MARYLAND CORPORATION manufactures three liquid products - Alpha, Beta and Gamma using a joint process with direct
Question:
MARYLAND CORPORATION manufactures three liquid products - Alpha, Beta and Gamma using a joint process with direct materials, direct labor and overhead totaling $560,000 per batch. In addition, the process results in 5,000 lbs. of "Twinkle", which it sells on the open market for $0.40 per pound. The company treats "Twinkle" as a by-product and has chosen to "inventory" the by-product by recognizing the sales in the period of production. The following information is available regarding these products resulting from the processing of one batch:
At Split-Off Point | After Split-Off Point | ||||||
Value per | Processing | Final Selling | |||||
Product | Gallons | Gallon | Cost/gallon | Price | |||
Alpha | 4,500 | $ 14 | $ 4 | $ 24 | |||
Beta | 18,000 | 8 | 5 | 15 | |||
Gamma | 135,800 | 18 | 2 | 22 | |||
Twinkle (in lbs) | 5,000 | $0.40 |
Round all allocation rates to 4 decimal places if necessary, and use your rounded number in all subsequent calculations.
Required:
For questions 1-3, account for the by-product by deducting the market value of the Twinkle byproduct from the joint costs before allocating to main products (the preferred manner, called "inventorying the costs" or "recognizing the by-product at the time of production").
- Allocate the joint costs using the physical unit method.Using this method, what would the journal entry be to reflect the allocation of joint costs on the books of the company?
- Allocate the joint costs using the sales value at split-off method.
- Allocate the joint costs using the net realizable value (NRV) method.
- WHY do you think that inventorying by-products is preferred? What about this treatment seems right? What advantages are there to doing it this way?
- Suggest another way that they could handle the costs of the by-product and the possible future sales proceeds. Does this seem right or wrong? WHY or WHY NOT?
- Assume you are using the NRV method and the further processing of Gamma was $7 per gallon instead of $2 per gallon. Would this change your allocation? WHY or WHY NOT? If your allocation would change, what would the revised allocations be?
International Financial Reporting and Analysis
ISBN: 978-1408075012
5th edition
Authors: David Alexander, Anne Britton, Ann Jorissen