Joint Products and By-Products
Easy Practice Test
Cost Accounting
Easy Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. The purpose of allocating joint costs is to
a. determine a cost per unit produced to value inventory
b. determine the total cost of manufacturing
c. record added processing costs
d. determine the exact cost of each product
Answer
A. Joint costs are allocated to individual products to determine the cost of making one unit of product. Inventory is valued based on the cost of manufacturing one unit. The total cost of manufacturing can be determined without allocating joint costs (b.). Added processing costs occur separately from joint costs (c.). Allocating joint costs is an estimate and will not give an exact cost (d.)
2. Allocating joint costs is primarily used for
a. strategic management decision making
b. determining the cost of each product
c. controlling costs
d. evaluating each manager’s performance
Answer
B. Joint costs are allocated to individual products to determine the cost of making one unit of product. Once the cost is determined it can be used for decision making, however, this is not the primary purpose. The allocation is an estimate and is not used for controlling costs or evaluating managers performance.
3. Joint costs are allocated using all of the following methods except
a. average cost per unit
b. relative sales value
c. relative net realizable value
d. relative quantity produced
Answer
A. Average cost per unit is not an allocation method. This is a result of the allocation. All others listed are allocation methods.
4. When allocating joint costs based on a common quantity, all products will
a. be sold at split-off
b. have a sales price at least twice as great as cost
c. have no cost to sell at split-off
d. have the same cost per the common quantity
Answer
D. Allocating based on a common quantity begins with computing the average cost per common quantity. The cost per quantity is then multiplied by the quantity for each product to get the cost for each product. When using this method it does not matter whether products are sold at split-off or have costs to sell. Sales price is not relevant when allocating based on quantity.
5. The skin of a potato when producing potato chips is considered
a. waste, because the skin can not be sold
b. scrap, because the skin can not be sold
c. shrinkage
d. not part of the cost of the product
Answer
A. The skin is part of the total cost of the potato (raw material) and is a cost of the product. It is considered waste if it can not be sold. Scrap can be sold (b.). Shrinkage occurs through dehydration and can not be identified.
6. When producing wood to be used by homebuilders, the sawdust sold to hardware stores would be considered
a. waste, because the sawdust can be sold
b. by product, because the sawdust can be sold
c. scrap, because the sawdust can not be sold
d. none of the above
Answer
B. Sawdust that is sold is called a by product. Waste can not be sold (a.) Scrap can be sold (c.)
7. The point where products are identifiable as separate products is
a. the completion of production
b. any point after the split-off point
c. any point before the split-off point
d. the split-off point
Answer
D. This is the definition of the split-off point. This is not the completion of production if products are further processed after split-off.
8. Sales value method of allocation is computed by
a. final sales value x quantity of units sold
b. sale value at split-off x quantity of units sold
c. sales value at split-off less costs to sell x quantity of units
d. final sales value to customer less further processing costs x quantity of units
Answer
B. Total sales value is sales value at split-off x quantity of units sold for all products. (c.) is net realizable value. (d.) is approximate net realizable value if you also add less costs to sell/dispose. (a.) is not a common allocation method.
9. Net Realizable Value is computed by
a. final sales value x quantity of units
b. sale value at split-off less costs to sell x quantity of units sold
c. final sales value less costs to sell x quantity of units
d. final sales value to customer less further processing costs x quantity of units
Answer
B. Net realizable value for each product is the sales value at split-off less costs to sell or dispose x the quantity of units sold.
10. Approximate Net Realizable Value is
a. final sales value x quantity of units
b. sale value at split-off less costs to sell x quantity of units
c. final sales value less costs to sell x quantity of units
d. final sales value to customer less further processing costs – cost to sell x quantity of units
Answer
D. Allocating using approximate net realizable value is done using the formula in (d.). This gives an estimated net profit from selling the product without considering the joint costs.
11. The cost of direct materials, direct labor, and manufacturing overhead incurred to produce product A and product B is $30,000. The company then separately processes each product after split-off and sells them by the pound. Selling costs are incurred whether or not the products are further processed into a different product. Each product consists of 2 pounds of production.
| Pounds produced |
Sales price per unit at Split-off |
Selling cost per unit at split-off |
Further cost of processing |
Final sales price per unit |
|
| A | 2,700 | $5 | $1.50 | $1.75 | $10 |
| B | 8,400 | $10 | $0.50 | $3.50 | $16 |
Allocate joint costs to product A and product B using
A. pounds produced
B. sales value at split-off
C. net realizable value
D. estimated net realizable value
Determine which product has a total lower processing cost per unit.
Answer
A. Pounds produced:
| % of total Joint Costs / units = Joint cost per unit Product A 2,700 = .243 x 30,000 = 7,290 / 1,350 = $5.40 Product B 8,400 = .757 x 30,000 = 22,710 / 4,200 = $5.41 Total 11,100 |
It takes 2 pounds to make a unit.
Units = pounds / 2
B. Sales Value at Split-off
Pounds produced is divided by 2 to get total units for each product.
Units x Price = Total sales value % total x Joint Costs = Allocated / Units
| Product A 1,350 x 5 = 6,750 .138 x 30,000 = 4,140 / 1,350 = $3.07 Product B 4,200 x 10 = 42,000 .862 x 30,000 = 25,860 / 4,200 = $6.16 Total 48,750 |
C. Net Realizable Value
Units x (sales price – cost to sell) = NRV get % x Joint costs = allocated / units
| A 1,350 x ($5 – $1.50) = 4,725 .106 x 30,000 = 3,180 / 1,350 = $2.36 B 4,200 x ($10 – $0.50) = 39,900 .894 x 30,000 = 26,820 / 4,200 = $6.39 Total 44,625 |
D. Approximate Net Realizable Value
Units x (final sales price – selling costs – further processing costs) = Appr. NRV
| A 1,350 x ($10 – $1.50 – $1.75) = 9,113 .153 x 30,000 = 4,590 / 1,350 = $3.40 B 4,200 x ($16 – $0.50 – $3.50) = 50,400 .847 x 30,000 = 25,410 / 4,200 = $3.67 Total 59,513 |
In all cases, product A has a lower cost per unit that product B.
Add the joint cost per unit to the further processing cost to get total cost.
Joint costs are higher for product B
Further processing costs are also higher for product B.
Notice that the total cost per unit varies significantly based on the method of allocation.
A. Allocate joint costs using
1. units produced
2. sales value at split-off
3. net realizable value
4. estimated net realizable value
B. Make all required journal entries to record manufacturing costs using the net realizable value method for allocating joint costs.
Answer
1. Units produced:
% of Total x Joint Costs = Cost allocated to product
| Product A 1,500 = .75 x 10,000 = 7,500 Product B 500 = .25 x 10,000 = 2,500 Total 2,000 |
2. Sales Value at Split-off
Units x Split-off Price = Total sales % total x Joint Costs = Allocated
| Product A 1,500 x 5 = 7,500 .714 x 10,000 = 7,140 Product B 500 x 6 = 3,000 .286 x 10,000 = 2,860 Total 10,500 |
3. Net Realizable Value
Units x (sales price split-off – cost to sell/dispose) = NRV % x Joint costs
| A 1,500 x ($5 – $0.25) = 7,125 .718 x 10,000 = 7,180 B 500 x ($6 – $0.40) = 2,800 .282 x 10,000 = 2,820 Total 9,925 |
4. Approximate Net Realizable Value
Units x (final sales price – selling costs – further processing costs) = Appr. NRV
| A 1,500 x ($10 – $0.25 – $1) = 13,125 .743 x 10,000 = 7,430 B 500 x ($10 – $0.40 – $0.50) = 4,550 .257 x 10,000 = 2,570 Total 17,675 |
B. Make required journal entries using the net realizable value method:
Work in Process – Joint Costs 10,000
Cash, wages payable, etc. 10,000
Work in Process – A 7,180
Work in Process – B 2,820
Work in Process – Joint Costs 10,000
Work in Process – A 1,500
Work in Process – B 250
Cash, wages payable, etc. 1,750
Finished Goods 11,750
Work in Process – A 8,680
Work in Process – B 3,070
A. Make the journal entries to account for scrap given the company uses the indirect method / net realizable value approach for accounting for scrap.
B. Make the journal entry to account for scrap given the company uses the direct method/ net realizable value approach for accounting for scrap.
C. Make the journal entry to account for scrap given the company uses the realized value approach to accounting for scrap.
Answer
A. Indirect / Net Realizable Value Approach:
Additional Processing Costs ($2.90 x 8,600)
WIP 24,940
Cash 24,940
Net proceeds received ($3.75 – $2.90 x 8,600)
WIP 7,310
CGS 7,310
Move Costs to FG (24,940 + 7,310)
Scrap 32,250
WIP 32,250
Record the sale ($3.75 x 8,600)
Cash 32,250
Scrap 32,250
Net result:
WIP = 0
CGS is reduced by the net realized from sale
B. Direct / net realizable value approach:
Cash 7,310
WIP 7,310
* Some textbooks credit CGS instead of WIP
C. Realized Value
WIP ** 24,940
Cash 24,940
Cash 32,250
Other Revenues 32,250
** Some textbooks debit CGS or Other revenues instead of WIP