 31, 2013 Sales revenue (joint products) 

   $20,250          (8,100)    $12,150

$ 319,000

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Cost of goods sold: Joint cost (90% × $82,000) $73,800 Separate costs (90% × $48,000) 43,200 By­products       8,100 Gross profit Non­factory expenses Income from operations Other revenues (by­product sales) Net income before taxes b.                                                      Zeena Foods              Income Statement   For Month Ended May 31, 2013 Sales revenue (joint products) Cost of goods sold ($73,800 + $43,200) Gross profit Non­factory expenses Income from operations Other income (by­product sales) Net income before taxes c. Joint cost NRV of by­product Joint cost to allocate

 (125,100) $ 193,900      (47,850) $ 146,050        20,250 $ 166,300

$ 319,000           (117,000) $ 202,000      (47,850) $ 154,150        12,150 $ 166,300

$ 82,000                                 (12,150) $ 69,850 Zeena Foods Income Statement  For Month Ended May 31, 2013

Sales revenue Cost of goods sold [(90% × $69,850) + $43,200] Gross profit Non­factory expenses Net income before taxes d.

$ 319,000   (106,065)    $ 212,935       (47,850) $ 165,085

The   approach   in  (c)  is  better  than   either  (a)  or  (b)  because  it   consistently matches the NRV of the by­product with the costs of the joint production operations that produced the by­product.

34. a. Estimated OH Estimated NRV of by­product Estimated OH to be covered Divided by estimated billable hours Predetermined OH rate per billable hour b. Cash 9,700 Manufacturing Overhead To record sale of by­product c. Total actual OH Total actual NRV of by­product

$415,200       (9,200) $406,000 ÷ 70,000 $      5.80  9,700 $ 410,500        (9,700)

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Total adjusted actual OH Total applied OH (70,900 × $5.80) Overapplied overhead

$ 400,800   (411,220)    $   10,420

35. a. $315,000 ÷ 45,000 = $7 per DLH b. DM DL ($20 × 125) OH ($7 × 125) Total

$    890 2,500        875 $4,265

c. Cash 93                  Manufacturing Overhead To record disposal value of spoiled work  incurred on Job XX (stained glass window) d.

93

OH rate = ($297,200 + $25,200) ÷ 45,000 = $7.16 (rounded)

DM DL ($20 × 125) OH ($7.16 × 125) Total Scrap sales value Total cost of job

$   890 2,500           895 $4,285         (93) $4,192

36. a. Cash     Work in Process Inventory—Hedge Fund         To record sale of Hedge Fund model

8,500 8,500

b. Cash 8,500     Manufacturing Overhead         To record sale of Hedge Fund model

8,500

c. The NRV approach is preferable because it allows Mae­Doff to reduce the cost of the Hedge Fund Extraordinaire building to ascertain a more reasonable profit amount. 37. a. Joint Services Rental  Sales  Totals 

Increase in Revenues $770,000       105,000 $875,000

0.88 0.12 1.00

Allocated Cost $28,600       3,900 $32,500

      b. Joint Services Rental  Sales  Totals 

Increase in Net Income $104,500 0.55       85,500 0.45 $190,000 1.00

Allocated Cost $17,875        14,625 $32,500

c.

The   allocation   based   on   increase   in   net   income   may   be   better   because   it matches the advertising cost to the direct net benefit of the advertising.  © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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38. a. Training cost = $120,000 ÷ 6,000 = $20 per hour Overhead cost = $55,500 ÷ 6,000 = $9.25 per hour Cost Assignment: Direct costs (4,000  $20; 2,000  $20) Overhead cost (4,000  $9.25; 2,000  $9.25) Total cost assigned

Children $  80,000       37,000 $117,000

 Adults $40,000   18,500    $58,500

b. Application rate = $55,500 ÷ [($35  4,000) + ($65  2,000)] = $55,500 ÷ ($140,000 + $130,000) = $55,500 ÷ $270,000 = $0.21 per dollar of sales value (rounded)

Cost Assignment: Direct costs (4,000 × $20; 2,000  $20) Overhead cost ($140,000  0.21; $130,000  0.21) Total cost assigned (off due to rounding) c.

Children Adults $  80,000 $40,000       29,400   27,300    $109,400 $67,300

Both methods result in higher charges to the Children’s group. The training hours method would be appropriate if hours spent with clients were considered the most important cost driver. However, it is also appropriate to assign costs based on an “ability to bear” such as occurs when costs are assigned using the sales value method of allocation. Based on the information in this problem, it seems that the selling price per   hour   for   children’s   lessons   is   too   low.   There   is   probably   a   higher   need   for supervision, greater rates for insurance, and more equipment damage for children than for adults.

39. a. Joint Activity Fund­raising Program Total

Percent 0.10 0.90 1.00

     b.

Percent 0.02 0.98 1.00

Joint Activity Fund­raising Program Total

Joint Cost Allocated $  26,100   234,900    $261,000 Joint Cost Allocated $    5,220   255,780    $261,000

40. Each student will have a different answer. No solution is provided.

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PROBLEMS 41. Each student will have a different answer. No solution is provided. One good source of information is “Corn Farmers Smile as Ethanol Prices Rise, but Experts on Food Supplies Worry” at http://www.public.iastate.edu/~yikes/iowa_corn.html. 42. a.  Joint cost allocation: Forever ($238,365 ÷ $317,820) × $76,950 Fantasy ($79,455 ÷ $317,820) × $76,950 Total

$57,712.50   19,237.50    $76,950.00

Total cost: Forever = $57,712.50 + $3,180.00 = $60,892.50 Fantasy = $19,237.50 + $2,940.00 + $4,680.00 + $6,195.00 = $33,052.50 b.

Work in Process Inventory—Combining Raw Material Inventory Wages Payable Manufacturing Overhead

59,715.00

Work in Process Inventory—Heating Work in Process Inventory—Combining

59,715.00

Work in Process Inventory—Heating Raw Material Inventory Wages Payable Manufacturing Overhead

17,235.00

Work in Process Inventory—Heating Raw Material Inventory

3,180.00

Work in Process Inventory—Heating Raw Material Inventory Wages Payable Manufacturing Overhead

13,815.00

Finished Goods Inventory—Forever Finished Goods Inventory—Fantasy Work in Process Inventory—Heating

60,892.50 33,052.50

42,000.00 11,340.00 6,375.00 59,715.00 9,150.00 3,225.00 4,860.00 3,180.00 2,940.00 4,680.00 6,195.00

93,945.00

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c.

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                  Work in Process—Combining DM  42,000 To Heating DL 11,340 OH 6,375 Bal. 0

59,715

              Work in Process—Heating DM 9,150 To FG—Forever DL 3,225 To FG—Fantasy OH 4,860     Prev. Dept. 59,715 DM 3,180 DM 2,940 DL 4,680 OH 6,195  Bal. 0                       FG Inv.—Forever      Beg.                           XXX     CGM                  60,892.50 43. a. Oil (5,000,000 bushels × 11 lbs.)  Meal (5,000,000 bushels × 44 lbs.)  Total

                                  FG Inv.—Fantasy Beg.                     XXX   CGM           33,052.50         55,000,000 220,000,000 275,000,000

Joint cost allocation: Oil (0.20 × $49,800,000) Meal (0.80 × $49,800,000) Total

20% 80%

$  9,960,000       39,840,000 $49,800,000

b. Cost of goods sold (in millions): Oil (0.60  $9,960,0000) Meal (0.75  $39,840,000) Total c. Ending finished goods (in millions): Oil (0.40 × $9,960,000) Meal (0.25 × $39,840,000) Total

60,892.50 33,052.50

$  5,976,000       29,880,000 $35,856,000 $  3,984,000          9,960,000     $13,944,000

44. a. Joint cost allocation: Skim (1,555,500 ÷ 1,830,000) × $872,000 Cream (274,500 ÷ 1,830,000) × $872,000 Total

$741,200   130,800    $872,000

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b.

79

Skim [($741,200 + $67,660) ÷ 1,555,500] = $808,860 ÷ 1,555,500 = $0.52; $0.52 ×  (1,555,500 – 1,550,000) = $0.52 × 5,500 = $2,860 Cream [($130,800 + $83,310) ÷ 274,500] = $214,110 ÷ 274,500 = $0.78; $0.78 ×  (274,500 – 274,000) = $0.78 × 500 = $390 Total finished goods inventory = $2,860 + $390 = $3,250

c.

Beginning finished goods inventory Cost of goods manufactured Goods available for sale Ending finished goods inventory Cost of goods sold

$               0      1,022,970 $ 1,022,970           (3,250) $ 1,019,720

Sales ($1,472,500 + $282,220) Cost of goods sold Gross margin

$ 1,754,720  (1,019,720) $    735,000

The  dairy  could   test  the  fat  content  of  the  milk   before  purchase and  only purchase milk that, when processed, would result in minimal loss.

45. a.   Relative sales value: Oil ($0.50 × 55,000,000) Meal ($0.20 × 220,000,000) Total

$27,500,000   38% (rounded)       44,000,000   62% (rounded)    $71,500,000 100%

Oil (0.38 × $49,800,000) Meal (0.62 × $49,800,000) Total

   $18,924,000         30,876,000 $49,800,000

      b.   Cost of goods sold: Oil (0.60 × $18,924,000) Meal (0.75 × $30,876,000) Total

  $11,354,400        23,157,000 $34,511,400

      c.    Ending finished goods: Oil (0.40 × $18,924,000) Meal (0.25 × $30,876,000) Total

  $  7,569,600           7,719,000 $15,288,600

d.

Each method allocates a different amount of joint cost to the joint products and results in a different per­unit cost for each product. In Problem 43, using the physical  measure   assigned  more   joint   cost  to  the   meal.   This  problem’s   allocation resulted in a lower cost of goods sold amount and a higher value in ending inventory.

46. a. Skim: $1,472,500 ÷ 1,550,000 gallons = $0.95 per gallon Cream: $282,220 ÷ 274,000 gallons = $1.03 per gallon © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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b. Relative sales values: Skim ($0.95  1,555,500)  Cream ($1.03  274,500)  Total

$1,477,725        282,735 $1,760,460

Joint cost allocation: Skim (0.84  $872,000)  Cream (0.16  $872,000)  Total 

$732,480        139,520 $872,000

c.

84% (rounded)   16% (rounded)    100%

Skim [($732,480 + $67,660) ÷ 1,555,500] = $800,140 ÷ 1,555,500 = $0.51 (rounded); $0.51  (1,555,500 – 1,550,000) = $0.51  5,500 = $2,805  Cream [($139,520 + $83,310) ÷ 274,500] = $222,830 ÷ 274,500 = $0.81 (rounded); $0.81 × (274,500 – 274,000) = $0.81 × 500 = $405 Total finished goods inventory = $2,805 + $405 = $3,210 Beginning finished goods inventory Cost of goods manufactured Goods available for sale Ending finished goods inventory Cost of goods sold

                    $               0      1,022,970 $ 1,022,970            (3,210) $ 1,019,760

Sales ($1,472,500 + $282,220) Cost of goods sold Gross margin

$ 1,754,720   (1,019,760)    $    734,960

  47. a. Joint cost allocation: Checking: $800,000 × ($1,914,000 ÷ $3,300,000) Credit cards: $800,000 × ($1,386,000 ÷ $3,300,000) Total b.

Revenues Joint cost Separate costs Gross margin unadjusted Identity theft insurance revenue Overall gross margin

=   $464,000 =     336,000 $800,000

  Checking Credit Cards $1,914,000 $1,386,000 (464,000)        (336,000)      (850,000)             (380,000) $   600,000     $    670,000

c. $800,000 – $26,000 = $774,000 Checking:  $774,000 × ($1,914,000 ÷ $3,300,000) Credit Cards: $774,000 × ($1,386,000 ÷ $3,300,000)

    Total $ 3,300,000 (800,000)   (1,230,000)    $ 1,270,000           26,000 $ 1,296,000

= $448,920 =   325,080

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Total

$774,000

The gross margin will be the same because the joint costs of the two joint products are $26,000 less than in (b). 48. a. Peaches Labor Overhead (40% of labor) Joint cost b.

c.

Joint Product Premium Good

Sales Value $30,000 15,000

$15,000 700             280 $15,980

Add’l Cost $1,500 4,200

NRV at Split­Off $28,500    10,800     $39,300 

 Percent * 73   27    100

Joint  Cost * $11,665       4,315 $15,980

rounded

*

d. Raw Material Inventory Cash (A/P) To record purchase of peaches

15,000

Work in Process Inventory—Clean & Sort Raw Material Inventory Wages Payable Manufacturing Overhead To record joint processing cost

15,980

Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Cutting (Good) Work in Process Inventory—Clean & Sort

11,665 4,315

15,000

15,000 700 280

15,980

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To transfer joint cost to Packaging and Cutting Work in Process Inventory—Cutting (Good) Various accounts To record cutting and canning costs for good peaches

2,000

Work in Process Inventory—Packaging (Good) Work in Process Inventory—Cutting (Good) To move good peaches from Cutting to Packaging

6,315

Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Packaging (Good) Various accounts To record packaging and delivery costs

1,500 2,200

2,000

6,315

3,700

Finished Goods Inventory (Premium) Work in Process Inventory—Packaging  (Premium) To record completed production of premium peaches

13,165 13,165

Finished Goods Inventory (Good) Work in Process Inventory—Packaging (Good) To record completed production of good peaches

8,515

Cash Various accounts Other Income To record sale of fair peaches

4,500

e. Total cost Estimated NRV of scrap Joint cost to allocate Joint Product Premium Good

Sales Value $30,000 15,000

8,515

500 4,000

$15,980      (4,000) $11,980 Add’l Cost $1,500 4,200

NRV at Split­Off  Percent * $28,500 73   10,800      27    $39,300 100

Joint Cost* $  8,745       3,235 $11,980

rounded

*

f. Raw Material Inventory Cash (A/P) To record purchase of peaches Work in Process Inventory—Clean & Sort Raw Material Inventory Wages Payable Manufacturing Overhead

15,000

15,980

15,000

15,000 700 280

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To record joint cost Work in Process Inventory—Packaging (Fair) Work in Process Inventory—Clean & Sort To recognize by­product

4,000

Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Cutting (Good) Work in Process Inventory—Clean & Sort To allocate joint cost

8,745 3,235

Work in Process Inventory—Cutting (Good) Various accounts To record cutting cost for good peaches

2,000

Work in Process Inventory—Packaging (Good) Work in Process Inventory—Cutting (Good) To move good peaches from Cutting to Packaging

5,235

Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Packaging (Good) Work in Process Inventory—Packaging (Fair) Various accounts To record packaging cost

1,500 2,200 500

Finished Goods Inventory (Premium)  Finished Goods Inventory (Good)  Finished Goods Inventory (Fair)  Work in Process Inventory—Packaging (Premium) Work in Process Inventory—Packaging (Good) Work in Process Inventory—Packaging (Fair) To move completed production to finished goods

4,000

11,980

2,000

5,235

4,200 10,245 7,435 4,500 10,245 7,435 4,500

49. a. 2,500 × ($2.50 – $1.00) = 2,500 × $1.50 = $3,750 b. $36,000 + $43,750 + $3,000 – $3,750 = $79,000 c. CGS for apparel = BI + Purchases – EI  = $35,000 + $181,350 – $21,500  = $194,850 Personal Training Apparel Gross revenues $ 753,000 $289,000 Separate costs: Cost of goods sold          (194,850) Labor (231,000) (33,250) Supplies (151,300) (700) Equipment depreciation (165,000) (1,200) Administration   (103,000)           (3,700) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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Net realizable value

                             $ 102,700 65%

Personal Training ($79,000  0.65) = $51,350  Apparel ($79,000  0.35) = $27,650 e.      Personal Training  Gross revenues  $ 753,000  Separate costs: Cost of Goods Sold Labor  (231,000) Supplies  (151,300) Equipment depreciation  (165,000) Administration  (103,000) Joint cost            (51,350)  Operating income  $   51,350

$  55,300 35%

d.

  Apparel $ 289,000 (194,850) (33,250) (700) (1,200) (3,700)       (27,650) $   27,650

50. a. Joint cost = $44,200 + $33,800 = $78,000 Sales value of orange juice = $5.25  22,400 = $117,600 Sales value of marmalade = $3.45  26,880 = $92,736 Sales value of pulp = $0.05  6,720 = $336

b.

56,000 gallons of output in Dept. 1: Transferred to Dept. 2 (40%) = 22,400 gallons Transferred to Dept. 3 (60%) = 33,600 gallons

c.

33,600 gallons of input to Dept. 3: Pulp (20%) = 6,720 gallons Marmalade (80%) = 26,880 gallons © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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d.

e.

85

Sales value (6,720 × $0.05)             $336 Distribution expense     (90) NRV $246 Joint Product Juice  Marmalade 

Gallons 22,400 26,880

Sales Price $5.25 3.45

Total Separate Sales Costs $117,600 $9,620 92,736   6,204*

NRV $107,980 86,532

*$6,450 – $246

f.

Joint Product Juice Marmalade

g.

Joint Product Juice Marmalade

 NRV $107,980          86,532 $194,512

Joint  Cost  $43,680  $34,320 

       Percent          56% (rounded)             44% (rounded)          100%

Separate Costs $9,620 $6,204

Joint Cost       $43,680            34,320 $78,000

Total Inv.    Value of Cost %      End. Inv. $7,995.00 $53,300  0.15 $6,078.60 $40,524  0.15

51. a. By­Product Inventory—Corma Work in Process Inventory—Zilla (5,000 × $30) To record completed production of by­product

150,000

      b. By­Product Inventory—Corma (5,000  $45) Various accounts Work in Process Inventory—Zilla To record completed production of by­product

225,000

(Alternative) Work in Process Inventory—Corma Various accounts To record production of by­product

150,000

50,000 175,000

50,000

Work in Process Inventory—Corma  Work in Process Inventory—Zilla  To record reduction of main product for NRV of  by­product

175,000

By­Product Inventory—Corma Work in Process Inventory—Corma To record completed production of by­product

225,000

    c. Sales value of Zilla at split­off (70 × 5,000 × $3.50) Sales value of Corma at split­off (5,000 × $30)

50,000

175,000

225,000 $1,225,000 (89%)*        150,000 (11%)* $1,375,000

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rounded

*

Total joint costs Proportion of Corma sales value at split­off Joint cost assignable to Corma

$875,000        0.11 $  96,250

Work in Process Inventory—Corma Work in Process Inventory—Zilla Various accounts To allocate joint cost

96,250 778,750 875,000

Work in Process Inventory—Corma Various accounts To record separate processing costs of Corma

50,000 50,000

Finished Goods Inventory—Corma Work in Process Inventory—Corma To record completed production of Corma

52. a. Joint process cost: Direct material Direct labor Overhead Total Less by­product NRV Amount to be allocated

146,250 146,250

$40,000 23,400   10,000    $73,400                  (4,600) $68,800

Allocation on the basis of sales value at split­off: Product Sales Value  Proportion * Tenderloin $132,000 0.55 Roast 86,000 0.36 Ham          22,400  0.09  $240,400 1.00 * rounded

Allocation $37,840 24,768       6,192  $68,800

Allocation on the basis of pounds produced: Product Pounds  Proportion * Tenderloin 8,600 0.26 Roast 13,400 0.41 Ham 10,800 0.33 32,800 1.00 * rounded

Allocation $17,888 28,208   22,704    $68,800

Computation of EI values under each allocation base:

Sales Value Approach: Product Allocation Tenderloin $37,840 Roast 24,768

Units 6,440 16,740

 Unit Cost * $5.88 1.48

Units in EI 1,000 2,600

EI Value $5,880 3,848

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Ham

87

6,192

8,640

Physical Pounds Approach: Product Allocation Units Tenderloin $17,888 6,440 Roast 28,208 16,740 Ham 22,704 8,640 b.

0.72

1,000

 Unit Cost * $2.78 1.69 2.63

Units in EI 1,000 2,600 1,000

720 EI Value $2,780 4,394 2,630

(1)   For financial statement purposes, the sales value allocation approach assigns joint cost   according   to   the   relative   market   values   of   the   products,   while   the   physical measure allocation approach treats every pound of output as equally worthy and, thus, assigns the same cost per pound to all outputs and ignores that some products have a higher selling price than others. Pounds are, however, an unchanging measure of   output,   while   the   value   of   money   changes   as   the   purchasing   power   of   the monetary unit changes. (2) Because joint cost is sunk once the joint process has been conducted, the allocated cost   and   the   bases   used   to   allocate   that   cost   are   irrelevant   to   decisions   about processing   beyond   the   split­off   point.   However,   using   an   inappropriate   base   to allocate   joint   cost   could   make   it   appear   that   certain   products   are   not   “worth” producing because the allocation would make the products appear to be unprofitable.

53. a. Total joint cost: Direct material Direct labor Overhead

$37,500 12,000   11,000    $60,500                           (1,620) $58,880

Sales value of scrap ($0.45 × 3,600 lbs.) Joint cost to be allocated b.

Revenues Separate costs NRV per unit Multiply by # of units produced Total NRV NRV %

Robes $  20.00        (6.80) $  13.20   6,000 $79,200           55%

Joint cost assignable to robes (55% × $58,880) Joint cost assignable to towels (45% × $58,880) Work in Process Inventory—Robes Work in Process Inventory—Towels Work in Process Inventory—Cutting To allocate joint costs to robes and towels Finished Goods Inventory—Scrap Work in Process Inventory—Cutting

Beach Towels $     7.00         (1.60) $     5.40  12,000 $ 64,800                45% $32,384   26,496    $58,880 32,384 26,496

1,620

58,880

1,620

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To record production of scrap c. Allocated joint cost Separate costs: $6.80 × 6,000 $1.60 × 12,000 Total to finished goods 54. a. Product Alpha Beta Gamma Total

Units Produced 2,500 5,000 7,500

Sales Value at Split­Off $250,000 400,000   150,000    $800,000

Sales Price $100 80 20

Robes $32,384

Beach Towels $26,496

40,800                $73,184

  19,200    $45,696

Joint Allocated % Costs Joint Costs 31.25% $720,000 $225,000   50.00 720,000 360,000   18.75    720,000       135,000 100.00% $720,000

b. Joint costs of Beta [from (a)] Additional processing costs Total cost of Beta

$360,000   150,000    $510,000

c. Alpha should not be processed further: Incremental revenue [($150 – $100)  $2,500] Incremental processing cost Decline in income if processed further Net realizable value of products: Units Selling Produced Price Revenue Alpha  (sold at split­off)  2,500 $100 $250,000 Beta  (processed further)  5,000 115 575,000 Gamma  (processed further)  7,500 30 225,000 Joint costs Net realizable value of Gamma Joint costs to be allocated Allocation of joint costs: Net Realizable Product Value  Alpha $250,000 Beta   425,000    Totals $675,000

% 37%   63    100%

$ 125,000  (150,000) $ (25,000) Processing Costs

Net Realizable Value

$           0

$250,000

150,000

425,000

100,000

125,000

$ 720,000             (125,000) $ 595,000 Joint Processing Final Cost Allocation Costs Cost $595,000 $220,150  $           0 $220,150 595,000   374,850          150,000   524,850    $595,000  $150,000 $745,000      (CIA adapted)

55. a. With many scrap and waste materials it is often an issue of who is to bear the cost. Undoubtedly, the resulting costs in this case to the firms and society far exceeded the © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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89

cost the individual or firm would have incurred to properly dispose of the hazardous waste materials. If   caught,   those   involved   with   this   type   of   illegal   disposal   of   materials   could   be subject to damage claims, very large fines, and prison time. Furthermore, it is likely that the costs of the cleanup would be imposed on them. b.

Firms have an obligation to ensure proper waste disposal and to educate their employees in proper methods of waste disposal. Employees should be made aware of the risks associated with improper disposal including the legal repercussions. Thus, the least expensive and most effective way to control waste is for each firm to assume responsibility for its own waste. Beyond   internal   measures,   the   larger   society   can   assume   a   greater   oversight   role through increased regulation and monitoring of waste control efforts. Much of this activity   is   currently   monitored   by   the   EPA,   but   the   role   of   this   agency   could   be expanded. Further, laws could be tightened, and the penalty structure for improper disposal of waste materials could be improved. Lastly, waste recycling opportunities for   manufacturing   firms   could   be   improved,   and   companies   could   pursue   other alternatives to reduce the costs of waste disposal.

The vendor/manufacturer must bear some of the responsibility for proper use and disposal of its products. Manufacturers should have superior knowledge about chemical properties and the risks associated with their products’ components. Further, while giving due consideration to relative cost, manufacturers have an obligation to make products with materials and components that are the least toxic and the most convenient   to   recycle.   If   product   materials   are   extraordinarily   toxic   to   the environment, manufacturers should be directly responsible for proper waste disposal. 56. Each student will have a different answer. However, some information on various by­ products follows. c.

Pork By­Products: insulin for the regulation of diabetes; valves for human heart surgery; suede for shoes and clothing; and gelatin for many food and nonfood uses. Swine by­ product   are   also   important   parts   of  such   products   as   water   filters,   insulation,   rubber, antifreeze, certain plastics, floor waxes, crayons, chalk, adhesives, and fertilizer. Since the first operation in 1971, tens of thousands of pig heart valves have been used to replace human heart valves weakened by disease or injury. Wheat/Soybean/Cottonseed By­Products: livestock, poultry, and fish/shrimp feed  Rice By­Products: pet foods; rice flour Lumber By­Products: animal bedding, sawdust (and particleboard), wood chips, mulch; slabs and chips produce paper; firewood Fish   By­Products:   used   in   organic   farming,   fish   meal   production,   and   production   of formulated bait (crab, crawfish, and lobster), and formulated food (aquaculture). Skins from carp have been used to make leather products. Animal By­Products:

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  

      

    

Glue made from cow hide is preferred when binding books because animal glue can withstand high temperatures and has the ability to dissolve in water, making recycling possible.  Plastic and rubber are made using fatty acids which come from animal and vegetable fats.  Animal   gelatins   are   an   ingredient   in   a   wide   range   of   foods   like   candies, marshmallows,   flavorings   and   of   course   Jell­O.   Gelatin   is   also   a   common   food stabilizer  in items  such as  mayonnaise  and ice  cream,  “lite”  products, and  frozen foods. Gelatins are used to clarify beverages like fruit juices, beer and wine.  Purified bone ash is used to refine sugar and to make china.  Animal fats are used in making maple syrup.  Plastic, cardboard and paper containers, cellophane and wax paper all involve animal products, as do plywood, drywall, and insulation.  Freon for air conditioning and refrigerators contains a derivative from animal fat.  Egg whites are used in ceramic tile and catalase enzyme is used to make foam rubber.  Laundry   detergents   and   fabric   softeners   contain   animal   products,   as   do   many disinfectants, household cleaners, and polishes.  Animals  provide ingredients  for cold and allergy  medicines  as well as the gelatin capsules they come in. Stomach remedies, vitamins, and mineral supplements are also derived   from   animals.   Cortison   and   treatments   for   anemia,   emphysema,   malaria, stroke, and heart attacks are animal­based. Latex surgical gloves contain tallow, x­ray film contains gelatin, and wool grease is used to make thermometers heat sensitive.  Sheep wool gives baseballs their bounce. Gelatin helps golf balls roll straight. Leather, foam rubber, and plastics are used in most types of sports equipment. Sheep intestines are used to string some types of sports racquets, and poultry feathers are thought to make the best darts and fishing lures.  Animal products are used in making electrical circuitry, ink toners to print onto copy paper, and paper. Steel ball bearings, lubricants, and fire extinguishers contain animal products. Animal products are used in brushes, art supplies, and in instruments such as drums and pianos.

57. The purpose, audience, and content criteria are met, and the joint costs should be allocated. The purpose criterion is met because the materials call for recipient action (encouraging parents to counsel their children and informing the parents on drug abuse detection) that will help accomplish the entity’s mission. This same call for action means that the materials meet the content criterion. The audience criterion is met because the audience (high school students’ parents) was chosen because of an actual or potential need for the action called for by the program component. (American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable= MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)

(AICPA adapted) 58. a. The purpose, audience, and content criteria are met, and the entire $24,000 should be allocated. The activity calls for specific action by the recipient (exercising) that will © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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help accomplish the entity’s mission. The purpose criterion is met based on the other evidence, because (a) performing such programs helps accomplish Entity D’s mission, and (b) the objectives of the program are documented in a letter to the public relations firm that developed the brochure. The audience criterion is met because the audience (residents over 65) is selected based on its need to use or reasonable potential for use of the action called for by the program component. The content criterion is met because the activity calls for specific action by the recipient (exercising) that will help accomplish the entity’s mission (increasing the physical activity of senior citizens), and the need for and benefits of the action are clearly evident (explains the importance of exercising). b. The cost of the first brochure should be split between fundraising and program; the cost of the second brochure should be charged entirely to program. c.

The content and audience criteria are met. The purpose criterion is not met, however, because a majority of compensation or fees for the fund-raising consultant varies based on contributions raised for this discrete joint activity. All costs should be charged to fund raising, including the costs of the second brochure and any other costs that otherwise might be considered program or management and general costs if they had been incurred in a different activity. (American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata& blobtable=MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)

(AICPA adapted) 59. The purpose, audience, and content criteria are not met. All costs  should be charged to fund-raising. The purpose criterion is not met because the activity has no call for specific action; the program only educates the audience about causes (describing its programs and showing the needy children). (Although the executive producer will be paid $5,000 if the activity raises over $1,000,000, that amount would not be a  majority of the executive producer’s total compensation for this activity; as such, this compensation is not relevant.) Also, the operating policies and internal management  memoranda state that these programs are designed to educate the public about  the needs of children in developing countries with no call for specific action by  recipients and to raise contributions, indicate that the purpose is fund-raising. The audience criterion is not met because the audience is a broad segment of the population of a country that is not in need of or has no reasonable potential for use of the program activity. The content criterion is not met because the activity does not call for specific action by the recipient that will help accomplish the entity’s mission. (American Institute of Certified Public Accountants, Statement of Position 98-2: Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (March 11, 1998); Section 10,730; http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable= MungoBlobs&blobkey=id&blobwhere=1175820927486&blobheader=application%2Fpdf)

(AICPA adapted) 60. a. Yes, it would meet the audience criterion because the attendees were “self­selected”  and were not invited based on their ability or likelihood to contribute. b.

Asking   attendees   to   take   a   quiz   about   diabetes,   volunteer   to   distribute   pamphlets about the disease to local businesses, write letters to their insurance companies about © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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additional coverage availability, and participate in the Medicare Advocacy Program to gather information and identify problems encountered by beneficiaries and providers were all “calls for action.” c. Program (0.65  $360,000) Management/general (0.25  $360,000) Fund­raising (0.10 × $360,000) Total

$234,000 90,000          36,000 $360,000

d.

Other   than  time,  and   assuming   that   no  one  type   of  discussion   prevailed   over  the others, the joint cost could be allocated 1/3, 1/3, and 1/3, which would be rational and systematic.

e.

All of the $430,000 would be allocated to fund­raising because the compensation test of the purpose criterion was violated in that the consultant’s fee was based on the quantity of money raised by the lecture.

61. Each   student   will   have   a   different   answer.   No   solution   is   provided.   However,   the following information may be appropriate: The “cost to raise a dollar” appears to reflect the relative importance of capital campaigns to each sector. Hospitals often have the most capital fund­raising activities and, often, the lowest fund­raising cost. Education  and human services  have a mix  of operating  and capital fund­raising and seem to fall in the middle of the range. Higher education ratios are lower than non­higher education, as higher ed is more capital–campaign intensive. Arts and culture and non­hospital health are typically raising mostly operating funds and thus would have the highest fund­raising cost. 62. a. The   income   statement   provided   is   incomplete   if   the   Center   for   Entrepreneurship produces joint products. One of two approaches would make the income statement more   accurate.   First,   part   of   the   costs   shown   on   the   income   statement   could   be assigned   to   fundraising   using   one   of   the   methods   discussed   in   the   chapter.   The remaining   costs   would   be   those   reasonably   allocated   only   to   the   executive development   activity.   An   alternative   approach   would   be   to   add   to   the   revenues reported on the income statement a portion of the proceeds generated by all of the fundraising activities of the college. b. The Center for Entrepreneurship should continue its operations if you can persuade the dean that the Center produces a net financial benefit for the college rather than a $250,000 loss. As outlined in the solution to (a), one of two approaches could be taken. The first approach is to argue that some portion of the costs incurred by the Center should appropriately be allocated against resources generated through fund­raising rather than charged against fees generated from executive development activity. For example, one could effect such an allocation using a monetary measure such as total cash and fair market value of other assets generated by the center from fund­raising  and fees. To present a credible argument, the cash and fair market value of other assets derived from   fund­raising   would   be   limited   to   contributions   to   the   college   from   parties primarily associated with the college through the Center. The result of this approach would be to assign a portion of the Center’s total costs to fund­raising and a portion to © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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executive development. If more than $250,000 of costs can be justifiably charged to fund­raising,   the   executive   development   program   will   be   profitable.   In   short,   this approach allocates some costs out of the Center and to fund­raising. The alternative approach would be to keep all costs in the Center and to allocate some of the cash and fair market value of other property raised through fund­raising to the Center. This approach would require one to credibly demonstrate that a portion of the total value of cash and property raised for the college from fund­raising should be assigned to the Center. The Center’s portion of the total value of cash and property raised through college fund­raising would be established by demonstrating which contributors were primarily connected to the college or university through relationships with the Center. With   this   approach,   the   Center’s   costs   would   be   as   reported   in   the   condensed statement,   but   reported   revenues   would   increase   by   the   amount   allocated   to   the Center.  If the  allocated  revenues  exceed  $250,000, the  Center  would  report a net profit and should remain in operation. 63. Each student will have a different answer. No solution is provided.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.