2nd Flr, GF Partners Bldg, 139 H.V. dela Costa, Salcedo Village, Makati City

SUMMARY OF STUDY OBJECTIVES

When two or more different products are manufactured in the same production process it is called a Joint production process.

The major products resulting from a joint production process are called Joint products. A products yield in joint production process with a relatively small value is a by –

products. The costs incurred in the joint production process which is common to all products are

called Joint costs. The split-off point is the point in the production process where the products become

identifiable, and as a result of their separate identity, their production costs can be measured separately.

All costs incurred beyond the split-off point that is assignable to one or more individual products are called separable costs.

METHODS OF ALLOCATING JOINT COSTS1. Allocate joint costs using market value

a. Sales Value at Split off – allocates joint costs to joint products on the basis of the relative sales value at the split off point.

b. Approximated Net Realizable Value- allocates joint costs to joint products on the basis of relative estimated NRV(Final sales value minus the expected separable costs)

c. Net Realizable Value at Split-off- allocates joint costs on the basis of estimated realizable value at split-off point.

d. Constant Margin Approach- allocates joint costs in such a way that the overall gross margin percentage is identical for the individual products.

2. Allocate joint costs using physical measurea. Units of Production Method-allocates joint costs based on the number of units

produced.b. Weighted Average Method-allocates joint costs based on the weight, units or

other measure.

ACCOUNTING FOR BY PRODUCTS1. By products are accounted during production (Net Realizable Value

approach) - NRV of the by products is treated as a reduction from the joint costs of the main products. Any loss of the by products or scrap is added to the cost to the cost of the main products

2. By products are accounted during sale (Realizable Value approach) – The realized value of the by products or scrap maybe reported as other sales revenue or other income.

Standard Cost – the predetermined costs of manufacturing a single unit or a number of product units during a specific period in the immediate future.

The purpose of standard cost accounting is to control and promote efficiency. Organizations have many reasons for using standard costs, including: Costs control;

Pricing decisions; Performance appraisal; Cost awareness; and Management by objectives.

Types of VarianceA variance exists when standard costs differ from actual costs.

I. Materialsa. Price varianceb. Quantity variance

II. Labora. Rate varianceb. Efficiency variance

III. Factory Overhead1. Two – variance methoda. Controllable variance

b. Volume variance2. Three variance method

a. Spending varianceb. Idle capacity variancec. Efficiency variance

a. Spending varianceb. Variable Efficiency variancec. Volume variance

Material Price Variance

AQ x AP = Pxxx (AP – SP) X AQ = MPV AQ = Actual QuantityAQ x SP = xxx AP = Actual PriceMPV = Pxxx SP = Standard Price

Material price variance is caused by paying a higher or lower price than the standard price for materials.

Material Quantity Variance

AQ x SP = Pxxx (AQ - SQ) X SP = MQV AQ = Actual QuantitySQ x SP = xxx SQ = Standard QuantityMQV = Pxxx SP = Standard Price

Material efficiency variance is caused by using more or less than the standard amount of materials to produce a product.

Labor Rate Variance

AH x AR = Pxxx (AR - SR) X AH = LRV AH = Actual HoursAH x SP = xxx AR = Actual RateLRV = Pxxx SR = Standard Rate

Labor rate variance is caused by paying a higher or lower rate of pay than the standard to produce a product or complete a process.

Labor Efficiency Variance

AH x SP = Pxxx (AH - SH) X SR = LEV AH = Actual HoursSH x SP = xxx SH = Standard HoursLEV = Pxxx SR = Standard Rate

Labor efficiency variance is caused by using more or less than the standard amount of labor hours to produce a product or complete a process.

Two Variance methods

Controllable Variance

AFO Pxxx BASH = Fixed Overhead + Variable (SH x VR)BASH (xxx)CV Pxxx BASH = Budgeted Allowance based on Standard

Hours VR = Variable RateAFO = Actual Factory Overhead

Volume Variance

BASH Pxxx FOSH = SH x FORFOSH (xxx)VV Pxxx FOSH = Factory Overhead Applied

FOR = Factory Overhead Rate

The Golden Key Company produces three joint products: A, B, and C. Total production cost for November was P216,000.

The units produced and unit sales prices at the split –off point were:

Product Units Produced Unit Sales Price Point A 60,000 P 2.20 6 B 80,000 1.25 4 C 100,000 1.28 4

Requirements: Allocation of joint costs using:1. Market value method2. Average unit cost method3. weighted average method

The Marco Daniel Company produces three products: W, X and Y that maybe sold at the split off point or processed further. Additional processing costs are entirely variable and are traceable to the respective products produced. Total joint costs incurred amounted to P50,000.

Units Sales Value If processed furtherProduct Produced At Split-off Additional cost Sales ValueW 20,000 P45,000 P20,000 P60,000X 15,000 P75,000 P20,000 P98,000Y 15,000 P30,000 P16,000 P62,000

Requirements:

A. Allocate joint costs and compute for the total cost using:1. Market value at split-off point2. Hypothetical market value method (assuming sales value at split-off point is not given)

MULTIPLE CHOICE

Lee Co. produces two joint products, Bex and Rom. Joint production costs for June 2001 were P30,000. During June 2001, further processing costs beyond the split-off point needed to convert the products into salable form, were P25,000 and P35,000 for 1,600 units of Bex and 800 units of Rom, respectively. Bex sells for P50 per unit, and Rom sells for P100 per unit. Lee uses the net realizable value method for allocating joint product costs.

1. For June 2001, the joint costs allocated to product Bex werea. P20,000b. P16,500c. P13,500d. P10,000

Life Co. manufactures products X and Y from a joint process that also yields a by-product, Z. Revenue from sales of Z is treated as a reduction of joint costs. Additional information is as follows:

PRODUCTS X Y Z TOTAL

Units produced 20,000 20,000 10,000 50,000Joint costs ? ? ? P262,000Sales value at split-off P300,000 P150,000 P10,000

P460,000

Joint costs were allocated using the sales value at split-off method.

2. The joint costs allocated to product X werea. P75,000b. P100,000c. P150,000d. P168,000

Alpha Corp. manufactures a product that yields the by-product “Yum”. The only costs associated with Yum are selling costs of P.10 for each unit sold. Alpha accounts for sales of

Yum’s separable costs from Yum’s sales, and then deducting this net amount from the major product’s cost of goods sold. Yum’s sales were 100,000 units at P1.00 each.

3. If Alpha changes its method of accounting for Yum’s sales by showing the net amount as additional sales revenue, then Alpha’s gross margin would

a. Increase by P90,000b. Increase by P100,000c. Increase by P110,000d. Be unaffected

Bravo Company manufactures product J and K from a joint process. For product J, 4,000 units were produced having a sales value at split-off of P15,000. If product J were processed further, the additional costs would be P3,000 and the sales value would be P20,000. For product K, 2,000 units were produced having a sales value at split-off of P10,000. If product K were processed further, the additional costs would be P1,000 and the sales value would be P12,000.

4. Using the sales value at split-off method, the portion of the total joint costs allocated to product J was P9,000. What were the total joint costs?

a. P14,400b. P15,000c. P18,400d. P19,000

The Wooden Shoe Company produced three products at a joint cost of P100,000. Two of these products were processed further. Production and sales were:

Product Weight Sales Additional Processing Costs A 300,000 lbs. P245,000 P200,000

B 100,000 lbs. 30,000 None C 100,000 lbs. 175,000 P100,000

5. If the net realizable value method is used, how much of the joint costs would be allocated to Product C? Assume that B is accounted for as a joint product.

a. P38,889b. P41,667c. P50,000d. P62,500

6. Assume B is a by-product whose sales value is credited to the joint processing costs. If net realizable value is used, how much of the joint costs would be allocated to Product C?

a. P38,889b. P43,750c. P50,000d. P62,500

7. If joint costs are allocated based on relative weight of the outputs, how much of the joint costs would be allocated to Product A? (All products are joint products).

a. P43,750b. P50,000c. P60,000d. P62,500

8. Delta Company produces two products from a joint processes: X and Z. Joint processing costs for this production cycle are P8,000.

Yar ds

Sales price per yard at

split-off

Disposal cost per yard at

split-off

Further processing per

yard

Final sales Price per

yardX 1,500 P6.00 P3.50 P1.00 P7.50Z 2,200 P9.00 P5.00 P3.00 P11.25

If X and Z are processed further, no disposal costs will be incurred or such costs will be borne y the buyer. Using a physical measure, what amount of joint processing cost is allocated to X and Z?

a. P2,500 and P5,500b. P3,243 and P5,500c. P2,500 and P4,757d. P3,243 and P4,757

9. Referring to number 8, using sales value at split-off, what is the total cost allocated to Z?

a. P5,500b. P12,100c. P11,357d. P4,757

10. Referring to number 8, if all units of product X were sold, what is the gross profit on sale of product X if the approximated net realizable value at split-off is used for allocating joint costs?

a. P8,450b. P5,071c. P6,954d. P9,750

11. Love Co. manufactures product A and B from a joint process. Sales value at split-off was P700,000 for 10,000 units of A and P300,000 for 15,000 units of B. Using the sales value at split-off approach, joint costs properly allocated to A were P140,000. Total joint costs were

a. P98,000b. P200,000c. P233,333d. P350,000

Ablen Corporation uses a process cost system and sells a variety of cooked meat. Four joint products produced out of the process are as follows:

Product Pounds ProducedClass A 1,000 Class B 9,000Class C 400Class D 5,100

The split-off point for these products occurs in Division B and the costs incurred up to this point are P20,000 for direct materials, P15,000 for direct labor, and P7,000 for factory overhead.

12. What are the joint cost allocated to Class A and Class B assuming the use of physical method for joint cost allocation.

a. P1,000 and P9,000b. P3,000 and P24,387c. P20,000 and P15,000d. P2,710 and P24,387

The Sunrise Corp. produces three production L, M and N from one input. The net realizable value of L at split-off is P100,000; M is P200,000; N is P20,000. Final sales value are P200,000, P300,000 and P20,000 for L, M and N respectively. However, these prices are subject to erratic change. Additional processing costs for L, M and N are P50,000, P75,000 and P 0 respectively. The numbers of units of each product are 60,000 of L, 60,000 for M and 30,000 of N. The total costs incurred up to the split-off are P150,000.

13. If the physical quantities method is used, what amount of joint costs should be allocated to product L? Assume that product N is accounted for as a by-product whose income is credited to the joint costs of production.

a. P46,875b. P50,000c. P62,500d. P65,000

14. The expected net income for the Sunrise Corp. isa. P200,000b. P225,000c. P245,000d. P370,000

Victoria Mills manufactures three products: A, B, and C in a joint process. For every ten kilos of materials input, the output is five kilos of A, three kilos of B, and two kilos of C, respectively. During the month, 50,000 kilos of raw materials costing P1,200,000 were process and completed with a joint conversion costs of P2,000,000. Conversion costs are

allocated to the products salable, further processing which does not require additional raw materials was done at the following costs:A, P300,000; B, P200,000; C, P300,000. The unit selling price are: A, P100; B, P120 and C, P150.

15. The unit cost of product A isa. P80b. P100c. P253.20d. P71.20

16. Assuming all units are sold, the gross margin on sale for product B isa. P800,000b. P720,000c. P600,000d. P480,000

17. If all units of Product C are sold, and selling and administrative expenses are 20% of sales, the net income from the sale of Product C is

a. P220,000b. P180,000c. P240,000d. P640,000

Tiny Co produces three products: Bo Mo and Lo from same process. Joint costs for this production run are P2,100.

Sales price Disposal cost Further Per lb at per lb at processing Final sales

Pounds Split off split off per lb. price per lbBo 800 P6.50 P3.00 P2.00 P7.50Mo 1,100 8.25 4.20 3.00 10.00Lo 1,500 8.00 4.00 3.50 10.50

If the products are process further, Tiny Co. will incur the following disposal costs upon sale: Bo, P3.00; Mo, P2.00 and Lo, P1.00.

18. Using sales value at split-off, what amount of joint processing cost is allocated to Mo?

a. P700b. P416c. P725d. P969

19. Using net realizable value at split –off, what amount of joint processing cost is allocated to Bo?

a. P706b. P951c. P700d. P444

20. Using physical measurement method, what amount of joint processing cost is allocated to Mo?

a. P494b. P679c. P927d. P700

Standard Costing

4. The following July information is for Kingston Company:Standard: Materials 3.0 feet per unit @ P4.20 per foot

Labor 2.5 hours per unit @ P7.50 per hourActual: Production 2,750 units produced during the month

Material 8,700 feet used, 9,000 feet purchased @ P4.50 per footLabor 7,000 direct labor hours @ P7.90 per hour

What is the material price variance (calculated at point of purchase)?a. P2,700 U c. P2,610 Fb. P3,105 F d. P1,890 U

5. Refer to number 1, what is the labor efficiency variance?a. P3,480 U c. P2,800 Fb. P938 U d. P1,125 U

3. The following March information is available for Batt Manufacturing Company when it produced

2,100 units:Standard: Materials 2 pounds per unit @ P5.80 per pound

Labor 3 direct labor hours per unit @ P10.00 per hourActual: Materials 4,250 pounds purchased and used @ P5.65 per pound

Labor 6,300 direct labor hours @ P9.75 per hour

What is the material quality variance?a. P275 F c. P290 Ub. PP637.50 U d. P630 F

4. Refer to number 3, what is the labor rate variance?a. P731.25 U c. P1,594 Ub. P1,575 F d. P750 F

5. Information on Kennedy Company’s direct material costs is as follows: Standard price 3.60;

Actual quantity purchased 1,600 units; standard quantity allowed for actual production, 1,450

units; material variance, P240 favorable. What was the actual purchase price per unit?a. P3.06 c. P3.45b. P3.11 d. P3.75

6. Lab Corp. uses a standard cost system. Direct labor information for product CER for the month of

October is as follows: standard rate P6.00 per hour; actual rate paid P6.10 per hour; standard

hours allowed for actual production, 1,500 hours; direct labor efficiency variance P600 unfavorable. What are the actual hours worked?

a. 1,400 c. 1,598b. 1,402 d. 1,600

7. Redd Co. uses a standard cost system for its production process and applies overhead based on direct labor hours. The following information is available for August when Redd made 4,500 units:

Standard: Direct labor hours per unit 2.5 hoursVariable overhead per direct labor hour P1.75Fixed overhead per direct labor hour 3.10Budgeted variable overhead 21,875Budgeted fixed overhead 38,750

Actual: Direct labor hours 10,000 hrs.Variable overhead P26,250Fixed overhead 38,000

Using the two-variance approach, what is the controllable variance?a. P5,812.50 U c. P3,625 Fb. P4,375 F d. P2,187.50 U

8. Refer to number 7, what is the volume variance?a. P3,125 F c. P2,937.50 Fb. P3,875 U d. P6,063 U

9. Actual fixed overhead is P33,300 (12,000 machine hours) and fixed overhead was estimated at

P34,000 when the predetermined rate of P3.00 per machine hour was set. If 11,500 standard

hours were allowed for actual production, applied fixed overhead isa. P33,300 c. P34,500b. P34,000 d. P36,000

10. One unit requires 2 direct labor hours to produce. Standard variable overhead per unit is P1.25

and standard fixed overhead per unit is P1.75. If 330 units were produced this month, what

total amount of overhead is applied to the units produced?a. P990 c. P660b. P1,980 d. undeterminable

Activity Based Costing

Olivia Enterprise is an exporter of souvenir items. The following overhead costs data have been accumulated:

Activity Center Cost Driver Amt. of Activity Center CostsMaterials handling Grams handled 100,000 grams P50,000Painting Units painted 50,000 units 200,000Assembly Labor hours 4,000 hours 120,000

Job 1234 contains3,000 units. It weighs 10,000 grams and uses 300 hours of labor. Prime costs incurred amounts to P180,000.

1. The overhead costs that should be assigned to Job 1234 isa. P14,000b. P26,000c. P12,000d. P9,000

2. The cost to produce a unit of Job 1234 isa. P64.67b. P68.67c. P64.00d. P60.00

Sekar Company manufactures two types of Electronic Toy,the Regular and SuperPro. The following data have been obtained:

Regular Super ProDirect material cost per unit P33 P38Direct labor cost per unit P32 P44Direct labor hours 12,000 3,000Machine hours 2,000 4,000Engineering hours 450 450Number of set ups 5 20Number of units 8,000 2,200

Currently, overhead costs are assigned to products on the basis of direct labor hours, but the company decided to adopt the ABC method of cost allocation. The overhead consist of the following items:

Overhead Cost Item Cost Driver AmountSetup costs No. of setups P250,000Engineering costs No. of engineering hours 180,000Machine costs No. of machine hours 900,000

3. Using direct labor hours to allocate overhead costs, the total cost of product Regular isa. P1,576,000b. P1,056,000c. P1,312,000d. P520,000

4. Using ABC, the total overhead costs assigned to product Super Pro isa. P1,576,000b. P1,402,000c. P890,000d. P1,056,000

5. Using ABC, the total manufacturing costs for product Regular isa. P1,576,000b. P1,402,000c. P520,000d. P960,000

6. Using ABC, the cost per unit of product SuperPro isa. P486.54b. P82.00c. P562.00d. P682.00

In manufacturing Roller blades, Super Store Company’s plant used 400 direct labor hours, 500 machine hours and 20 setups. The following overhead costs were taken from the factory accounts:

Overhead Expenses Volume of ActivitiesMachining center P120,000 20,000 machine hoursSetup center 40,000 100 setups

4,000 direct labor hoursThe plant was using a factory wide overhead rate based on direct labor hours. A new ABC system will use machine hours in the Machining Department and number of setups in the Setup Department as cost drivers.

7. The overhead costs assigned to roller blades using direct labor hours to allocate overhead cost isa. P160,000b. P16,000c. P12,000d. P120,000

8. Using ABC, the overhead costs assigned to roller blades isa. P160,000b. P16,000c. P12,000d. P11,000

The controller of D’Day Chemical Supply has established the following activity centers with overhead costs and related cost drivers:

Activity Centers Budgeted Overhead Costs

Cost Drivers Budgeted Level for Cost Drivers

Materials Handling P120,000 Weight of raw materials 60,000 poundsMachine setups 240,000 Number of setups 120 setupsHazardous waste 60,000 Weight of hazardous

Materials12,000 pounds

Quality Control 85,000 Number of inspections 1,000 inspectionsOthers 205,000 Machine Hours 102,500 hours

An order for 1,000 boxes of powdered chemicals has the following production requirements:

Raw materials (in pounds) 10,500Machine setups 5Hazardous materials (in pounds) 1,850Inspections 13Machine hours 490

9. Assume the company allocates overhead costs on a plant wide basis using machine hours, the plant wide overhead rate is

a. P1.45/mhrb. P6.93/mhrc. P2.00/mhrd. P2.50/mhr

10. The same assumption as in number 9, the overhead cost per box of powdered chemicals isa. P3.396b. P3,396c. P2.50d. P.98

11. Using ABC, the total overhead costs charged to the 1,000 boxes of powdered chemical isa. P120,000b. P205,000c. P42,335d. P3,396

12. The same assumption as in number 11, the overhead costs per unit of powdered chemical isa. P42,335b. P3,396c. P120d. P205e. P42.335

The Chromosome Manufacturing Company produces two products, X and Y. X is selling at P12.70 per unit while Y is selling at P12.50 per unit.The following data are obtained for the current period.

Product X Product Y

Number of units 11,000 3,000Direct material cost per unit P3.50 P3.00Direct labor hours 10,000 2,500Direct labor cost per unit P5.50 P4.00Machine hours 2,100 2,800Inspection hours 80 100Purchase orders 10 30

Overhead costs AmountInspection costs P16,200Purchasing costs 8,000Machine costs 49,000

13. Using direct labor hours to allocate overhead costs, the gross margin of product X isa. P17,860b. (P17,860)c. P32,500d. (P32,500)

14. Using ABC, the total manufacturing costs for product Y isa. P64,000b. P19,000c. P35,640d. P92,200

15. Using ABC, the total gross margin for the period is a. P185,700b. P267,200c. (P15,400)d. (P44,360)

Amend Instrument Inc. manufactures two product: missile instruments and pressure gauges. During January, 50 range instruments and 300 pressure gauges were produced, Direct cost of P54,000 and P85,000 are incurred for Instruments and Gauges, respectively and overhead costs of P81,000 were incurred. An analysis of overhead costs reveals the following activities:

Activity Cost Driver Total CostMaterial handling Number of requisitions P30,000Machine setups Number of setups P27,000Quality inspections Number of inspections P24,000

The cost driver volume for each product was as follows:

Cost Driver Instruments Gauges TotalNumber of requisitions 400 600 1,000Number of setups 150 300 450Number of inspections 200 400 600

16. The amount of overhead assigned to product Instruments isa. P27,000b. P30,000c. P40,500d. P29,000

17. The total manufacturing cost of product Instrument is a. P83,000b. P54,000c. P85,000d. P135,000

18. The cost per unit of product Gauge isa. P270b. P553c. P457d. P283