Exam 7: Cost Allocation: Departments, Joint Products, and By-Products

Ted Brown is the chief financial officer of Haywood Inc., a large manufacturer of cosmetics and other personal care products. Ted is conducting a financial analysis of the firm's line of hand lotions which consists of three products: SkinSalve, SkinCream, and SkinBalm. Total sales for the three products in the recent year were $400,000, $250,000 and $500,000, respectively. Because there is a small amount of additional processing cost for each of the three products, which differs between the products ($20,000, $50,000 and $30,000, respectively), Ted has been using the net realizable value method for allocating the joint production cost of $500,000. However, he is not satisfied with the result of somewhat different gross margin percentage ratios (gross margin/sales) for the three products when using this approach. He knows only of the physical units method, the sales value at split-off method, and the net realizable value method for allocating joint cost. Required: Devise a new method of cost allocation for Ted so that after allocation of joint costs and separable costs, the gross margin percentage is the same for all three products.

Which is not a common method used to allocate costs under the departmental approach?

By-product costing that uses the asset recognition method(s) creates:

The amount of joint costs allocated to product N using the net realizable value method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):

The amount of joint costs allocated to product M using the net realizable value method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):

Beth Johnson was recently appointed Vice President of Administration in the Sigma Group, a nationwide personal financial planning services firm. Ann Garber, department manager, has just finished reading the most recent memo from VP Johnson, which reads in part: In order to more efficiently apportion the costs of hard copy duplication, departments will be charged $0.075 per page for all duplicated materials. This new rate replaces the two-tier rate structures of $0.05 and $0.10 per page, and is effective as of the date of this memo. The two tier system was used to charge a higher rate for the more difficult jobs. "What is she trying to do?" Ann asks. "This new price will drive up my department's duplicating costs so much that we'll have to cut back on how much stuff we have duplicated." Required: a. What is the control advantage of any multi-tier pricing (costing) system versus a single price (cost) system? b. If the new price for duplication reduces total usage of duplicating services, are there any significant disadvantages to such a reduction in usage?

The departmental approach of cost allocation recognizes that the typical manufacturing operation involves which type(s) of departments?

A concept which is commonly employed with allocation bases related to size is:

"What's the big fuss about learning three different methods of cost allocation for joint products? The total cost doesn't change, and the real question that needs answering is whether to further process joint products or sell right away. Besides, our firm uses JIT inventory, so there aren't any ending inventories to cost." Required: Comment on these ideas.

The reciprocal method of departmental cost allocation is preferred over the step method because it takes into account all the reciprocal flows between:

The amount of joint costs allocated to product DBB-2 using the sales value at split-off method is (calculate all ratios and percentages to 2 decimal places, for example 33.33%, and round all dollar amounts to the nearest whole dollar):

The direct method of departmental cost allocation is the simplest of the three methods because it:

Allocation of service department costs to producing departments is the most complex of the allocation phase of departmental cost allocation because of the likely presence of:

The amount of joint costs allocated to product Z using the net realizable value method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):

The total cost accumulated in the fabrication department using the step method is (assume the purchasing department goes first; calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):

Which of the following is not a phase of the departmental approach?

Stulce Inc. produces joint products A, B, and C from a joint process. Information concerning a batch produced in May at a joint cost of $120,000 was as follows: Required(calculate all ratios, percentages, and unit costs to 2 decimal places, for example 33.33%, and round all dollar amounts to the nearest whole dollar): 1. Allocate the joint costs to the joint products using the physical measures method. 2. Calculate the gross margin for each of the three products using the cost allocation for the physical unit method in part (1) above. 3. Allocate the joint costs to the joint products using the net realizable method. 4. Calculate the gross margin for each of the three products using the cost allocation for the net realizable value method in part (3) above.

An alternative concept of fairness in cost allocation, absent the cause-and-effect basis, includes:

The amount of joint costs allocated to product DBB-3 using the physical measure method is (calculate all ratios and percentages to 2 decimal places, for example 33.33%, and round all dollar amounts to the nearest whole dollar):

The amount of joint costs allocated to product Y using the sales value at split-off method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):