Assume Q is a by-product and Moody uses the cost reduction method of accounting for by-product cost.If estimated net realizable value is used,how much of the joint costs would be allocated to product R?
A)$38,889
B)$43,750
C)$50,000
D)$62,500

Question

Quizplus · Accepted Answer

If Moody uses the cost reduction method of accounting for by-product cost, then the joint costs would be allocated based on the relative sales value at the split-off point. 
Assuming Q is the by-product, the joint costs would be allocated between R and Q based on their relative sales values. 
If the estimated net realizable value is used, then the amount of joint costs allocated to R would be:

Joint costs allocated to R = Total joint costs x (Estimated net realizable value of R / Estimated net realizable value of R + Q)

= $350,000 x ($700,000 / $700,000 + $300,000)

= $350,000 x 0.7

= $245,000

Therefore, the amount of joint costs allocated to R is $245,000. But since the question is asking for only the amount allocated to R, we need to subtract the estimated net realizable value of Q from this amount:

Joint costs allocated to R (after deducting value of by-product Q) = $245,000 - $201,250 (i.e. estimated net realizable value of Q = $300,000 x 0.67)

= $43,750

Hence, the answer is B.

Assume Q Is a By-Product and Moody Uses the Cost