Test bank cost accounting chapter 16

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60)Theconstantgross-marginpercentagemethoddiffersfrom market-basedjoint-costallocationmethod
(salesvalueatsplit-offandestimatednetrealizablevalue)sincenoaccountistakenofprofitsearned
beforeorafterthesplit-offpointwhenallocatingjointcosts.
Answer:FALSE
Explanation:Theconstantgross-marginpercentagemethodtakesaccountoftheprofitsearnedbeforeor
afterthesplit-offwhenallocatingjointcosts.
Diff:2
Objective:3
AACSB:Analyticalthinking

61)Thesalesvalueatsplit-offmethodpresupposestheexactnumberofsubsequentstepsundertakenfor
furtherprocessing.
Answer:FALSE
Explanation:Thesalesvalueatsplit-offmethoddoesnotpresupposetheexactnumberofsubsequent
steps.
Diff:2
Objective:3
AACSB:Analyticalthinking

62)Injointcosting,outputswithnosalesvaluearealwaysexcludedwhencostsareallocatedusing
physicalmeasures.
Answer:TRUE
Diff:1
Objective:3
AACSB:Analyticalthinking

63)TheonlyallowablemethodofjointcostallocationisnetrealizablevaluewhichisspecifiedbyFASB.
Answer:FALSE
Explanation:TheFASBdoesnotspecifyasingleallowablemethodofjointcostallocation.
Diff:1
Objective:3
AACSB:Analyticalthinking

64)Theconstantgross-marginpercentageNRVmethodistheonlymethodofallocatingjointcostsunder
whichproductsmayreceivenegativeallocations.
Answer:TRUE
Diff:1
Objective:3
AACSB:Analyticalthinking

65)Thesalesvalueatsplit-offmethodofjointcostallocationinvolvescomputationoftherelativeamounts
ofthesalesvalueoftheamountofeachjointproductsoldduringtheperiod.
Answer:FALSE
Explanation:Thesalesvalueatsplit-offmethodallocatesjointcoststojointproductsproducedduringthe
accountingperiodonthebasisoftherelativetotalsalesvalueatthesplit-offpoint(notwhentheproduct
issold).
Diff:2
Objective:3
AACSB:Analyticalthinking

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66)Theconstantgross-marginpercentageNRVmethodallocatesjointcoststojointproductsinsucha
waythatthegrossmarginoneachjointproductisthesameasitwasinthepreviousyear.
Answer:FALSE
Explanation:Theconstantgross-marginpercentageNRVmethodallocatesjointcoststojointproductsin
suchawaythattheoverallgrossmarginpercentageisidenticalfortheindividualproducts.
Diff:2
Objective:3
AACSB:Analyticalthinking
67)Theconstantgross-marginpercentageNRVmethodistheonlymethodwherebyproductscanreceive
negativeallocations.
Answer:TRUE
Diff:1
Objective:3
AACSB:Analyticalthinking
68)Underthebenefits-receivedcriterion,thephysical-measuremethodismuchlessdesirablethanthe
salesvalueatsplit-offmethod.Why?
Answer:Underthebenefits-receivedcriterion,thephysical-measuremethodismuchlessdesirablethan
thesalesvalueatsplit-offmethodbecausethephysicalmeasureoftheindividualproductsmayhaveno
relationshiptotheirrespectiverevenue-generatingabilities.
Consideragoldminethatextractsorecontaininggold,silver,andlead.Usingacommonphysical
measure(tons)wouldresultinalmostallcostsbeingallocatedtolead,theproductthatweighsthemost
buthasthelowestrevenue-generatingpower.Thismethodofcostallocationisinconsistentwiththemain
reasontheminingcompanyisincurringminingcosts—toearnrevenuesfrom goldandsilver,notlead.
Whenacompanyusesthephysical-measuremethodinaproduct-lineincomestatement,productsthat
haveahighsalesvalueperton,likegoldandsilver,wouldshow alarge"profit"andproductsthathavea
low salesvalueperton,likelead,wouldshow sizablelosses.
Diff:2
Objective:3
AACSB:Analyticalthinking

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69)Foreachofthefollowingmethodsofallocatingjointcosts,giveapositiveoranegativeaspectof
selectingeachonetoallocatejointcosts.
a. salesvalueatsplit-off
b. estimatednetrealizablevaluemethod
c. theconstantgrossmarginmethod
d. aphysicalmeasuresuchasvolume
Answer:
a. Positive:Costsareallocatedtoproductsinproportiontotheirpotentialrevenues.Thisisafairly
simplemethodtoimplement.

Negative:Weusethesalesvalueoftheentireproductionoftheaccountingperiod.

b. Positive:Itcanbeusedwhenthemarketpricesoftheproductsarenotknownoravailable.
Negative:Itcanbeverycomplexinoperationswithmultipleproductsandmultiplesplit-offpoints.

c. Positive:Accountistakenoftheprofitsearnedeitherbeforeorafterthesplit-offpointwhenallocating
thejointcosts.

Negative:Theassumptionismadethatallhavethesameratioofcosttosalesvalue.Thisislikelynot
true.

d. Positive:Itisfairlysimpletouse.
Negative:Ithasnorelationshiptotherevenue-producingpowerofindividualproducts.

Diff:2
Objective:3
AACSB:Analyticalthinking

70)BerkelCompanyprocessessugarcaneintothreeproducts.DuringMay,thejointcostsofprocessing
were$600,000.Productionandsalesvalueinformationforthemonthwereasfollows:

Product UnitsProducedSSpalleits-oVffalPuoeinatt Separable
costs
Sugar 15,000 $200,000
$60,000
SugarSyrup 10,000 175,000 192,000
96,000
FructoseSyrup 5,000 125,000

Required:

Determinetheamountofjointcostallocatedtoeachproductifthesalesvalueatsplit-offmethodisused.

Answer:

Product Units SalesValue Percent JointCost Allocated

Sugar 15,000 $200,000 40%× $600,000 $240,000

SugarSyrup 10,000 175,000 35%× 600,000 210,000

FructoseSyrup 5,000 125,000 25%× 600,000 150,000

Total $500,000 100% $600,000

Diff:2
Objective:3
AACSB:Applicationofknowledge

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71)CalamataCorporationprocessesasinglematerialintothreeseparateproductsA,B,andC.During
September,thejointcostsofprocessingwere$300,000.Productionandsalesvalueinformationforthe
monthwereasfollows:

Product UnitsProducedVaFliunealpSeralUesnit Separable
Costs
A 10,000 $25
B $125,000
C 15,000 30 250,000
125,000
12,500 24

Required:
Determinetheamountofjointcostallocatedtoeachproductiftheconstantgross-marginpercentageNRV
methodisused.
Answer:Thegrossmarginpercentageis20% ($1,000,000-$800,000)/$1,000,000

FinalSales LessGross Total LessSeparable JointCosts
Value Margin Production
Product $250,000 $50,000 Costs Costs Allocated
A 90,000 $200,000
B 450,000 60,000 $ 125,000 $75,000
C 300,000 360,000
Total 1,000,000 200,000 240,000 250,000 110,000
800,000
125,000 115,000

$ 500,000 300,000

Diff:2
Objective:3
AACSB:Applicationofknowledge

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72)OregonLumberprocessestimberintofourproducts.DuringJanuary,thejointcostsofprocessing
were$280,000.Therewasnoinventoryatthebeginningofthemonth.Productionandsalesvalue
informationforthemonthisasfollows:

SalesValueat

Product Boardfeet Split-offPoint EndingInventory
2×4's 6,000,000
2×6's 3,000,000 $0.30perboardfoot 500,000bdft.
4×4's 2,000,000
Slabs 1,000,000 0.40perboardfoot 250,000bdft.

0.45perboardfoot 100,000bdft.

0.10perboardfoot 50,000bdft.

Required:

Determinethevalueofendinginventoryifthesalesvalueatsplit-offmethodisusedforproductcosting.

Roundto3decimalplaceswhennecessary.

Answer:

Product Boardfeet SalesValue Percent JointCost Allocated

2×4's 6,000,000 $1,800,000 45.0× $280,000 $126,000

2×6's 3,000,000 1,200,000 30.0× 280,000 84,000

4×4's 2,000,000 900,000 22.5× 280,000 63,000

Slabs 1,000,000 100,000 2.5× 280,000 7,000

Totals $4,000,000 100.0% $280,000

Product FractionofProductionin Allocated Inventoryvalue
Inventory
2×4's
2×6's 500,000/6,000,000× $126,000= $10,500
4×4's
Slabs 250,000/3,000,000× 84,000= 7,000

100,000/2,000,000× 63,000= 3,150

50,000/1,000,000× 7,000= 350

Total $21,000

Diff:3
Objective:3
AACSB:Applicationofknowledge

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73)ZenonChemical,Inc.,processespinerosinintothreeproducts:turpentine,paintthinner,andspot
remover.DuringMay,thejointcostsofprocessingwere$240,000.Productionandsalesvalueinformation
forthemonthisasfollows:

Product UnitsProduced SalesValueat
Split-offPoint

Turpentine 15,000liters $120,000

Paintthinner 15,000liters 100,000

Spotremover 7,500liters 50,000

Required:

Determinetheamountofjointcostallocatedtoeachproductifthephysical-measuremethodisused.

Answer:

Product UnitsProduced Percentage JointCosts Allocated

Turpentine 15,000liters 40% $720,000= $288,000

Paintthinner 15,000liters 40% 720,000= 288,000

Spotremover 7,500liters 20% 720,000= 144,000

Totals 37,500 100 $720,000

Diff:2
Objective:3
AACSB:Applicationofknowledge

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74)RedSauceCanningCompanyprocessestomatoesintocatsup,tomatojuice,andcannedtomatoes.
Duringthesummerof2017,thejointcostsofprocessingthetomatoeswere$420,000.Therewasno
beginningorendinginventoriesforthesummer.Productionandsalesvalueinformationforthesummer
isasfollows:

Product Cases SalesValueat SeparableCosts SellingPrice
Split-offPoint
Catsup
Juice 100,000 $6percase $3.00percase $28percase
Canned
150,000 8percase 5.00percase 25percase

200,000 5percase 2.50percase 10percase

Required:

Determinetheamountallocatedtoeachproductiftheestimatednetrealizablevaluemethodisused,and

computethecostpercaseforeachproduct.

Answer:

Product ExpectedSales Separable NetRealizable Percentage
Value Costs Value

Catsup $2,800,000 $300,000 $2,500,000 35.71

Juice 3,750,000 750,000 3,000,000 42.86

Canned 2,000,000 500,000 1,500,000 21.43

Totals $7,000,000 100.00

Product Percentage JointCosts Allocated Separable ProductCosts
Costs

Catsup 35.71%× $420,000= $149,982+ $300,000= $449,982
Juice 42.86%× 420,000= 180,012+
Canned 21.43%× 420,000= 90,006+ 750,000= 930,012

500,000= 590,006

Catsupcostpercase =$449,982/100,000=$4.50
Juicecostpercase =$930,012/150,000=$6.20
Cannedcostpercase =$590,006/200,000=$2.95
Diff:3
Objective:3
AACSB:Applicationofknowledge

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75)Pilgrim Corporationprocessesfrozenturkeys.Thecompanyhasnotbeenpleasedwithitsprofit
marginperproductbecauseitappearsthatthehighvalueitemshavetoofew costsassignedtothem,
whilethelow valueitemshavetoomanycostsassignedtothem.Theprocessingresultsinseveral
products,theprimaryoneofwhichisfrozensmallturkeys.Otherproductsincludefrozenpartssuchas
wingsandlegs,byproductssuchasskinandbones,andunusedscrapitems.

Required:
Whatmaybethecostassignmentproblem ifakeyconsiderationisthevalueoftheproductsbeingsold?
Answer:First,thecompanyneedstoconsiderwhetherthebyproductsarebeingtreatedasproducts,
ratherthanbyproducts.Forthemostpart,byproductsshouldnotbeassignedcosts.Therevenuefrom the
byproductsshouldbeusedaseitherminorsalecategoriesorelseasoffsetstoprocessingcosts.

Asecondconsiderationisthemethodusedtoassignthecosts.Itispossiblethatsomephysicalmeasure
(weight)isbeingused,inwhichcasethepartsitemsandthebyproductsmayweighasmuchasthe
primaryproduct.Itmaybenecessarytoevaluatethevariousmethodsofallocationandselecttheone
whichmanagementfeelsisbestfordecisionmaking.
Diff:2
Objective:3
AACSB:Applicationofknowledge

76)WharfFisheriesprocessesmanyofitsseafooditemstothedemandsofitslargestcustomers,mostof
whicharelargeretaildistributors.Tokeeptheaccountingsystem simple,ithasalwaysassignedcostby
theweightofthefinishedproduct.However,withincreasedcompetition,ithashadtowatchitsprices
closelyand,inrecentyears,severalitemshaveincurredzeroprofitmargins.Afterseveralweeksof
investigation,yourconsultingfirm hasfoundthat,whileweightisimportantinprocessingofseafood,
numerousitemshaveverydistinctprocessingstepsandsomeitemsareprocessedthroughmoresteps
thanothers.

Required:
Basedonthefindingsofyourconsultingfirm,whatchangesmightyourecommendtothecompanyinthe
wayofcostallocationamongitsproducts?
Answer:Recommendationsmightinclude,amongothers,someofthefollowing:

a. Categorizethefishingexpeditionsasjointcosts,especiallyifmultipleitemsarecaught.
b. Categorizeallprocessingactivitieswheremultipleitemsareprocessedasjointcosts.
c. Forthoseprocessesthatareuniquetoonlyoneproductorasetofproducts,useseparablecost
categories.
d. Choosesomethingotherthanweightforallocatingjointcosts.Selectoneofthevaluemethodsof
assigningthecosts.
e. Carefullyseparatemainproductsfrom byproductsinthecostingsystem.
f. Donotallocatethejointcostsforinternaldecisions.
Diff:2
Objective:3
AACSB:Applicationofknowledge

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77)ParagonUniversityoperatesanextensiveandanexpensiveregistration,testing,andcounselingcenter,
throughwhichallstudentsarerequiredtopassthroughwhentheyentertheuniversity.Theregistration
effort'scosts(forthemostpart)arealmostimpossibletoallocatebaseduponwhichstudentsrequiretime,
effort,etc.Thecostofthiscenterisapproximately15% ofthetotalcostsofParagon.Thisdepartment
engagesinnootheractivitiesthantheregistrationofstudents.Paragonisinterestedindeterminingthe
profitabilityofthethreetechnicaldepartmentsitoperates.Paragonhastheperceptionthatsome
departmentsaremoreprofitablethanothers,anditwouldliketodetermineanappropriatemethodof
allocatingthecostsofthisregistrationcenter.

Required:
RecommendtoParagonUniversityamethod(ormethods)ofallocatingthecostsofregistrationtothe
threedepartments.
Answer:Thejointcostsoftheregistrationeffortcouldbeallocatedbasedonphysicalvolumeorthesales
(tuition)dollarsofeachdepartment.

Volume.Allocatingonvolumewouldbebasednotuponphysicalmeasures,butuponthenumberofcredit
hourseachofthethreedepartmentsoffereachsemester.Iftheratioofcredithoursforthethree
departmentswere25%,45%,and30% thenthecostswouldbeallocatedbasedupontheseratios.

SalesDollars.Itispossiblethatsomedepartmentschargemorepercredithourthanothers.Inthiscaseit
mightbeappropriatetoallocatethecostsbaseduponthetotaltuitionrevenuesofeachdepartment.
Diff:2
Objective:3
AACSB:Applicationofknowledge

16.4 Objective16.4

1)Whichofthefollowingisnottrueofthejointallocationmethods?
A)thesalesvalueatthesplit-offmethodisthebestmeasureofbenefitsreceived
B)whensellingpricesofallproductsatthesplit-offareunavailable,theNRVmethodisthebest
alternative
C)theconstantgross-marginpercentageNRVmethodtreatsthejointproductsasthoughtheycomprisea
singleproduct
D)whensellingpricesareatthesplit-offpointareavailablebutfurtherprocessingisnecessary,theNRV
methodisthepreferredallocationmethod
Answer:D
Diff:1
Objective:4
AACSB:Analyticalthinking

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2)Whenthesellingpricesofallproductsatthesplit-offpointareunavailable,the________isthebest
alternativeforallocatingjointcosts.
A)salesvalueatsplit-offmethod
B)NRVmethod
C)physicalmeasuresmethod
D)constantgross-marginpercentagemethod
Answer:B
Diff:2
Objective:4
AACSB:Analyticalthinking

3)Whichofthefollowingstatementsistrueofthemethodsforallocatingjointcosts?
A)Thesalesvalueatsplit-offmethodlacksacommonbasisforallocatingjointcoststoproducts.
B)Thecomplexityofthesalesvalueatsplit-offmethodincreaseswhenmanagersmakefrequentchanges
tothesequenceofpost-split-offprocessingdecisions.
C)TheNRVmethodassumesthatnoneofthemarkupisattributabletotheseparablecosts.
D)TheNRVmethodtreatsthejointproductsasthoughtheycompriseasingleproduct.
Answer:C
Diff:2
Objective:4
AACSB:Analyticalthinking

4)Thedrawbackoftheconstantgross-marginpercentageNRVmethodinjointcostingisthatit________.
A)recognizesthatprofitsarederivedfrom thecostsincurredaftersplit-off
B)assumestheprofitmargintobeidenticalacrossallproducts
C)attemptstoapproximatethesalesvaluesatsplit-offbysubtractingfrom finalsellingpricesthe
separablecostsincurredafterthesplit-offpoint
D)ignorestheseparablecostsoffurtherprocessing
Answer:B
Diff:2
Objective:4
AACSB:Analyticalthinking

5)Injointcosting,whichmethodassumesthatallthemarkupisattributabletothejointprocesscosts?
A)salesvalueatsplit-offmethod
B)NRVmethod
C)constantgross-marginpercentagemethod
D)physicalmeasuresmethod
Answer:B
Diff:2
Objective:4
AACSB:Analyticalthinking

6)Whenthesellingpricesatthesplit-offareunavailable,theNRVmethodisthebestalternative.
Answer:TRUE
Diff:1
Objective:4
AACSB:Analyticalthinking

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7)Physicalmeasuressuchasweightorvolumearethebestindicatorsofthebenefitsreceivedfor
allocatingjointcosts.
Answer:FALSE
Explanation:Salesvalueisabetterindicatorofthebenefitsreceivedthanthephysicalmeasures.
Diff:2
Objective:4
AACSB:Analyticalthinking

8)Injointcosting,theconstantgross-marginpercentagemethodrecognizesthattheprofitmarginisnot
justattributabletothejointprocessbutisalsoderivedfrom thecostsincurredaftersplit-off.
Answer:TRUE
Diff:2
Objective:4
AACSB:Analyticalthinking

9)Theconstantgross-marginpercentageNRVmethodmakesthesimplifyingassumptionoftreatingthe
jointproductsasthoughtheycompriseasingleproduct.
Answer:TRUE
Diff:1
Objective:4
AACSB:Analyticalthinking

10)Listthereasonsthatthesalesvalueatsplit-offmethodofjointcostallocationshouldbeused.
Answer:1. Measurementofthevalueofthejointproductsatsplit-off-Salesvalueatsplit-offisthe
bestmeasureofthebenefitsreceivedasaresultofjointprocessing.

2. Noanticipationofsubsequentmanagementdecisions-Thismethoddoesnotrequireinformationon
processingstepsaftersplit-off.

3. Availabilityofacommonbasistoallocatejointcoststoproducts-Revenueisthecommonbasisto
allocatecosts.

4. Simplicity-ItisthesimplestmethodcomparedtotheNRVandconstantgross-marginpercentage
NRVmethods.
Diff:2
Objective:4
AACSB:Analyticalthinking

11)Explainwhysomecompanieschoosenottoallocatejointcoststoproducts.
Answer:Somecompanieschoosenottoallocatejointcoststoproductsduetothecomplexityoftheir
productionorextractionprocessesandthedifficultyofgatheringasufficientamountofdatatoallocate
thecostscorrectly.Ratherthanallocatingjointcosts,somefirmssimplysubtractthem directlyfrom total
revenuesinthemanagementaccounts.
Diff:2
Objective:4
AACSB:Analyticalthinking

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12)Whatarethefourmethodsofallocatingjointcoststoindividualproducts?Whichofthesemethodsis
preferred,andwhataretwoadvantagesofthismethod?
Answer:Thefourmethodsofallocatingjointcoststoindividualproductsare:thesales-valueatsplit-off
method,estimatednet-realizablevalue(NRV)method,theconstantgrossmarginpercentageNRV,and
physicalmeasuresmethods.
Ofthesemethods,thesales-valueatsplit-offmethodispreferredwhenmarketpricesareavailable,
becauseitisconsistentwiththebenefits-receivedcriterion,itdoesnotdependoranticipatefurther
managerialdecisionsonfurtherprocessing,anditisrelativelysimple.
Diff:2
Objective:4
AACSB:Analyticalthinking
13)ExplainwhysomecompaniescarrytheirinventoriesatNRVminusanestimatedoperatingincome
margininsteadoftheNRVitself.
Answer:SomecompaniescarrytheirinventoriesatNRVminusanestimatedoperatingincomemargin
insteadoftheNRVitself.ThisisbecauseaccountantsdonotordinarilyrecordinventoriesatNRVbecause
thispracticerecognizestheincomeoneachproductatthetimetheproductioniscompletedbutbeforeit
issold.Whenanyend-of-periodinventoriesaresoldinthenextperiod,thecostofgoodssoldthenequals
thiscarryingvalue.
Diff:2
Objective:4
AACSB:Applicationofknowledge

16.5 Objective16.5

1)Whenaproductistheresultofajointprocess,thedecisiontoprocesstheproductpastthesplit-off
pointfurthershouldbeinfluencedbywhichofthefollowingmeasures?
A)theproduct'sproportionofthetotalcosts
B)theportionofthejointcostsallocatedtotheindividualproducts
C)theextrarevenueearnedpastthesplit-offpoint
D)theincrementaloperatingincomeearnedpastthesplit-offpoint
Answer:D
Diff:1
Objective:5
AACSB:Analyticalthinking

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2)Acompanymanufacturesthreeproducts,A,B,andCfrom asinglerawmaterialinput.ProductCcan
besoldatthesplit-offpointfortotalrevenuesof$60,000oritcanbeprocessedfurtheratatotalcostof
$16,000andthensoldfor$78,000.ProductC:
A)shouldbesoldatthesplit-offpoint,ratherthanprocessedfurther.
B)wouldincreasethecompany'soverallnetincomeby$18,000ifprocessedfurtherandthensold.
C)wouldincreasethecompany'soverallnetincomeby$78,000ifprocessedfurtherandthensold.
D)wouldincreasethecompany'soverallnetincomeby$2000ifprocessedfurtherandthensold.
Answer:D
Explanation:Theincreaseinoperatingincomewouldbe$2000byfurtherprocessing:$78,000-$16,000=
$62,000lesstherevenuesatthesplit-offpointof$60,000=$2000.
Diff:2
Objective:5
AACSB:Analyticalthinking

3)Whichofthefollowingstatementsistrueofsell-or-process-furtherdecisionsinjointcosting?
A)Jointcostsincurredbeforethesplit-offpointarerelevantindecidingwhethertoprocesstheproduct
further.
B)Allseparablecostsinjoint-costallocationsareincrementalcosts.
C)Separablecostsincurredbeforethesplit-offpointareirrelevantindecidingwhethertoprocessthe
productfurther.
D)Coststhatdifferbetweenthealternativesofsellingproductsorprocessingfurtherarerelevant.
Answer:D
Diff:2
Objective:5
AACSB:Analyticalthinking

4)WhichofthefollowingfactorswouldNOTbeoneofthereasonswhythesalesvalueatthesplit-off
wouldbeusedtoallocatejointcosts?
A)thesalesvaluemethodisagoodmeasureofbenefitsreceived
B)ithelpsdeterminemanagercompensationandperformanceevaluation
C)itisamethodthatisindependentoffurtherprocessingdecisions
D)itprovidesacommonallocationbasis
Answer:B
Diff:2
Objective:5
AACSB:Analyticalthinking

5)Separablecoststhatdonotdifferbetweenalternativesareirrelevantfordecisionmaking.
Answer:TRUE
Diff:1
Objective:5
AACSB:Analyticalthinking

6)Jointprocessingcostsarerelevantindecidingwhethertoprocesstheproductfurther.
Answer:FALSE
Explanation:Jointprocessingcostsareirrelevantindecidingwhethertoprocesstheproductfurther.
Diff:1
Objective:5
AACSB:Analyticalthinking

7)Allseparablecostsinjoint-costallocationsarealwaysincrementalcosts.
Answer:FALSE
Explanation:Someoftheseparablecostsmaybefixedandthereforenotincremental.
Diff:2
Objective:5
AACSB:Analyticalthinking

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8)NewYorkLibertyCorporationmakesminiaturestatuesoftheEmpireStateBuildingfrom castiron.
Salestotal50,000unitsayear.Thestatuesarefinishedeitherroughorpolished,withanaveragedemand
of60% roughand40% polished.Ironingots,thedirectmaterial,costs$5perpound.Processingcostsare
$300toconvert30poundsinto60statues.Roughstatuesaresoldfor$17each,andpolishedstatuescanbe
soldfor$19orengravedforanadditionalcostof$5.Polishedstatuescanthenbesoldfor$32.

Required:
DeterminewhetherNew YorkLibertyCompanyshouldselltheengravedstatutes.Why?
Answer:New YorkLibertyshouldengravethestatutesbecausetheyincreaseprofitsby$7perstatute.

Sales Rough Polished
CostofSales: $17.00 $19.00

Materials($5×30)/60 $2.50 7.50 $3.00 7.50
Conversion$300/60 5.00 $9.50 5.00 $11.50
OperatingIncome

Sales,polishedandengraved $32.00
Costs:
$2.50 12.50
Materials 5.00 $19.50
Conversion 5.00
AdditionalProcessing $8.00
OperatingIncome
Advantageinfavorofsellingtheengravedstatutes

Diff:3
Objective:5
AACSB:Applicationofknowledge

9)Whatrevenueorexpenseamountsarenecessarytomakeasell-or-process-furtherdecisionandwhy?
Whatitemsareirrelevanttothedecisionandwhy?
Answer:Therevenuesandexpensesthatoccuraftersplit-offarethenecessaryitemstomakeasell-or-
process-furtherdecision.Ifincrementalrevenuesarehigherthanincrementalcosts,processingfurtheris
thecorrectdecision.Expensesthatoccurbeforethesplit-offpoint,calledjointprocessingcosts,are
irrelevanttothedecision.Theseexpenseshaveoccurredandhavenoeffectonthedecisiontosell-or-
process-further.
Diff:2
Objective:5
AACSB:Analyticalthinking

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10)Firmsshouldbewaryofusingthefullcostofajointproductasthebasisformakingpricingdecisions.
Why?
Answer:Firmsshouldbewaryofusingthefullcostofajointproduct(thatis,thecostafterjointcostsare
allocated)asthebasisformakingpricingdecisionsbecauseinmanysituations,thereisnodirectcause-
and-effectrelationshipthatidentifiestheresourcesdemandedbyeachjointproductthatcanthenbeused
asabasisforpricing.Infact,theuseofthesalesvalueatsplit-offorthenetrealizablevaluemethodto
allocatejointcostsresultsinareverseeffect:Thesellingpricesofjointproductsdrivejoint-costallocations,
ratherthancostallocationsservingasthebasisforthepricingofjointproducts.
Diff:2
Objective:5
AACSB:Analyticalthinking

16.6 Objective16.6

1)Whichmethodofaccountingrecognizesbyproductsinthefinancialstatementsatthetimetheir
productioniscompleted?
A)grossmarginmethod
B)salesmethod
C)productionmethod
D)marketvaluemethod
Answer:C
Diff:1
Objective:6
AACSB:Analyticalthinking

2)ToridCompanyprocesses18,025gallonsofdirectmaterialstoproducetwoproducts,ProductXand

ProductY.ProductXsellsfor$5pergallonandProductY,themainproduct,sellsfor$170pergallon.The

followinginformationisforDecember:

Beginning Ending

Production Sales Inventory Inventory

ProductX: 5800 5700 0 100

ProductY: 10,075 10,180 125 20

Themanufacturingcoststotalled$26,000.

Underproductionmethod,ProductXNRVwouldbeoffsetagainstthecostsofProductYbyhow much?
A)$28,500
B)$29,000
C)$17,000
D)$500
Answer:B
Explanation:5800gallons×$5=$29,000
Diff:2
Objective:6
AACSB:Applicationofknowledge

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3)ToridCompanyprocesses18,700gallonsofdirectmaterialstoproducetwoproducts,ProductXand

ProductY.ProductXsellsfor$10pergallonandProductY,themainproduct,sellsfor$150pergallon.

ThefollowinginformationisforDecember:

Beginning Ending

Production Sales Inventory Inventory

ProductX: 5975 5800 0 175

ProductY: 10,575 10,655 100 20

Themanufacturingcoststotalled$30,000.

How muchistheendinginventoryforthebyproductifbyproductsarerecognizedinthegeneralledgerat
thepointofsale?
A)$0
B)$1750
C)$3000
D)$26,250
Answer:A
Explanation:Byproductsarenotrecognizeduntiltheyaresold.Therefore,theendinginventoryisalways
$0.
Diff:2
Objective:6
AACSB:Applicationofknowledge

4)ToridCompanyprocesses17,750gallonsofdirectmaterialstoproducetwoproducts,ProductXand

ProductY.ProductXsellsfor$7pergallonandProductY,themainproduct,sellsfor$160pergallon.The

followinginformationisforDecember:

Beginning Ending

Production Sales Inventory Inventory

ProductX: 5425 5300 0 125

ProductY: 10,175 10,170 25 30

Themanufacturingcoststotalled$27,000.

TheproductionmethodwillreportProductXinthebalancesheetat________.
A)$0
B)$4800
C)$875
D)$20,000
Answer:C
Explanation:125gallons×$7=$875
Diff:3
Objective:6
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5)ToridCompanyprocesses18,175gallonsofdirectmaterialstoproducetwoproducts,ProductXand

ProductY.ProductXsellsfor$6pergallonandProductY,themainproduct,sellsfor$190pergallon.The

followinginformationisforDecember:

Beginning Ending

Production Sales Inventory Inventory

ProductX: 5550 5400 0 150

ProductY: 10,475 10,505 50 20

Themanufacturingcoststotalled$29,000.

IfthebyproductinventoryisrecordedatNRVlessprofitmarginof40%,thebalancesheetwillreport
________ofbyproductinventory.
A)$900
B)$0
C)$3800
D)$540
Answer:D
Explanation:$900×60% =$540
Diff:3
Objective:6
AACSB:Applicationofknowledge

6)Whichifthefollowingisanegativeconsequenceofrecordingbyproductsintheaccountingrecords
whenthesaleoccurs?
A)therevenuefrom thebyproductsisusuallyfairlylargeandtheaccountingrecordswillbedistorted
B)earningscannotbetimedunderthismethod
C)managerscanbetemptedtostockpilebyproducts
D)itinvolvescomplexcalculationscomparedtotheproductionmethod
Answer:C
Diff:2
Objective:6
AACSB:Analyticalthinking

7)Whichofthefollowingstatementsistrueoftheproductionmethodofaccountingforbyproducts?
A)Itmakesnojournalentriesuntilthebyproductissold.
B)Itisthepreferredmethodbecauseofthematchingprinciple.
C)Itrecordsrevenuesofthebyproductintheincomestatementasrevenue.
D)Itaddsrevenuesofthebyproducttothecostofgoodssoldintheincomestatement.
Answer:B
Diff:2
Objective:6
AACSB:Analyticalthinking

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8)Whichofthefollowingstatementsistrueofthesalesmethodofaccountingforbyproducts?
A)Itmakesjournalentrieswhenthebyproductsareproduced.
B)Itisthepreferredmethodbecauseofthematchingprinciple.
C)Itallowsafirm tomanageitsreportedearningsbytimingthesaleofbyproducts.
D)Thismethodrecognizesthebyproductinventoryintheaccountingperiodinwhichitisproduced.
Answer:C
Diff:2
Objective:6
AACSB:Analyticalthinking

9)Whichofthefollowingjournalentriescanhappenonlyundertheproductionmethodofrecording
byproducts?
A)WorkinProcess
FinishedGoods-Byproduct

AccountsPayable
B)CashorAccountsReceivable

Revenues-Mainproduct
C)ByproductInventory
FinishedGoods-Mainproduct

WorkinProcess
D)CashorAccountsReceivable

Revenues-Byproduct
Answer:C
Diff:3
Objective:6
AACSB:Applicationofknowledge

10)Byproductsarerecognizedinthegeneralledgereitheratthetimeproductioniscompletedoratthe
timeofsale.
Answer:TRUE
Diff:1
Objective:6
AACSB:Analyticalthinking

11)Thesalesmethodforrecognizingbyproductsisconceptuallycorrectbecauseitisconsistentwiththe
matchingprinciple.
Answer:FALSE
Explanation:Theproductionmethodforrecognizingbyproductsisconceptuallycorrectbecauseitis
consistentwiththematchingprinciple.
Diff:2
Objective:6
AACSB:Analyticalthinking

12)Theproductionmethodforrecognizingbyproductsreducesthecostofmanufacturingthemainor
jointproductsintheincomestatement.
Answer:TRUE
Diff:1
Objective:6
AACSB:Analyticalthinking

13)Theproductionmethodforrecognizingbyproductsissimplerandisoftenusedinpractice,primarily
becausethedollaramountsofbyproductsareimmaterial.
Answer:FALSE
Explanation:Thesalesmethodissimplerandisoftenusedinpractice,primarilybecausethedollar
amountsofbyproductsareimmaterial.
Diff:1
Objective:6

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14)WoodyCityManufacturingmillslumberforcompanieswhomanufacturefurniture.Themain
productisfinishedlumberwithabyproductofwoodshavings.Thebyproductissoldtoplywood
manufacturers.ForJuly,themanufacturingprocessincurred$412,000intotalcosts.Eightythousand
boardfeetoflumberwereproducedandsoldalongwith7,000poundsofshavings.Thefinishedlumber
soldfor$6.00perboardfootandtheshavingssoldfor$0.60apound.Therewerenobeginningorending
inventories.

Required:

Prepareanincomestatementshowingthebyproduct(1)asacostreductionduringproduction,and(2)as

arevenueitem whensold.

Answer:

Costreductionwhen Revenuewhensold
produced

Sales:Lumber $480,000 $480,000

Shavings 4,200

TotalSales: $480,000 484,200

CostofGoodSold:

Totalmanufacturingcosts $332,000 $332,000

Byproduct 4,200 0

TotalCOGS 327,800 332,000

GrossMargin $152,200 $152,200

Diff:2
Objective:6
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15)Distinguishbetweenthetwoprincipalmethodsofaccountingforbyproducts,theproduction
byproductmethodandthesalebyproductmethod.Brieflydiscusstherelativemerits(orlackthereof)of
each.
Answer:
a. Productionbyproductmethod.

Thismethodrecognizesbyproductsinthefinancialstatementsatthetimetheirproductionis
completed.Theestimatednetrealizablevaluefrom thebyproductproducedisoffsetagainstthecostsof
themain(orjoint)products,anditisreportedinthebalancesheetasinventory.Accountingentriesare
madeandthebyproductsarereportedinthebalancesheetattheirsellingprice.
b. Salebyproductmethod.

Thismethoddelaysrecognitionofthebyproductsuntilthetimeoftheirsale.Revenuescouldbe
recordedinoneaccountingperiod,whiletheexpenseinanearlierperiod.Companiesmayfindit
necessarytokeepaninventoryofthebyproductprocessingcostsinaseparateaccountuntilthe
byproductsaresold.Thispracticecanberationalizedonthegroundsthatthedollaramountsof
byproductsareimmaterial.Butmanagerscanusethismethodtomanagereportedearningsbytiming
whentheysellbyproducts.
Diff:2
Objective:6
AACSB:Analyticalthinking
16)Whatarethetwomethodstoaccountforbyproducts.Whichisthemoreappropriatemethodtouse
andwhy?
Answer:Thetwomethodsaretheproductionmethodandthesalesmethod.Theproductionmethod
recognizesbyproductsinthefinancialstatementsatthetimeproductioniscompleted.Thesalesmethod
delaysrecognitionofbyproductsuntilthetimeofsale.Theproductionmethodistheappropriate
methodtousebecauseitisconsistentwiththematchingprinciple.Ifthesalesmethodwereused,the
byproductcostrecognitioncouldbedelayedforseveralperiodsuntiltheinventoryissold.
Diff:2
Objective:6
AACSB:Analyticalthinking

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