Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 40

Joint Products Alderon Industries manufactures chemicals for various purposes. One process that Alderon uses produces SPL-3, a chemical used in swimming pools; PST-4, a chemical used in pes­ticides; and RJ-5, a by-product sold to fertilizer manufacturers. Alderon uses the net realizable value of its main products to allocate joint production costs and the first-in, first-out inventory method to value the main products. The by-product is inventoried at its net realizable value, which is used to reduce the joint production costs before they are allocated to the main products. The ratio of output to input of direct material used in the joint process remains consistent from month to month.

?Data regarding Alderon’s operations for the month of November follow. During this month, Alderon incurred joint production costs of $1,702,000 in the manufacture of SPL-3, PST-4, and RJ-5.

	SPL-3	PST-	RJ-5
Finished goods inventory in gallons  November 1	18,000	52,000	3,000
November sales in gallons	650,000	325,000	150,000
November production in gallons	700,000	350,000	170,000
Sales value per gallon at split-off	—	$3.80	$0.70*
Additional process costs	$874,000	$816,000	—
Final sales value per gallon	$4.00	$6.00	—

Required

*Selling costs of 10 cents per gallon are incurred to sell the by-product.

1. Determine Alderon Industrie’s allocation of joint production costs for the month of November. Be sure to present appropriate supporting calculations.

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2. Determine the dollar values of the finished goods inventories for SPL-3, PST-4, and RJ-5 as of November 30.

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3. Alderon has an opportunity to sell PST-4 at the split-off point for $3.80 per gallon. Prepare an analysis showing whether Alderon should sell PST-4 at the split-off point or process further.

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4. As a production supervisor for Alderon, you have learned that small quantities of the critical chemical compound in PST-4 might be present in SPL-3. What should you do?

Step 1 of 8

Joint product costing:

Joint product is a result of a single input or single set of inputs processed in a single production process. The multiple products have substantial commercial value in comparison to each other. In joint product costing the cost is to be identified up to split-off point and it should designate a proper method for allocating such cost among 2 or more products. Further, if a specific cost is associated with a particular product it should be allocated to such product only.