ch11 Raiborn SM PDF

Chapter 11 59
‘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,
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60 Chapter 11
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
Chapter 11 61
organizational efficiency. The AICPA is concerned with donors having knowledge of the
relative and absolute magnitude of funds spent on fundraising.
62 Chapter 11
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.
Chapter 11 63
12. # of SV at

Products Units SplitOff Total SV Classification
Boco 1,200 $6.000 $ 7,200 Joint product
Loco 1,000 $1.750 $ 1,750 Byproduct
Roco 5,000 $2.500 $12,500 Joint product
Soco 3,800 $4.200 $15,960 Joint product
Moco 4,100 $1.900 $ 7,790 Joint product
Coco 200 $0.250 $ 50 Scrap
Doco 300 $1.800 $ 540 Scrap
Joco 1,000 $0.020 $ 20 Scrap
Voco 6,000 $0.001 $ 6 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) $ 21,600,000
Incremental costs (27,000,000  $0.75) (20,250,000)

Increase in income (27,000,000  $0.05) $ 1,350,000
Based on the incremental change in net income, the company should process Grade A
lumber further.
14. a.
JP4539 4,500 0.125  $558,000 = $ 69,750
JP4587 18,000 0.500  $558,000 = 279,000
JP4591 13,500 0.375  $558,000 =
209,250
36,000 1.000 $558,000
b. JP4539 4,500  $14 = $ 63,000 0.14  $558,000 = $ 78,120

JP4587 18,000  $ 8 = 144,000 0.32  $558,000 = 178,560
JP4591 13,500  $18 = 243,000 0.54  $558,000 = 301,320
$450,000 1.00 $558,000
JP4539 4,500  ($24 – $4) = $ 90,000 0.17  $558,000 = $ 94,860

JP4587 18,000  ($15 – $5) = 180,000 0.33  $558,000 = 184,140
JP4591 13,500  ($22 – $2) = 270,000 0.50  $558,000 = 279,000
$540,000 1.00 $558,000
64 Chapter 11
15. a. Final Sales SplitOff Increm. Increm. Increm.

Product Value Sales Value Revenue Cost Profit
Butter $ 6.00 $4.00 $2.00 $3.00 $(1.00)
Jam 14.00 6.40 7.60 4.00 3.60
Syrup 3.60 3.00 0.60 0.40 0.20
Only jam and syrup should be processed beyond the splitoff point.
b. Joint cost $123,200

Less NRV of syrup ($3.60 – $0.40) × 1,000 3,200
Joint cost to be allocated $120,000
Unitbased allocation:
Butter (10,000 ÷ 30,000) × $120,000 $ 40,000
Jam (20,000 ÷ 30,000) × $120,000
80,000
Total $120,000
Weightbased allocation:
Butter (10,000 × 16 ounces) 160,000 50%
Jam (20,000 × 8 ounces) 160,000
50%

Total product weight 320,000
100%
Butter (0.50  $120,000) $ 60,000
Jam (0.50  $120,000)
60,000
Total $120,000
Sales value at splitoff allocation [from (a)]
Butter (10,000  $4.00) $ 40,000 24%
Jam (20,000  $6.40) 128,000
76%

NRV $168,000 100%
Butter (0.24  $120,000) $ 28,800
Jam (0.76  $120,000) 91,200
Total $120,000
16. a. # of Joint Allocated

Product Pounds Proportion Cost Joint Cost
Steaks 3,312 24% $26,400 $ 6,336
Roasts 6,210 45 26,400 11,880
Ground Beef 4,278
31 26,400 8,184
Total 13,800 100% $26,400
Chapter 11 65
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 $ 2.10
Allocated joint cost (0.56)
Special label (0.15)
Profit desired (0 .40)
Allowable separate cost $ 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. Games News Documentaries

Revenues $ 34,040,000 $ 30,720,000 $ 189,320,000
Separate costs
(31,040,000) (16,320,000) (110,720,000)

NRV $ 3,000,000 $ 14,400,000 $ 78,600,000
% of $96,000,000 total 3% 15% 82%
Joint cost allocation:
Games ($24,000,000 × 0.03) $ 720,000
News ($24,000,000 × 0.15) 3,600,000
Documentary ($24,000,000 × 0.82) 19,680,000

Total $24,000,000
Games News Documentaries

Revenues $ 34,040,000 $ 30,720,000 $ 189,320,000
Separate costs (31,040,000) (16,320,000) (110,720,000)
Allocated costs (720,000) (3,600,000) (19,680,000)
Net profit $ 2,280,000 $ 10,800,000 $ 58,920,000
b. Games News Documentaries

Revenues $34,040,000 $30,720,000 $189,320,000
% of $254,080,000 total 13% 12% 75%
66 Chapter 11
Games ($24,000,000 × 0.13) $ 3,120,000
News ($24,000,000 × 0.12) 2,880,000
Documentaries ($24,000,000 × 0.75) 18,000,000

Total $24,000,000
Games News Documentaries

Revenues $ 34,040,000 $ 30,720,000 $ 189,320,000
Separate costs (31,040,000) (16,320,000) (110,720,000)
Allocated costs
(3,120,000) (2,880,000)
(18,000,000)
Net profit $ (120,000) $ 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] $ 270,000
Eau de Toilette [(32,000 ÷ 80,000) × $1,080,000] 432,000
Body Splash [(28,000 ÷ 80,000) × $1,080,000]
378,000
Total $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) $ 129,600
Eau de Toilette ($1,080,000 × 0.38) 410,400
Body Splash ($1,080,000 × 0.50) 540,000
Total $1,080,000
Approximated NRV computation:
Perfume [20,000 × ($16.50 – $2.50)] $280,000 30%
Eau de Toilette [32,000 × ($13.00 – $1.50)] 368,000 40%
Body Splash [28,000 × ($12.00 – $2.00)]
280,000 30%

Chapter 11 67
Total $928,000 100%
Approximated NRV allocation:
Perfume ($1,080,000 × 0.3) $ 324,000
Eau de Toilette ($1,080,000 × 0.4) 432,000
Body Splash ($1,080,000 × 0.3)
324,000
Total $1,080,000
b. 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)] $ 9,600
Eau de Toilette [$480,000 × (1,600 ÷ 32,000)] 24,000
Body Splash [$434,000 × (1,680 ÷ 28,000)]
26,040
Total $59,640
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 = $ 5,388
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 = 22,912
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 =
35,784
Total $64,084
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 = $11,220
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 = 24,000
Body Splash
($324,000 + $56,000) = $380,000 total cost
68 Chapter 11
$380,000 ÷ 84,000 = $4.52 per ounce
1,680  3 ounces  $4.52 =
22,781
Total $58,001
c. 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.
21. a. Fabric Yarn

Final revenues $ 540,000 $ 420,000
Revenues at splitoff (360,000)
(300,000)
Incremental revenues $ 180,000 $ 120,000
Incremental costs (120,000)
(102,000)
Net benefit (cost) of further processing $ 60,000 $ 18,000
Both products should be processed further.
b. The irrelevant item is the $120,000 joint cost.
22. Increm. Increm. Process

Product Revenues Costs Benefit/(Loss) Further?
JP#1 $50 $55 $ (5) No
JP#2 $40 $25 $15 Yes
JP#3 $65 $45 $20 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 Unit Lbs. of Allocated

Products Weight Total Pounds Product Percent Joint Cost
Fish 0.500 75,000 37,500 57 $ 81,396
Oil 0.250 75,000 18,750 29 41,412
Meal 0.125 75,000
9,375 14

19,992
0.875 65,625 100 $142,800
b.
Joint Lbs. of Selling Price Allocated
Products Product per Lb. Total Percent Joint Cost
Fish 37,500 $4.50 $168,750 55 $ 78,540
Oil 18,750 6.50 121,875 39 55,692
Meal 9,375 2.00 18,750 6 8,568
$309,375 100 $142,800
Chapter 11 69
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 $377,400 (68%)

Sales value of sour cream 177,600 (32%)

Total sales value $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 240,000 (72%)
Quarts of sour cream
95,000 (28%)
Total quarts 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. Final SplitOff Increm. Increm. Increm.

Product Revenues Sales Value Revenue Costs Profit
Candied
apples $690,000 $670,000 $20,000 $26,000 $(6,000)
Apple
jelly 775,000 730,000 45,000 32,000 13,000
Apple
jam 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 $ 360,000
Joint cost for jackets and blouses ($138,000 + $48,000) (186,000)
70 Chapter 11
Joint cost assigned to dresses $ 174,000
b. 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
c. Dresses Jackets Blouses

Final sales value $300,000 $268,000 $210,000
Sales value at split off
290,000 230,000
80,000
Increase in value $ 10,000 $ 38,000 $130,000
Additional costs (26,000) (20,000) (78,000)
Incremental benefit (loss) $ (16,000) $ 18,000 $ 52,000
Jackets and blouses should be processed beyond splitoff.
Chapter 11 71
d. Joint cost allocated to jackets $ 138,000
Additional costs 20,000
Total cost for 16,000 jackets $ 158,000
Sales (12,000  $16.75*) $ 201,000
Cost for 12,000 jackets (0.75  $158,000) (118,500)
Gross profit $ 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 $ 0
Production costs to splitoff point 240,000
Less NRV of byproduct
Sales of byproduct $ 60,000
Production & Marketing (50,000)
(10,000)
Current manufacturing costs of gasoline $230,000
Ending inventory of gasoline (30,000)
Cost of sales for gasoline $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. 2
b. 2
c. 2
d. 1
e. 1
f. 1
g. 2
h. 2
i. 2
j. 1
k. 1
l. 1
m. 1
27. Joint process cost $337,500

Less net realizable value of byproduct inventory
(65,000)
Amount to be allocated $272,500
72 Chapter 11
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 $142,000

Less NRV of byproduct [2,000 × ($1.50 – $0.30)]
(2,400)
Approx. NRV of Fillet [18,000 × ($16 – $3)] $234,000 60%

Approx. NRV of Smoked [20,000 × ($13.00 – $5.20)] 156,000
40%
Total NRV $390,000
Cost allocation:
Fillet (0.6  $139,600) $ 83,760
Smoked (0.4  $139,600) 55,840
Total cost allocation $139,600
b. Separate costs for Fillet = 18,000  $3.00 = $ 54,000
Separate costs for Smoked = 20,000  $5.20 = $104,000
Fillet Smoked
Joint cost $ 83,760 $ 55,840
Separate costs 54,000
104,000
Total costs $137,760 $159,840
Divide by pounds ÷ 18,000 ÷ 20,000
Cost per pound (rounded) $ 7.65 $ 7.99
Inventory values:
Fillet (4,000  $7.65) $30,600
Smoked (2,400  $7.99) 19,176
Remnants (350  $1.20)
420
Total inventory value $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 $20,000,000

Revenue from tours $ 800,000
Chapter 11 73
Expenses of tours
(480,000)
(320,000)
Joint cost to be allocated $19,680,000
Greedy CEOs Sequel
Gross revenues $10,000,000 $ 58,000,000
Separate costs (6,800,000) (41,200,000)

Net realizable value $ 3,200,000 $ 16,800,000
NRV Allocation
Greedy CEOs $ 3,200,000 16% $ 3,148,800
Sequel 16,800,000
84%
16,531,200
$20,000,000 100% $ 19,680,000
b. Greedy CEOs Sequel
Gross revenues $10,000,000 $ 58,000,000
Separate costs (6,800,000) (41,200,000)

Net realizable value $ 3,200,000 $ 16,800,000
Joint cost (3,148,800) (16,531,200)

Net profit $ 51,200 $ 268,800
31. Total sales value (1,200 × $335) $ 402,000
Less costs (1,200 × $250) (300,000)

Reduction of joint cost $ 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) $1,600,000

Cost of sales:
Production costs $664,000
Byproduct revenue
(40,000 pounds ÷ 100 = 400 bags; 400  $4)
(1,600)
(662,400)
Gross margin $ 937,600
b. 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 $20,250

Cost of byproduct sales (135,000  $0.06)
(8,100)
Net realizable value of by product $12,150
a. Zeena Foods
Income Statement
For Month Ended May 31, 2013
Sales revenue (joint products) $ 319,000
74 Chapter 11
Cost of goods sold:
Joint cost (90% × $82,000) $73,800
Separate costs (90% × $48,000) 43,200
Byproducts 8,100 (125,100)
Nonfactory expenses (47,850)
Income from operations $ 146,050
Other revenues (byproduct sales) 20,250
Net income before taxes $ 166,300
b. Zeena Foods
Income Statement
Sales revenue (joint products) $ 319,000
Cost of goods sold ($73,800 + $43,200) (117,000)
Income from operations $ 154,150
Other income (byproduct sales) 12,150
c. Joint cost $ 82,000
NRV of byproduct (12,150)
Joint cost to allocate $ 69,850
Zeena Foods
Income Statement
Sales revenue $ 319,000
Cost of goods sold [(90% × $69,850) + $43,200] (106,065)

d. 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 $415,200

Estimated NRV of byproduct (9,200)
Estimated OH to be covered $406,000
Divided by estimated billable hours ÷ 70,000
Predetermined OH rate per billable hour $ 5.80
b. Cash 9,700
Manufacturing Overhead 9,700
To record sale of byproduct
c. Total actual OH $ 410,500
Total actual NRV of byproduct (9,700)
Chapter 11 75
Total adjusted actual OH $ 400,800
Total applied OH (70,900 × $5.80) (411,220)

Overapplied overhead $ 10,420
35. a. $315,000 ÷ 45,000 = $7 per DLH
b. DM $ 890
DL ($20 × 125) 2,500
OH ($7 × 125) 875
Total $4,265
c. Cash 93
Manufacturing Overhead 93
To record disposal value of spoiled work
incurred on Job XX (stained glass window)
d. OH rate = ($297,200 + $25,200) ÷ 45,000 = $7.16 (rounded)
DM $ 890
DL ($20 × 125) 2,500
OH ($7.16 × 125)
895
Total $4,285
Scrap sales value (93)
Total cost of job $4,192
36. a. Cash 8,500

Work in Process Inventory—Hedge Fund 8,500
To record sale of Hedge Fund model
b. Cash 8,500
Manufacturing Overhead 8,500
To record sale of Hedge Fund model
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 Increase in Revenues Allocated Cost

Rental $770,000 0.88 $28,600
Sales
105,000 0.12 3,900
Totals $875,000 1.00 $32,500
b. Joint Services Increase in Net Income Allocated Cost

Rental $104,500 0.55 $17,875
Sales 85,500 0.45
14,625
Totals $190,000 1.00 $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.
76 Chapter 11
38. a. Training cost = $120,000 ÷ 6,000 = $20 per hour
Overhead cost = $55,500 ÷ 6,000 = $9.25 per hour
Cost Assignment: Children Adults

Direct costs (4,000  $20; 2,000  $20) $ 80,000 $40,000
Overhead cost (4,000  $9.25; 2,000  $9.25) 37,000 18,500

Total cost assigned $117,000 $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:
Children Adults
Direct costs (4,000 × $20; 2,000  $20) $ 80,000 $40,000
Overhead cost ($140,000  0.21; $130,000  0.21) 29,400 27,300

Total cost assigned (off due to rounding) $109,400 $67,300
c. 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 Percent Joint Cost Allocated

Fundraising 0.10 $ 26,100
Program 0.90 234,900

Total 1.00 $261,000
b. Joint Activity Percent Joint Cost Allocated

Fundraising 0.02 $ 5,220
Program 0.98 255,780

Total 1.00 $261,000
Chapter 11 77
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 $57,712.50
Fantasy ($79,455 ÷ $317,820) × $76,950 19,237.50

Total $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 59,715.00
Raw Material Inventory 42,000.00
Wages Payable 11,340.00
Manufacturing Overhead 6,375.00
Work in Process Inventory—Heating 59,715.00
Work in Process Inventory—Combining 59,715.00
Finished Goods Inventory—Forever 60,892.50
Finished Goods Inventory—Fantasy 33,052.50
78 Chapter 11
c. Work in Process—Combining
DM 42,000 To Heating 59,715
DL 11,340
OH 6,375
Bal. 0
Work in Process—Heating
DM 9,150 To FG—Forever 60,892.50
DL 3,225 To FG—Fantasy 33,052.50
OH 4,860
Prev. Dept. 59,715
DM 3,180
DM 2,940
DL 4,680
OH 6,195
Bal. 0
FG Inv.—Forever
FG Inv.—Fantasy
Beg. XXX Beg. XXX
CGM 60,892.50 CGM 33,052.50
43. a. Oil (5,000,000 bushels × 11 lbs.) 55,000,000 20%

Meal (5,000,000 bushels × 44 lbs.) 220,000,000 80%
Total 275,000,000
Oil (0.20 × $49,800,000) $ 9,960,000
Meal (0.80 × $49,800,000)
39,840,000
Total $49,800,000
b. Cost of goods sold (in millions):
Oil (0.60  $9,960,0000) $ 5,976,000
Meal (0.75  $39,840,000)
29,880,000
Total $35,856,000
c. Ending finished goods (in millions):
Oil (0.40 × $9,960,000) $ 3,984,000
Meal (0.25 × $39,840,000)
9,960,000
Total $13,944,000
Skim (1,555,500 ÷ 1,830,000) × $872,000 $741,200
Cream (274,500 ÷ 1,830,000) × $872,000 130,800

Total $872,000
Chapter 11 79
b. 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
Beginning finished goods inventory $ 0
Cost of goods manufactured 1,022,970
Goods available for sale $ 1,022,970
Ending finished goods inventory (3,250)
Cost of goods sold $ 1,019,720
Sales ($1,472,500 + $282,220) $ 1,754,720
Cost of goods sold (1,019,720)
c. 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) $27,500,000 38% (rounded)
Meal ($0.20 × 220,000,000)
44,000,000 62% (rounded)

Total $71,500,000 100%
Oil (0.38 × $49,800,000) $18,924,000
Meal (0.62 × $49,800,000)
30,876,000
Total $49,800,000
b. Cost of goods sold:
Oil (0.60 × $18,924,000) $11,354,400
Meal (0.75 × $30,876,000)
23,157,000
Total $34,511,400
c. 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. 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
80 Chapter 11
b. Relative sales values:
Skim ($0.95  1,555,500) $1,477,725 84% (rounded)
Cream ($1.03  274,500) 282,735 16% (rounded)

Total $1,760,460 100%
Skim (0.84  $872,000) $732,480
Cream (0.16  $872,000)
139,520
Total $872,000
c. 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 $ 0
Cost of goods manufactured 1,022,970
Goods available for sale $ 1,022,970
Ending finished goods inventory (3,210)
Cost of goods sold $ 1,019,760
Sales ($1,472,500 + $282,220) $ 1,754,720
Cost of goods sold (1,019,760)

Checking: $800,000 × ($1,914,000 ÷ $3,300,000) = $464,000
Credit cards: $800,000 × ($1,386,000 ÷ $3,300,000) = 336,000
Total $800,000
b. Checking Credit Cards Total

Revenues $1,914,000 $1,386,000 $ 3,300,000
Joint cost (464,000) (336,000) (800,000)
Separate costs (850,000)
(380,000) (1,230,000)

Gross margin unadjusted $ 600,000 $ 670,000 $ 1,270,000
Identity theft insurance revenue 26,000
Overall gross margin $ 1,296,000
c. $800,000 – $26,000 = $774,000
Checking: $774,000 × ($1,914,000 ÷ $3,300,000) = $448,920
Credit Cards: $774,000 × ($1,386,000 ÷ $3,300,000) = 325,080
Chapter 11 81
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 $15,000

Labor 700
Overhead (40% of labor)
280
Joint cost $15,980
b.
c. Joint Sales Add’l NRV at Joint

Product Value Cost SplitOff Percent * Cost *
Premium $30,000 $1,500 $28,500 73 $11,665
Good 15,000 4,200 10,800
27
4,315
$39,300 100 $15,980
*
rounded
d. Raw Material Inventory 15,000
Cash (A/P) 15,000
To record purchase of peaches
Work in Process Inventory—Clean & Sort 15,980
Raw Material Inventory 15,000
Wages Payable 700
To record joint processing cost
Work in Process Inventory—Packaging (Premium) 11,665
Work in Process Inventory—Cutting (Good) 4,315
82 Chapter 11
To transfer joint cost to Packaging and Cutting
Various accounts 2,000
To record cutting and canning costs for good peaches
Work in Process Inventory—Packaging (Good) 6,315
To move good peaches from Cutting to Packaging
To record packaging and delivery costs
Finished Goods Inventory (Premium) 13,165
Work in Process Inventory—Packaging
(Premium) 13,165
To record completed production of premium peaches
Finished Goods Inventory (Good) 8,515
To record completed production of good peaches
Cash 4,500
Various accounts 500
Other Income 4,000
To record sale of fair peaches
e. Total cost $15,980
Estimated NRV of scrap (4,000)
Joint cost to allocate $11,980
Joint Sales Add’l NRV at Joint

Product Value Cost SplitOff Percent * Cost*
Premium $30,000 $1,500 $28,500 73 $ 8,745
Good 15,000 4,200 10,800
27
3,235
$39,300 100 $11,980
*
rounded
f. Raw Material Inventory 15,000
Cash (A/P) 15,000
To record purchase of peaches
Raw Material Inventory 15,000
Wages Payable 700
Chapter 11 83
To record joint cost
Work in Process Inventory—Packaging (Fair) 4,000
To recognize byproduct
To allocate joint cost
To record cutting cost for good peaches
To move good peaches from Cutting to Packaging
Work in Process Inventory—Packaging (Fair) 500
To record packaging cost
Finished Goods Inventory (Premium) 10,245
Finished Goods Inventory (Good) 7,435
Finished Goods Inventory (Fair) 4,500
Work in Process Inventory—Packaging (Fair) 4,500
To move completed production to finished goods
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)
84 Chapter 11
Administration (103,000)
(3,700)
Net realizable value $ 102,700 $ 55,300
65% 35%
d. Personal Training ($79,000  0.65) = $51,350
Apparel ($79,000  0.35) = $27,650
e. 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)
Joint cost
(51,350) (27,650)
Operating income $ 51,350 $ 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
Chapter 11 85
Marmalade (80%) = 26,880 gallons
d. Sales value (6,720 × $0.05) $336
Distribution expense (90)
NRV $246
e. Joint Sales Total Separate

Product Gallons Price Sales Costs NRV
Juice 22,400 $5.25 $117,600 $9,620 $107,980
Marmalade 26,880 3.45 92,736 6,204* 86,532
*$6,450 – $246
f. Joint Joint
Product NRV Percent Cost
Juice $107,980 56% (rounded) $43,680
Marmalade
86,532
44% (rounded)
34,320
$194,512 100% $78,000
g. Joint Joint Separate Total Inv. Value of

Product Cost Costs Cost % End. Inv.
Juice $43,680 $9,620 $53,300  0.15 $7,995.00
Marmalade $34,320 $6,204 $40,524  0.15 $6,078.60
51. a. ByProduct Inventory—Corma 150,000

Work in Process Inventory—Zilla (5,000 × $30) 150,000
To record completed production of byproduct
b. ByProduct Inventory—Corma (5,000  $45) 225,000

Work in Process Inventory—Zilla 175,000
(Alternative)
Work in Process Inventory—Corma 50,000
To record production of byproduct
To record reduction of main product for NRV of
byproduct
ByProduct Inventory—Corma 225,000
c. Sales value of Zilla at splitoff (70 × 5,000 × $3.50) $1,225,000 (89%)*
86 Chapter 11
Sales value of Corma at splitoff (5,000 × $30) 150,000 (11%)*

$1,375,000
*
rounded
Total joint costs $875,000
Proportion of Corma sales value at splitoff   0.11

Joint cost assignable to Corma $ 96,250
To allocate joint cost
To record separate processing costs of Corma
Finished Goods Inventory—Corma 146,250
To record completed production of Corma
52. a. Joint process cost:
Direct material $40,000
Direct labor 23,400
Overhead 10,000

Total $73,400
Less byproduct NRV
(4,600)
Amount to be allocated $68,800
Allocation on the basis of sales value at splitoff:
Product Sales Value Proportion * Allocation
Tenderloin $132,000 0.55 $37,840
Roast 86,000 0.36 24,768
Ham
22,400 0.09 6,192
$240,400 1.00 $68,800
*
rounded
Allocation on the basis of pounds produced:
Product Pounds Proportion * Allocation
Tenderloin 8,600 0.26 $17,888
Roast 13,400 0.41 28,208
Ham 10,800 0.33 22,704

32,800 1.00 $68,800
*
rounded
Computation of EI values under each allocation base:
Sales Value Approach:
Product Allocation Units Unit Cost * Units in EI EI Value
Chapter 11 87
Tenderloin $37,840 6,440 $5.88 1,000 $5,880

Roast 24,768 16,740 1.48 2,600 3,848
Ham 6,192 8,640 0.72 1,000 720
Physical Pounds Approach:
Product Allocation Units Unit Cost * Units in EI EI Value
Tenderloin $17,888 6,440 $2.78 1,000 $2,780
Roast 28,208 16,740 1.69 2,600 4,394
Ham 22,704 8,640 2.63 1,000 2,630
b. (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 $37,500
Direct labor 12,000
Overhead 11,000

$60,500
Sales value of scrap ($0.45 × 3,600 lbs.)
(1,620)
b. Robes Beach Towels
Revenues $ 20.00 $ 7.00
Separate costs (6.80) (1.60)
NRV per unit $ 13.20 $ 5.40
Multiply by # of units produced  6,000  12,000
Total NRV $79,200 $ 64,800
NRV % 55% 45%
Joint cost assignable to robes (55% × $58,880) $32,384
Joint cost assignable to towels (45% × $58,880) 26,496

$58,880
Work in Process Inventory—Robes 32,384
Work in Process Inventory—Towels 26,496
Work in Process Inventory—Cutting 58,880
To allocate joint costs to robes and towels
88 Chapter 11
Finished Goods Inventory—Scrap 1,620
Work in Process Inventory—Cutting 1,620
To record production of scrap
c. Robes Beach Towels
Allocated joint cost $32,384 $26,496
Separate costs:
$6.80 × 6,000 40,800
$1.60 × 12,000 19,200

Total to finished goods $73,184 $45,696
54. a. Sales
Units Sales Value at Joint Allocated
Product Produced Price SplitOff % Costs Joint Costs
Alpha 2,500 $100 $250,000 31.25% $720,000 $225,000
Beta 5,000 80 400,000 50.00 720,000 360,000
Gamma 7,500 20 150,000
18.75
720,000
135,000
Total $800,000 100.00% $720,000
b. Joint costs of Beta [from (a)] $360,000
Additional processing costs 150,000

Total cost of Beta $510,000
c. Alpha should not be processed further:
Incremental revenue [($150 – $100)  $2,500] $ 125,000
Incremental processing cost (150,000)
Decline in income if processed further $ (25,000)
Net realizable value of products:
Units Selling Processing Net Realizable
Produced Price Revenue Costs Value
Alpha
(sold at splitoff) 2,500 $100 $250,000 $ 0 $250,000
Beta
(processed further) 5,000 115 575,000 150,000 425,000
Gamma
(processed further) 7,500 30 225,000 100,000 125,000
Joint costs $ 720,000
Net realizable value of Gamma (125,000)
Joint costs to be allocated $ 595,000
Allocation of joint costs:
Net Realizable Joint Processing Final
Product Value % Cost Allocation Costs Cost
Alpha $250,000 37% $595,000 $220,150 $ 0 $220,150
Beta 425,000
63
595,000 374,850

150,000 524,850

Totals $675,000 100% $595,000 $150,000 $745,000
(CIA adapted)
Chapter 11 89
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
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.
c. 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.
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:
90 Chapter 11
 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
Chapter 11 91
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
92 Chapter 11
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) $234,000
Management/general (0.25  $360,000) 90,000
Fundraising (0.10 × $360,000)
36,000
Total $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
Chapter 11 93
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.

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Chapter 11 59

COST ALLOCATION FOR JOINT PRODUCTS AND

c. Four categories of output may be obtained from joint production. Joint

12. # of SV at

b. JP­4539 4,500  $14 = $ 63,000 0.14  $558,000 = $ 78,120

JP­4539 4,500  ($24 – $4) = $ 90,000 0.17  $558,000 = $ 94,860

15. a. Final Sales Split­Off Increm. Increm. Increm.

b. Joint cost $123,200

16. a. # of Joint Allocated

17. a. Games News Documentaries

% of $96,000,000 total 3% 15% 82%

Games News Documentaries

b. Games News Documentaries

Games News Documentaries

Total $928,000 100%

Ending inventory valuation based on approximated NRV:

21. a. Fabric Yarn

22. Increm. Increm. Process

a. Joint Unit Lbs. of Allocated

23. a. Sales value of milk $377,400 (68%)

19. a. Final Split­Off Increm. Increm. Increm.

c. Dresses Jackets Blouses

27. Joint process cost $337,500

28. a. Joint cost $142,000

Approx. NRV of Fillet [18,000 × ($16 – $3)] $234,000 60%

30. a. Total joint cost $20,000,000

32. a. Sales of lumber (160,000 × $10) $1,600,000

33. Sales of by­product $20,250

34. a. Estimated OH $415,200

36. a. Cash 8,500

37. a. Joint Services Increase in Revenues Allocated Cost

b. Joint Services Increase in Net Income Allocated Cost

c. The allocation based on increase in net income may be better because it

Cost Assignment: Children Adults

39. a. Joint Activity Percent Joint Cost Allocated

b. Joint Activity Percent Joint Cost Allocated

43. a. Oil (5,000,000 bushels × 11 lbs.) 55,000,000 20%

b. Checking Credit Cards Total

48. a. Peaches $15,000

c. Joint Sales Add’l NRV at Joint

Joint Sales Add’l NRV at Joint

e. Joint Sales Total Separate

g. Joint Joint Separate Total Inv. Value of

51. a. By­Product Inventory—Corma 150,000

b. By­Product Inventory—Corma (5,000  $45) 225,000

c. Sales value of Zilla at split­off (70 × 5,000 × $3.50) $1,225,000 (89%)*

Sales value of Corma at split­off (5,000 × $30) 150,000 (11%)*

Tenderloin $37,840 6,440 $5.88 1,000 $5,880

b. Asking attendees to take a quiz about diabetes, volunteer to distribute pamphlets

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b. JP4539 4,500  $14 = $ 63,000 0.14  $558,000 = $ 78,120

JP4539 4,500  ($24 – $4) = $ 90,000 0.17  $558,000 = $ 94,860

15. a. Final Sales SplitOff Increm. Increm. Increm.

19. a. Final SplitOff Increm. Increm. Increm.

33. Sales of byproduct $20,250

51. a. ByProduct Inventory—Corma 150,000

b. ByProduct Inventory—Corma (5,000  $45) 225,000

c. Sales value of Zilla at splitoff (70 × 5,000 × $3.50) $1,225,000 (89%)*

Sales value of Corma at splitoff (5,000 × $30) 150,000 (11%)*