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

Exercise 46

Joint Products and By-Products

Princess Corporation grows, processes, packages, and sells three apple products: slices that are used in frozen pies, applesauce, and apple juice. The outside skin of the apple, which is removed in the cutting department and processed as animal feed, is treated as a by­product. Princess uses the net realizable value method to assign costs of the joint process to its main products. The apple skin by-product net realizable value is used to reduce the joint production costs prior to allocation to the main products. Details of Princess’ production process follow:

• The cutting department washes the apples and removes the outside skin. The department then cores and trims the apples for slicing. At this point, each of the three main products and the by-product are recognizable. Each product is then transferred to the next department for final processing.

• The slicing department receives the trimmed apples and slices and freezes them. Any juice generated during the slicing operation is frozen with the slices.

• The crushing department trims pieces of apple and processes them into applesauce. The juice generated during this operation is used in the applesauce.

• The juicing department pulverizes the core and any surplus apple from the cutting department into a liquid. This department experiences a loss equal to 8 percent of the weight of the good output produced.

• The feed department chops the outside skin into animal food and packages it. A total of 270,000 pounds of apples entered the cutting department during November. The following information shows the costs incurred in each department, the proportion by weight (based on pounds) trans­ferred to the four final processing departments, and the selling price of each end product. Assume no beginning or ending inventory of apple slices, applesauce, or juice.

Department	Costs Incurred	Proportion of Product by Weight Transferred to Departments	Selling Price per Pound of Final Product
Cutting	$60,000	—	—
Slicing	11,280	33%	$.80
Crushing	8,550	30	.55
Juicing	3,000	27	.40
Feed	700	10	.10
Total	$83,530	100%

Required

1. Princess Corporation uses the net realizable value method to determine inventory values for its main products and by-products. For the month of November, calculate each of the following:

?a. Output in pounds for apple slices, applesauce, apple juice, and animal feed.

?b. Net realizable value at the split-off point for each of the three main products.

?c. Cutting department cost assigned to each of the three main products and to the by-product in accord­ance with corporate policy.

?d. Gross margin in dollars for each of the three main products.

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2. Comment on the significance to management of the gross margin dollar information by main product for planning and control purposes as opposed to inventory valuation.

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3. List the important issues that Princess faces as a global company. What are its critical success factors? Which key issues arise because Princess operates in several countries? Should any of these issues affect the way Princess allocates costs, as determined in requirement 1?

Step 1 of 3

1.?a.

Product	Input	Proportion	Total Lbs	Lbs Lost	Net Lbs
Slices	270,000	.33	89,100	0	89,100
Sauce	270,000	.30	81,000	0	81,000
Juice	270,000	.27	72,900	5,400	67,500
Feed	270,000	.10	27,000	0	27,000
Total		1.00	270,000	5,400	264,600

Note:  Loss of 8% of good output; 72,900/(1.08) = 67,500;

                     loss = 72,900 – 67,500 = 5,400 lbs

??       (67,500 x .08 = 5,400 lbs)

1.?b,c,d
Basic Information					By-Product
	Slices	Sauce	Juice	Total	Feed
Sales, Units	89,100	81,000	67,500	237,600	27,000
Price	$      0.80	$     0.55	$         0.40		.10
Separable Proc. Cost	11,280	8,550	3,000	22,830	700
Units Produced	89,100	81,000	67,500	237,600	27,000
Sales Value of Prod.	71,280	44,550	27,000	142,830	2,700
Total Joint Cost before by-product			$    60,000
By-product NRV			$      2,000	=$2,700-700	?
Joint Cost to Allocate to Main Products			$    58,000
Cost Allocation and Gross Margin Analysis
	Slices	Sauce	Juice	Total
Sales Value of Prod.	$   71,280	$  44,550	$  27,000	$  142,830
Less: Separable Costs	11,280	8,550	3,000	22,830
Net Realizable Value	60,000	36,000	24,000	120,000
% of Total NRV	50.00%	30.00%	20.00%	100.00%
Allocated Joint Cost	29,000	17,400	11,600	58,000
Gross Margin	$     31,000	$ 18,600	$  12,400	$   62,000