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GROUP 2Bay, Lance Ceniza, Sandra Ibarra, Joanna Lastra, Shein Monteclaro, Christian41. LO (Physical measure joint cost allocation) Powisett Farms Dairy began operations at the start of May 2010. Powisett Farms operates a fleet of trucks to gather whole milk from local farmers. The whole milk is then...

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41. LO.3 (Physical measure joint cost allocation) Powisett Farms Dairy began operations at the start of May 2010. Powisett Farms operates a fleet of trucks to gather whole milk from local farmers. The whole milk is then separated into two joint products: skim milk and cream. Both products are sold at the split-off point to dairy wholesalers. For May, the firm incurred the following joint costs: Whole milk purchase cost Direct labor costs Overhead costs Total product cost

$400,000 180,000 292,000 $872,000

During May, the firm processed 2,000,000 gallons of whole milk, producing 1,555,500 gallons of skim milk and 274,500 gallons of cream. The remaining gallons of the whole milk was lost during processing. There was no Raw Material or Work in Process Inventory at the end of May. After the joint process, the skim milk and cream were separately processed at costs, respectively, of $67,660 and $83,310. Of the products produced, Powisett Farms Dairy sold 1,550,000 gallons of skim milk for $1,472,500 and 274,000 gallons of cream for $282,220 to wholesalers. a. Powisett uses a physical measure (gallon) to allocate joint costs. Allocate the joint cost to production. Product

Gallons Produced

Proportion

Joint Cost

Allocated Amount

Cost per Gallon

Skim Milk

1,555,500

0.85

$872,000

$741,200

$0.48

Cream

274.500

0.15

$872,000

$130,800

$0.48

Total

1,830,000

1

$872,000

b. Calculate ending Finished Goods Inventory cost, Cost of Goods Sold, and gross margin for May. Ending Finished Goods Inventory Cost: Product

Gallons Produced

Allocate d joint cost ($)

Separat e cost ($)

Skim Milk

1,555,500

741,200

67,660

Cream

274,500

130,800

Total

1,830,000

872,000

Total cost ($)

Cost per Gallon

Inventor y in gallons

Inventor y in $

808,860

0.52

5,500

2,860

83,310

214,110

0.78

500

390

150,970

1,022,970

3,250

Cost of Goods Sold: Product

Allocated joint cost ($)

Separate cost ($)

Total COGM ($)

Cost of Ending Inventory ($)

COGS ($)

Skim Milk

741,200

67,660

808,860

2,860

806,000

Cream

130,800

83,310

214,110

390

213,720

Total

872,000

150,970

1,022,970

3,250

1,019,720

Gross Margin: Product

Sale value ($)

COGS ($)

Gross margin ($)

Skim Milk

1,472,000

806,000

656,500

Cream

282,220

213, 720

68,500

Total

1,754,720

1,019,720

735,000

c. A manager at Powisett Farms Dairy noted that the milk fat content of whole milk can vary greatly from farmer to farmer. Because milk fat content determines the relative yields of skim milk and cream from whole milk, the ratio of joint products can be partly determined based on the milk fat content of purchased whole milk. How could Powisett Farms Dairy use information about milk fat content in the whole milk it purchases to optimize the profit realized on its joint products? In order for Powisett Farms Dairy to collect information on the milk fat content from different farmers, they must average the various milk fat contents to get their ratio and use it to approximate their values in order to determine the maximum profit. The farmers must also be paid based on the milk fat content of the milk they are providing because it will make a difference with the profit of the company.

42. LO.3 (Monetary measure joint cost allocation) Refer to the information in Problem 40. a. Assume the net realizable values of the joint products are as follows: Soybean oil $0.50 per pound Soybean meal $0.20 per pound Allocate the joint cost incurred in March on the basis of net realizable value. Relative Sales Value Oil

$0.50

55,000,000

$ 27,500,000

38%

Meal

$0.20

220,000,000

$ 44,000,000

62%

$ 71,500,000

100%

Total Joint cost allocation: Oil

0.38

$49,800,000

$18,924,000

Meal

0.62

$49,800,000

$30,876,000

Total

$49,800,000

b. Calculate the cost of goods sold for March using the answer to (a). Cost of goods sold (COGS) Oil

0.60

$18,924,000

$11,354,400

Meal

0.75

$30,876,000

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

Total

c. Calculate the cost of Finished Goods Inventory at the end of March based on the answer to (a). Ending Finished Goods Oil

0.40

$18,924,000

$7,569,600

Meal

0.25

$30,876,000

$7,719,000

Total

$15,288,600

d. Compare the answers to (b) and (c) of Problem 40 to the answers to (b) and (c) of this problem. Explain why the answers differ. The difference between the two problems is that since they are using two different methods, they have different amounts of joint cost that are allocated to their joint products. The physical measure joint allocation method of problem 40 assigned more of its joint cost to the meal, while problem 42's monetary measure method resulted in a higher value of the ending inventory and a lower amount of the cost of goods sold. In addition, because of their differing methods, their per-unit cost for each product is different. Additional answers for number 42, since it needed the answers of number 40. a. Allocate the joint cost to the joint products on the basis of pounds of product produced. Oil

5,000,000 bushels

11 lbs.

$55,000,000

20%

Meal

5,000,000 bushels

44 lbs.

$220,000,000

80%

$ 275,000,000

100%

Total Joint cost allocation: Oil

0.20

$49,800,000

$9,960,000

Meal

0.80

$49,800,000

$39,840,000 $49,800,000

Total

b. Calculate the cost of goods sold for March. Cost of Good Sold (in millions) Oil

0.60

$9,960,000

$5,976,000

Meal

0.75

$39,840,000

$29,880,000

Total

$35,856,000

c. Calculate the cost of Finished Goods Inventory at the end of March. Ending Finished Goods (in millions) Oil

0.40

$9,960,000

$3,984,000

Meal

0.25

$39,840,000

$9,960,000 $13,944,000

Total

43. LO.3 (Monetary measure joint cost allocation) Refer to the information in Problem 41. a. Calculate the sales price per gallon for skim milk and cream. Product

Sale value ($)

Sale Units

Sale price/ Gallon ($)

Skim Milk

1,472,500

1,550,000

0.95

Cream

282,200

274,000

1.02993 or 1.03

TOTAL

1,754,700

1,824,000

b. Using relative sales value, allocate the joint cost to the joint production. Skim

$0.95

1,555,500

$1,477,725

84%

Cream

$1.03

247,500

$2,82,735

16%

$ 275,000,000

100%

Total Joint cost allocation: Skim

0.84

$872,000

$732,480

Cream

0.16

$872,000

$139,520

Total

$872,000

c. Calculate ending Finished Goods Inventory cost, Cost of Goods Sold, and the gross margin for the month. Skim [($732,480 + $67,660) ÷ 1,555,500] = $800,140 $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 $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 FGI, beginning

$0

COGM

1,022,970

Goods Available for Sale

1,022,970

FGI, end

(3,210)

COGS

$1,019,760

Sales

$1,754,720

COGS

(1,019,760)

Gross Margin

$734,960

44. LO.3 & LO.4 (Joint cost allocation; by-product; income determination) Stephenville Bank & Trust offers two primary financial services: commercial checking and credit cards. The bank also generates some revenue from selling identity fraud insurance as a by-product of its two main services. The monthly joint cost for conducting the two primary services is $800,000 and includes expenses for facilities, legal support, equipment, record keeping, and administration. The joint cost is allocated on the basis of total revenues generated from each primary service. The following table presents the results of operations and revenues for June: Service

Number of Accounts

Total Revenues

Commercial checking

12,000

$1,914,000

Credit cards

28,000

1,386,000

Identity theft insurance

10,000

80,000

To account for revenues from the identity theft insurance, management reduces Cost of Services Rendered for primary services. The commissions are accounted for on a realized value basis as the policies are received. For June, separate costs for commercial checking accounts and credit cards were $850,000 and $380,000, respectively.

a. Allocate the joint cost. ● Joint Cost = $800,000 - $80,000 (Revenue of Identity Theft Insurance) = $720,000 Service

Total Revenue

Proportion

Join Cost

Allocated Amount

Commercial Checking

$1,914,000

0.58

$720,000

$417,600

Credit Cards

$1,386,000

0.42

$720,000

$302,400

Total

$3,300,000

$720,000

b. Determine the income for each primary service and the company’s overall gross margin for June. Service

Allocated Joint Cost

Separate Costs

Total Cost of Service

Total Revenue

Income

Commercial Checking

$417,600

$850,000

$1,267,600

$1,914,000

$646,400

Credit Cards

$302,400

$380,000

$682,400

$1,380,000

$697,600

Total

$720,000

$230,000

$1,950,000

$3,294,000

$1,344,000

Company’s overall gross margin for June: Particulars

Amount ($)

Total Revenue from Primary Activities

3,294,000

Less: Joint Costs

800,000

Other Separate Costs

1,230,000

Gross Margin

(1,264,000)

Add: Other Income Revenue from Identity Theft Insurance Net Income as Company’s Overall

80,000 $1,344,000

45. LO.3 & LO.4 (Joint products; by-product) Fredericksburg Vegetable is a fruit packing business. The firm buys peaches by the truckload in season and separates them into three categories: premium, good, and fair. Premium peaches can be sold as is to supermarket chains and to specialty gift stores. Good peaches are sliced and canned in light syrup and sold to supermarkets. Fair peaches are considered a by-product and are sold to Altas Company, which processes the peaches into jelly. Fredericksburg Vegetable has two processing departments: (1) Cleaning and Sorting (joint cost) and (2) Cutting and Canning (separate costs). During the month, the company paid $15,000 for one truckload of fruit and $700 for labor to sort the fruit into categories. Fredericksburg Vegetable uses a predetermined overhead rate of 40 percent of direct labor cost. The following yield, costs, and final sales value resulted from the month’s truckload of fruit. Premium

Good

Fair

Yield in pecks

1,500

2,000

500

Cutting & canning costs

$0

$2,000

$0

Total packaging and delivery costs

$1,500

$2,200

$500

Total final sales value

$30,000

$15,000

$4,500

a. Determine the joint cost. Joint cost = Peaches Cost + Labor + Overhead Cost = 15,000+700+280 = 15,980 b. Diagram Fredericksburg Vegetable’s process in a manner similar to Exhibits 11–5 and 11–10.

c. Allocate joint cost using the approximated net realizable value at split-off method, assuming that the by-product is recorded when realized and is shown as Other Income on the income statement. Joint Product

Sales Value

Additional Cost

Net realized value at split off

Percentag e

Total joint cost

Joint Cost

Joint Product

a

b

a-b=c

d

e

(d)x(e) = f

Premium

30,000

1,500

28500

39300/285 00 = 73%

11980

11665

Good

15,000

4,200

10800

39,300/10, 800 = 27%

11980

4315

39300

100%

Total

15980

d. Using the allocations from (c), prepare the necessary entries assuming that the by-product is sold for $4,500 and that all costs were as shown. Raw Material Inventory Cash (or AP)

15000

Work in Process inventory C & S RW Inventory Wages Payable Manufacturing Overhead

15980

Work In Process inventory - P Work in Process inventory - C Work in Process Inventory - C&S

11,665 4315

Cash

4500

15000

15000 700 280

15980

Various Account Other Income

500 4000

e. Allocate joint cost using the approximated net realizable value at split-off method, assuming that the by-product is recorded using the net realizable value approach and that the joint cost is reduced by the net realizable value of the by-product. Joint Cost to Allocate = Total Cost - Estimated net realized value of scrap = 15,980 -4000 = 11,980

Joint Product

Sales Value

Additional Cost

Net realized value at split off

Percentage

Total joint cost

Joint Cost

a

b

a-b=c

d

e

(d)x(e) = f

Premium

30,000

1,500

28,500

39,300/28,5 00= 73%

11,980

8,745

Good

15,000

4,200

10,800

39,300/10,8 00= 27%

11,980

3,235

39,300

100%

Total

11,980

f. Using the allocations from (d), prepare the necessary entries, assuming that the estimated realizable value of the by-product is $4,000. Raw Material Inventory Cash (or AP)

15,000

Work in Process inventory - C&S Raw material inventory Wages payable Manufacturing overhead

15,980

Work in Process inventory - P Work in Process inventory - C&S

4,000

Work in Process inventory - P (Premium) Work in Process inventory - C (Good) Work in Process inventory - C&S

8,745 3,235

Work in Process inventory - C (Good) Various accounts

2,000

Work in Process inventory - P (Good) Work in Process inventory - C (Good)

5,235

Work in Process inventory - P (Premium) Work in Process inventory - P (Good) Work in Process inventory - P (Fair) Various accounts

1,500 2,200 500

Finished Goods inventory (Premium) Finished Goods inventory (Good) Finished Goods inventory (Fair) Work in Process inventory - P (Premium)

10,245 7,435 4,500

15,000

15,000 700 280

4,000

11,980

2,000

5,235

4,200

10,245

Work in Process inventory - P (Good) Work in Process inventory - P (Fair)

7,435 4,500

46. LO.3 & LO.4 (Process costing; joint cost allocation; by-product) GetAhead provides personal training services for, and sells apparel products to, its clients. GetAhead also generates a limited amount of revenue from the sale of protein drinks. The net realizable value from drink sales is accounted for as a reduction in the joint cost assigned to the Personal Training Services and Apparel Products. Protein drinks sell for $2.50 per bottle. The costs associated with making and packaging the drinks are $1.00 per bottle. The following information is available for 2010 on apparel products, which are purchased by GetAhead: Beginning Inventory

$35,000

Ending Inventory

$21,500

Purchases

$181,350

Joint cost is to be allocated to Personal Training Services and Apparel Products based on approximated net realizable values. For 2010, total revenues were $753,000 from Personal Training Services and $289,000 from Apparel. The following joint costs were incurred: Rent

$36,000

Insurance

$47,750

Utilities

$3,000

Separate costs were as follows: Personal Training

Apparel

Labor

$231,000

$33,250

Supplies

151,300

700

Equipment depreciation

165,000

1,200

Administration

103,000

3,700

For the year, 2,500 bottles of protein drinks were sold. a. What is the total net realizable value of protein drinks used to reduce the joint cost assigned to Personal Training and Apparel? Sales: 2,500.00 x 2.50 = 6,250

Cost: 2,500.00 x 1.00 =2,500 NRV = 3,750 b. What is the joint cost to be allocated to Personal Training and Apparel? Rent

36,000

Insurance

43,750

Utilities

3,000

Total

82,750

NRV -by product

3,750

Net joint cost

79,000

c. What is the approximated pre-tax realizable value of each main product or service for 2010? Personal Training: Revenue

-

753,000

Separate cost : Labor