Joint Products and By-Products
Medium Practice Test
Cost Accounting
Medium Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. When allocating costs to joint products using relative sales value at split off the further processing costs after split-off are
a. ignored for purposes of allocating the joint costs
b. deducted from the relative sales value for each product
c. deducted from the joint cost allocated to each product
d. added to the relative sales value at split off
Answer
A. Further processing costs are never used to allocate joint costs.
2. Incremental revenues and incremental costs are considered when using which method to allocate joint costs?
a. relative sales value
b. quantity
c. net realizable value
d. approximate net realizable value
Answer
D. Approximate net realizable value considers that the final sale price will be higher (incremental revenue) and further processing costs will be added (incremental costs) along with costs to dispose in determining allocation % to each product. Quantity does not consider revenue at all (b.) Relative sales value and net realizable value uses sales a split-off and does not consider further processing after split-off.
3. The method used to record by products where no value is assigned to the by product until it is sold is
a. net realizable value at split off
b. approximate net realizable value
c. other revenue method
d. realized value
Answer
D. Realized value records value only after the scrap/by product is sold. The cost of further processing is recorded to work in process which is not recorded as an expense until sold. Net realizable value at split-off (a.) and approximate net realizable value (b.) are joint cost allocation methods. Joint costs are not allocated to scrap or by products. The “other revenue” method is not a method used to record scrap or by products.
4. The net realizable value direct approach to accounting for scrap records the sales value of scrap as
a. a cost that is ignored
b. an increase directly to cost of goods sold for the total cost
c. an increase in joint processing costs
d. a decrease in joint processing costs
Answer
D. This method directly decreases joint processing costs for the value of scrap or by product sales.
5. A company produces 3 products that can not be sold at split-off and must be processed further. Quantity of physical measurement does not give a good representation of costs incurred. The method that should be used is
a. relative sales value
b. physical measurement
c. net realizable value
d. approximate net realizable value
Answer
D. Approximate net realizable value is the method that must be used when all products can not be sold at split-off. Quantity of physical measurement can be used in any situation; however, it should not be used if it is recognized that it will not give a fair allocation.
6. When products share a common manufacturing process joint costs should be allocated to the products in the way that
a. computes the actual cost of specifically producing the products
b. assigns a cost to each product on a proportionate basis
c. maximizes total company profit
d. minimizes total company costs
Answer
B. Each product should get a proportionate share of costs based on some appropriate allocation method. Total company costs and profits will be the same regardless of how these costs are allocated. The allocation is always an estimate and never actual.
7. Management relies on the allocation of joint costs primarily to
a. determine sales commission for each product
b. evaluate management performance
c. determine inventory cost for accounting purposes
d. determine whether to further process a product
Answer
C. Allocating joint costs must be done to determine the total cost to produce one unit of product. Inventory is valued using a cost per unit. Incremental revenues is compared to incremental costs to determine if further processing should occur (d.).
8. Joint costs are most often allocated based on
a. total company profits
b. total material costs
c. total sales value
d. total processing costs
Answer
C. 3 of the 4 most common allocation methods use sales value.
9. Costs incurred after the joint manufacturing process are referred to as
a. further processing costs
b. separate costs
c. direct costs
d. all of the above
Answer
D. All terms listed mean costs incurred after joint processing that can be directly tracked to one product type.
10. Joint products should be process further when
a. separate costs are less than the final sales price
b. separate costs are less than incremental revenues
c. incremental revenues are less than further processing costs
d. all of the above
Answer
B. Further processing should occur when incremental revenues are more than incremental costs. Profit will be increased if further processed. Separate cost means the same thing as incremental costs.
11. A company produces 3 products from the same process with the following information.
| Product 1 | Product 2 | Product 3 | |
| Units produced: | 2,000 | 3,000 | 5,000 |
| Pounds per unit | 5 | 4 | 3 |
| Selling costs | $0.25 | $0.25 | $0.50 |
| Final Sales price | $1.00 | $14.00 | $12.00 |
| Further processing costs | $0.40 | $3.00 | $1.00 |
| Sales price at split-off | $1.00 | $8.00 | $8.00 |
To manufacture the joint products the company incurs $20,000 for direct materials, $40,000 for direct labor, $15,000 for manufacturing overhead. In addition, the company incurs $50,000 selling and administrative costs each month. Product 1 is considered a by product. The direct net realizable approach is used to record scrap and by products.
A. Allocate joint costs and determine the cost per pound for products 1, 2 and 3 based on
1. net realizable value
2. approximated net realizable value
3. sales value at split-off
4. pounds produced
B. Determine the gross profit from selling product 3 given the net realizable value method of allocating joint costs is used given 4,500 units were sold.
Answer
Subtract the NRV of the by product from the joint costs before to determine the joint cost that is allocated.
| Sales price | $1.00 |
| – further processing costs | $0.40 |
| – selling/disposal costs | $0.25 |
| = net realizable value | $0.35 |
| x units sold | 2,000 |
| = net realizable value | $700 |
| Total Joint Costs $75,000 less NRV By Product ($700) Joint Costs to Allocate $74,300 |
Total joint costs are product costs only
Allocate product costs only to products 2 and 3.
The first one has a very low NRV and is a byproduct.
1. Net Realizable Value
Units x (sales price at split-off – cost to sell) = NRV % x Joint costs = allocated
| 2 3,000 x ($8 – $0.25) = 23,250 .383 x 74,300 = 28,457 3 5,000 x ($8 – $0.50) = 37,500 .617 x 74,300 = 45,843 Total 60,750 |
2. Approximate Net Realizable Value
Units x (final sales price – selling costs – further processing costs) = Appr. NRV
| 2 3,000 x ($14 – $0.25 – $3) = 32,250 .381 x 74,300 = 28,308 3 5,000 x ($12 – $0.50 – $1) = 52,500 .619 x 74,300 = 45,992 Total 84,750 |
3. Sales Value at Split-off
Units x Split-off Price = Total sales % total x Joint Costs = Allocated
| 2 3,000 x 8 = 24,000 .375 x 74,300 = 27,863 3 5,000 x 8 = 40,000 .625 x 74,300 = 46,438 Total 64,000 |
4. Pounds produced
Units x Pounds = Total pounds % total x Joint Costs = Allocated
| 2 3,000 x 4 = 12,000 .444 x 74,300 = 32,989 3 5,000 x 3 = 15,000 .556 x 74,300 = 41,311 Total 27,000 |
B. Determine gross profit for product 3 given 4,500 units are sold.
Determine the cost per unit for product 3
| Allocated cost | 45,843 |
| Added processing cost | 5,000 |
| Total cost | 50,843 |
| / units produced | 5,000 |
| = cost per unit | $10.17 |
| x units sold | 4,500 |
| = cost of goods sold | 45,765 |
| Total sales – product 3 | 54,000 |
| Cost of Goods Sold – product 3 | 45,765 |
| Gross Profit – product 3 | 8,235 |
Selling costs are period costs and not part of cost of goods sold
Answer
Add Joint Costs:
WIP: Joint Costs 75,000
Cash, wages pay, etc. 75,000
Allocate Joint costs:
WIP: 1 By Product 700
WIP: 2 32,989
WIP: 3 41,311
WIP: Joint Costs 75,000
Added Processing Costs
WIP: 2 9,000
WIP: 3 5,000
Cash, wages pay, etc. 14,000
A. Indirect, net realizable value
B. Direct, net realizable value
C. Realized value given the by product is routinely sold
Answer
| Sales price | $1.00 x 2,000 = $2,000 |
| – added processing costs | $0.40 |
| – selling/disposal costs | $0.25 |
| = net realizable value | $0.35 x 2,000 = $700 |
A. Indirect / net realizable value approach:
Additional Processing Costs ($0.40 + $0.25 x 2,000)
WIP 1,300
Cash 1,300
Net proceeds received ($1 – $0.65 x 2,000)
WIP 700
CGS 700
Move Costs in WIP to FG
By Product 2,000
WIP 2,000
Record the sale ($3.75 x 8,600)
Cash 2,000
By Product 2,000
Net result:
WIP = 0
CGS is reduced by the net realized from sale
B. Direct / net realizable value approach:
Cash 700
WIP* 700
* Some textbooks record a credit to CGS instead of WIP
C. Realized Value
WIP** 1,300
Cash 1,300
Cash 2,000
Other Revenues 2,000
** Some textbooks debit CGS or Other Revenue instead of WIP