## Practice As You Learn

### Cost Accounting

#### Medium Practice Test

Know how to:

1) Allocate joint costs using 4 different methods
2) Record the cost of joint products
3) Record the cost of scrap using various methods

Memorize the formulas for each method:

1. Physical quantity:
Units of physical measurement x Quantity for each

2. Sales value at split-off:
Units sold x Sales price at split off

3. Net Realizable Value
Units sold x Sales price at split off – cost to sell/dispose

4. Approximate Net Realizable Value
Units sold x (Final sales price – further processing costs – costs to sell/dispose)

Reduce the amount of total joint costs by any net realized from the sale of scrap/by products before allocating.

Allocate:

1) Work the formula for each joint product

2) Total amounts computed for all joint products

3) Compute the % of total for each joint product.

4) Multiply the % x total joint costs to be allocated to get the amount of joint costs allocated to each joint product

Journal entries:

Debit Work in Process to add allocated costs

The joint process and each product identified at split-off have a separate “Work in Process” account

Specify the product “Work in Process” account

The objective for recording scrap for each method.

Indirect, net realizable value:
Reduce cost of goods sold for the net received after the product is sold

Direct, net realizable value:
Decrease work in process for the net received after the product is sold

Realized value approach:
Reduce cost of production or increase other income (if not usually sold) for net received

Practice Problem 1: Allocating Joint Costs

A company uses a joint process to manufacture quarts of oil. Product A is sold in 2- quart bottles and product B is sold in 4-quart bottles. Joint Processing Costs are \$170,000.

 Units Produced Sales Price per unit at Split-off Selling/Disp. cost per unit at split-off Further cost of processing Final Sales price per unit A 2,000 \$13 \$0.25 \$2 \$20 B 6,000 \$30 \$2.50 \$3 \$40

Allocate joint costs and determine the cost per unit for product A and product B using

A. quarts produced
B. sales value at split-off
C. net realizable value
D. estimated net realizable value

A. Quarts produced:

 % of total Joint Costs Product   A 2,000 x 2   =   4,000 .143 x 170,000 = 24,310 Product   B 6,000 x 4   =   24,000 .857 x 170,000 = 145,690 Total 28,000

Joint Cost / Units = Cost per Unit + added costs = final cost

 A 24,310 / 2,000     = 12.16 + 2 = \$14.16 B 145,690 / 6,000   = 24.28 + 3 = \$27.28

B. Sales Value at Split-off

 % total x Joint Costs                           Units x Price = Total sales value Product A        2,000 x 13 =        26,000       .126        x       170,000 =   21,420 Product B        6,000 x 30 =      180,000       .874        x        170,000 =   148,580        Total                                     206,000

Joint Cost / Units = Cost per Unit + added costs = final cost

 A        21,420 / 2,000    =        10.71        + 2        = \$12.71 B        148,580 / 6,000  =        24.76        + 3        = \$27.76

C. Net Realizable Value

Units x (sales price – cost to sell/dispose) = NRV get % x Joint costs

 A        2,000 x (\$13 – \$0.25) =     25,500          .134     x     170,000    =      22,780 B       6,000 x (\$30 – \$2.50)  =     165,000        .866     x     170,000     =   147,220               Total                               190,500

Joint Cost / Units = Cost per Unit + added costs = final cost

 A         22,780 / 2,000    =     11.39         +        2     = \$13.39 B         147,220 / 6,000  =    24.54         +        3    = \$27.54

D. Approximate Net Realizable Value

Units x (final sales price – selling costs – further processing costs) = Appr. NRV

 A         2,000 x (\$20 – \$0.25 – \$2)   =   35,500    .146  x     170,000  =     24,820 B         6,000 x (\$40 – \$2.50 – \$3)   = 207,000    .854  x     170,000  =  145,180               Total                                      242,500

Joint Cost / Units = Cost per Unit + added costs = final cost

 24,820  / 2,000   =         12.41   +    2        = \$  14.41 145,180  / 6,000    =         24.20   +    3         = \$27.20

Practice Problem 2: Recording Joint Cost Allocation

Make the journal entries necessary to record joint costs using the allocation done in practice problem 1 using the net realizable value basis (C).

Record all product costs incurred in the joint process to Work in Process.
The breakdown of joint costs is unknown.
Joint costs are allocated and recorded as a credit to each product.

 Work in Process – Joint                      170,000              Raw materials, Cash, etc.                 170,000

Move the joint costs to each product using your allocation.

 Work in Process – A                           22,780 Work in Process – B                         147,220             Work in Process – Joint                   170,000

Add separate processing costs to each product (units x cost per unit)

 Work in Process – A                           4,000 Work in Process – B                         18,000             Raw Materials, cash, etc.                  22,000

Move the cost of completed units to finished goods (Total amount in each WIP)

 Finished Goods – A                         26,720 Finished Goods – B                       165,220             Work in Process – A                     26,780            Work in Process – B                  165,220

Costs to sell/dispose are period costs that are recorded as selling expense when the product is sold.

Practice Problem 3: Recording Scrap Sales

The following information is available relative to scrap:

 Selling price of scrap plastic: \$0.30 per pound Additional processing costs to make the scrap plastic sellable: \$0.08 per pound Scrap plastic sales: 10,000 pounds

A. Make the journal entries to account for scrap given the company uses the indirect method / net realizable value approach

B. Make the journal entry to account for scrap given the company uses the direct method/ net realizable value approach

C. Make the journal entry to account for scrap given the company uses realized value approach

A. Indirect / net realizable value approach:

WIP                    800
Cash                   800

(10,000 x .08)

WIP                   2,200
CGS                   2,200

10,000 x (0.30 – 0.08)

Move costs to saleable product (total in WIP)
Scrap / By Product  3,000
WIP                           3,000

Record the sale
Cash                            3,000
Scrap/By Prod           3,000

(10,000 x \$0.30)

Net result:
WIP = 0
CGS is reduced by the net realized from sale

B. Direct / net realizable value approach:

Cash              2,200
WIP (or CGS)       2,200

C. Realized Value

WIP (or CGS)            800
Cash                          800

Cash                             3,000
Other Revenues         3,000