16-30 Joint-cost allocation. Elsie Dairy Products Corp buys one input, full-cream milk, and refines it in a churning process. From each gallon of milk Elsie produces two cups (one pound) of butter and two quarts (8 cups) of buttermilk. During May 2008, Elsie bought 10,000 gallons of milk for $15,000. Elsie spent another $5,000 on the churning process to separate the milk into butter and buttermilk. Butter could be sold immediately for $2 per pound and buttermilk could be sold immediately for $1.50 per quart. Elsie chooses to process the butter further into spreadable butter by mixing it with canola oil, incurring an additional cost of $0.50 per pound. This process results in 2 tubs of spreadable butter for each pound of butter processed. Each tub of spreadable butter sells for $2.50. Required 1. Allocate the $20,000 joint cost to the spreadable butter and the buttermilk using the a. Physical-measure method (using cups) of joint cost allocation b. Sales value at splitoff method of joint cost allocation c. NRV method of joint cost allocation d. Constant gross margin percentage NRV method of joint cost allocation 2. Each of these measures has advantages and disadvantages; what are they? 3. Some claim that the sales value at split off method is the best method to use. Discuss the logic behind this claim. 16-31 Further processing decision (continuation of 16-30). Elsie has decided that buttermilk may sell better if it was marketed for baking and sold in pints. This would involve additional packaging at an incremental cost of $0.25 per pint. Each pint could be sold for $0.90. (Note: 1 quart = 2 pints) 1. If Elsie uses the sales value at splitoff method, what combination of products should Elsie sell to maximize profits? 2. If Elsie uses the physical-measure method, what combination of products should Elsie sell to maximize profits? 3. Explain the effect that the different cost allocation methods have on the decision to sell the products at split off or to process them further. 16-32 Joint-cost allocation with a byproduct. The Cumberland Mine is a small mine that extracts coal in West Virginia. Each ton of coal mined is 40% Grade A coal, 40% Grade B coal, and 20% coal tar. All output is sold immediately to a local utility. In May, Cumberland mined 1,000 tons of coal. It spent $10,000 on the mining process. Grade A coal sells for $100 per ton. Grade B coal sells for $60 per ton. Cumberland gets one-quarter of a vat of coal tar from each ton of coal tar processed. The coal tar sells for $60 per vat. Cumberland treats Grade A and Grade B coal as joint products, and treats coal tar as a byproduct. Required 1. Assume that Cumberland allocates the joint costs to Grade A and Grade B coal using the sales value at splitoff method and accounts for the byproduct using the production method. What is the inventoriable cost for each product and Cumberland’s gross margin? 2. Assume that Cumberland allocates the joint costs to Grade A and Grade B coal using the sales value at splitoff method and accounts for the byproduct using the sales method. What is the inventoriable cost for each product and Cumberland’s gross margin? 3. Discuss the difference between the two methods of accounting for byproducts, focusing on what conditions are necessary to use each method.
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