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134) The Macon Industries started the production of K1 (its main product) and S2 (its by-
product) on January 2, 2020. During 2020, 7,500 units of K1 and 1,500 units of S2 were
produced. In 2020, 6,000 units of K1 and 1,000 units of S2 were sold at $57.00 and $1.10 per
unit, respectively. Production was halted at the end of 2020 and the inventory was sold in 2021 at
the normal selling prices. The joint production costs were $240,000 and are entirely avoidable.
The separable costs to produce K1 were $2.60 per unit and to produce S2 were $0.45 per unit.
Operating expenses were $60,000 in 2020 and $12,000 in 2021.
Required:
a. Prepare an income statement for 2020 and 2021 assuming the “other revenue” method of
accounting for by-products is used.
b. Prepare an income statement for 2020 and 2021, assuming the “cost reduction” method of
accounting for by-products is used and by-product costs are expensed in the period in which they
are incurred.
135) What is the difference between an intermediate cost center and a final cost center?
136) Describe the difference between the direct method of service department allocation, the step
method, and the reciprocal method.
137) Why does the sequence in which service departments are allocated make a difference when
using the step method but not when using the reciprocal method?
138) Which of the three service department allocation methods should be used for decision
making? Explain your reasoning.
139) What are some of the reasons that joint costs are allocated?
140) Explain the difference between the net realizable value method for joint cost allocation and
the netback (or workback) method.
141) In a sell-or-process-further decision, (a) what are the relevant data to be considered and (b)
what is the decision process associated with the split-off point?
142) Describe two methods of accounting for by-products. What effects do these methods have
on the allocation of the joint cost to the main products?
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143) Boswell Consulting has two service departments, S1 and S2, and three production
departments, P1, P2, and P3. Data for a recent month follow:
Service Provided to: S1 S2 P1 P2 P3
S1 0.10 0.20 0.40 0.30
S2 0.30 0.20 0.40 0.10
Costs $ 200,000 $ 100,000 $ 600,000 $ 800,000 $ 1,000,000
Required:
(a) Determine the allocations to the production departments when the reciprocal method is used.
(b) Briefly describe why the reciprocal method is theoretically preferable to other methods of
allocation.
144) Morgan and Regis Consultants is a large, international consulting organization. The
company provides consulting services in the computer and Internet areas. The company also has
several divisions that provide manufacturing of various computer parts. The company has five
divisions that are all profit centers. Each division includes allocated corporate costs in its annual
budget. The budget for the coming year for the Building and Grounds Service Department is
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$6,000,000. Included in this budget is the maintenance of all corporate buildings, depreciation,
cleaning, insurance, and all other facility-related maintenance costs. The company uses a
weighted method of allocating facility costs based on the type of space maintained by each
division. Space ranges from manufacturing warehouses, which are least expensive to maintain, to
computer mainframe space, which requires specialized temperature controls, air conditioning,
and maintenance. The company has decided to use a weighting system assigning the following
relative weights to each type of space: 1 for warehouse, 3 for office, and 5 for computer space.
Below, find data relating to the five divisions and the square footage of each type of space.
Currently, Division 5, the Internet Consulting Division, is the largest in sales volume and profits
for the company, which has been growing at the rate of 20% per year, while Divisions 3 and 4
have been struggling due to declining margins on technology products.
Type of space
Office Computer Warehouse Total
Weighting 3 5 1
Division 1 10,000 0 0 10,000
Division 2 31,000 10,000 5,000 46,000
Division 3 15,000 12,000 32,000 59,000
Division 4 15,000 10,000 50,000 75,000
Division 5 30,000 30,000 0 60,000
Total 1,01,000 62,000 87,000 2,50,000
Required:
(a) As director of corporate budgeting, you are required to send to each division its facility
allocation for the coming year. Prepare a schedule showing how the budget of $6,000,000 will be
allocated to each division. (Round allocation rate to six decimal places)
(b) Describe potential motivational problems brought on by these allocations.
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145) Castro Corporation has one service department and three producing departments. The
budget for the following year allocates the service department costs to the producing departments
based on the number of employees in each department. Currently, the budget for the service
department is $2,400,000 and the number of employees in each department is as follows:
Department 1: 100
Department 2: 50
Department 3: 150
During the year, due to sudden expanded growth, Department 2 has to add 50 new employees;
however the service department costs have not increased due to budget constraints.
Required:
(a) What were the expected service department allocations at the beginning of the year to each
production department?
(b) What will be the actual allocations based on the number of employees each department has at
year end?
(c) Comment on the reasonableness of the situation. What are the potential causes of any
problems created by this allocation method?
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146) Liberty Credit Checks produces two styles of credit reports: personal and corporate. The
difference between the two is the amount of background information and data collection
required. The corporate report uses more skilled personnel because additional checking and data
are required. Total support service costs to be allocated are $3,200,000. The relevant figures for
the year just completed follow:
Allocation base Individual Corporate
Data purchased $ 40,000 $ 80,000
Research hours 24,000 30,000
Interview hours 1,000 10,000
Number of reports 16,000 3,000
Required:
(a) Which allocation base would be preferred by each manager? Which allocation base would be
least preferred?
(b) Provide arguments that each manager would make for his/her preferred allocation base. How
would each manager argue against his/her least preferred allocation base?
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147) Portofino Manufacturing Corporation manufactures three products in a joint process.
Additional information is as follows:
Product J K L Total
Units produced 16,000 4,000 2,000 22,000
Sales value at split-off $ 300,000 $ 100,000 $ 20,000 $ 420,000
Additional costs if processed further $ 48,000 $ 20,000 $ 6,000 $
74,000
Sales value if processed further $ 340,000 $ 160,000 $ 40,000 $
540,000
Joint Costs $ 120,000
Required:
(a) Allocate the joint costs to the three products using the net realizable value method.
(b) Determine which products should be sold at split-off and which products should be processed
further.
148) Dawson Corporation produces a product called Blocker, which gives rise to a by-product
called Spotter. The only costs associated with Spotter are additional processing costs of $4 for
each unit. Dawson accounts for Spotter’s sales first by deducting its separable costs from its sales
and then by deducting this net amount from the cost of sales of Blocker. This year, 9,600 units of
Spotter were produced. They were all sold for $8 each. Company operating expenses were
$250,000 for the year. Sales revenue and cost of goods sold for Blocker were $1,600,000 and
$800,000, respectively. (CPA adapted)
Required:
(a) Calculate the company’s gross margin under the current accounting method.
(b) Assume the company changes its accounting method and accounts for the by-product’s net
realizable value as “other revenue.” Calculate the gross margin under the new method.
(c) Under what circumstances would method (a) or (b) be preferred?
149) Bartoff Foods produces three supplemental food products simultaneously through a refining
process costing $186,000. The joint products, Bulkup and Bodybuilder, have a final selling price
of $8 per pound and $10 per pound, respectively, after additional processing costs of $2 per
pound for each product incurred after the split-off point. Quicksnack, a by-product, is sold at the
split-off point for $6 per pound. The production of Bulkup results in 20,000 pounds with a
caloric value of 6,000 calories per pound. The production of Bodybuilder, which is very high in
carbohydrates, has a caloric value of 12,500 calories per pound. 10,000 pounds of Bodybuilder
are produced. Quicksnack has a caloric value of 2,000 calories a pound and 2,000 pounds are
produced. (CMA adapted)
Required:
(a) Allocate the joint product costs using the net-realizable-value method, assuming that
Quicksnack is accounted for as a by-product, with its net realizable value deducted from the cost
of the main products.
(b) Allocate the joint product costs using the physical quantities method, assuming that
Quicksnack is accounted for as a by-product, with its sales revenue accounted for as “other
revenue.” Bartoff uses calories per pound as the physical measurement.
(c) Compute Bartoff Food’s gross margin under requirements (a) and (b).
(b)
150) Timberland Corporation produces three products from a joint process: One-X, Two-Y, and
Three-Z. Each product can be processed further and sold for more. Data on the processes are as
follows:
Product One-X Two-Y Three-Z Total
Units produced 16,000 8,000 4,000 28,000
Joint costs $ 60,000 (a) (b) $ 120,000
Sales value at split-off (c) (d) $ 30,000 $ 200,000
Additional Processing Costs $ 14,000 $ 10,000 $ 6,000 $ 30,000
Sales value if Processed Further $ 140,000 $ 60,000 $ 40,000 $
240,000
The amount of joint costs for One-X is the amount that has been allocated.
Required:
Determine the values for the lettered spaces. (CPA adapted)
151) Penny’s Pineapples is a pineapple grower. After cultivating, fertilizing, growing, and
picking pineapples, the company sells whole pineapples to food processors. The company is
considering adding a processing line where sliced pineapples and pineapple juice, along with a
“mash” used for animal feed will be the final products. Projected information about the costs
follows:
Product Units produced Separable costs Final selling
price per unit
Sliced pineapple 900,000 cans $ 600,000 $ 3.00 per can
Pineapple juice 400,000 bottles $ 150,000 $ 1.75 per bottle
Mash 500,000 pounds $ 120,000 $ 0.50 per pound
Joint product costs of cultivating, fertilizing and picking pineapples total $1,000,000.
Required:
(a) Determine the amount of joint costs allocated to each product using the net realizable value
method.
(b) Determine the final cost per unit for each product.
(c) Determine the gross margin as a percent of sales for each product.
(d) A fertilizer manufacturer approaches Penny Martin, the President of the company, and asks to
buy the rinds and other excess materials currently used to produce Mash. He would be willing to
pay $0.30 per pound for these materials. What advice would you give Penny?
(b)
152) Fantasy Manufacturing produces three products in a joint operation. Information regarding
the products appears below:
Item 1 Item 2 Item 3 Total
Units Produced 20,000 25,000 10,000 55,000
Sales Value at Split-off $ 150,000 $ 50,000 $ 20,000 $ 220,000
Additional costs if Processed further $ 10,000 $ 30,000 $ 5,000 $
45,000
Sales Value if Processed Further $ 170,000 $ 90,000 $ 28,000 $
288,000
Joint Costs $ 100,000
Required:
Allocate the joint costs using the net realizable value method.