Answer:
Joint cost
Joint costs are manufacturing costs incurred by the company where one single process leads to multiple products being manufactured. In this case since the product manufactured are more than one then the cost incurred in this process are known as joint costs and these costs are allocated to each of the product based on common allocation base.Formula to calculate allocation of joint cost allocation
Sales value at split-off method for allocation joint costs
Under this method the joint costs incurred during the production at allocated based on the sales value of each of the product when the products split after the production process is complete.Net realisable value method
Under this method the joint costs incurred during the production would be allocated to each of the product based on the final sales price of the product in case they are processed further less any costs incurred in selling the product. This method is known as net realisable value method as cost allocated based on net realizable value of each of the products. Net realizable value is the sales value of the product less cost incurred in selling the product.
Physical measure method
Under this method the joint costs is allocated based on the quantity of units produced for each of the product at the split off point.
a.Calculate the products which should be processed further and which should not be processed further as shown below
Thus, company should not further process product
and
as the revenue after processing is lower than under intermediate sales. All the other products can be processed further.
Following shows the working
b.
The net cash flow after processing costs is positive
and thus company should process the trees.
Following shows the working
c.Company can process the product until the costs of further processing exceeds $914. If the costs are below $914 then further processing is recommended.d.1.
Calculate profit per ton by allocating joint costs using tons of products produced as shown below
Following shows the working
2.
Calculate profit per ton by allocating joint costs using net realizable value as shown below
Following shows the working
e.The decision in part (a) would not change as the total net cash flow would remain same for company.
f.The allocation of joint costs would not impact decision made in (a) and (b). This is because this cause would incur even if one of the product is further processed and thus cause cash outflow.
Answer:
Overhead cost allocation
Overhead cost allocation is the process to share the cost of particular service between each department or job based on certain allocation base or criteria which is common to the services for which cost is incurred. This helps to divide the cost evenly between the departments and get a correct picture of the performance of each department. The indirect costs are not directly related to production and are known as overhead which could be administrative overhead or selling overhead. They could be fixed overhead or variable overhead. Company should proper allocation base to divide each cost.
Step down method
Step method is one of the method to allocate service department cost to the other department. In this method, the service cost of one department is allocated to another service department and other operating department in a sequential form. The allocation process begins with service department with having largest number of services provided to other service department or is based on the largest percentage of its own costs used by other service department.
a.In the given case we are first allocating water to service department and profit centers based on the gallons of water as allocation base.Step 1: We will begin with cost allocation of service department A
Step 2: The next allocation will be of cost allocation of service department B
Step 3: The last allocation will be of cost allocation of service department C
Formula to calculate percentage base to other departments
Allocate the service department costs to operating department as shown below
Following shows the working
b.In order to accurately allocate the opportunity cost of resources the allocation should begin with service department which provides largest number of services provided to other service department or is based on the largest percentage of its own costs used by other service department.
In this case therefore allocation should begin with A which provides highest service to other department which would be followed by allocation of department C and b.
Answer:
Process costing:
Process costing is a technique of costing in which the costs are directly traced to the manufacturing processes. Under this an average cost is calculated by allocating the total costs to the total production and then these average costs are assigned to individual units.
a.Compute the allocated joint costs per stones as shown in the table:
Allocated joint cost is calculated by dividing the allocated costs with the number of stones.
The allocated costs is computed by allocating the total costs of production on the percentage daily production which is percentage of the number of stones produced in each batch.
The result of the above table is as follows:
b.Compute the allocated joint costs per stone (before taxes) using Net realizable costs as shown below:
The net realizable costs of the stone is computed by deducting the selling price minus the additional costs of the packaging. The net realizable value is computed by multiplying the number of stones with the net realizable after costs.
The cost is allocated on the percentage of net realizable value and then the allocated joint costs is apportioned on the number of stones.
The result of the above tables is as follows:
c.The Net realizable value (NRV) is better method for allocation of the joint costs but don't look on the bigger perspective of allocation, when the company has to pay taxes also NRV method is better according to the decision making point of view.
The management may also like NRV as this don't distort the profitability of the product. This also don't consider the tax effects on the alternative cost allocations. The NRV method will result in larger tax than the number of stones method.Each stones or product of the entity is to be sold to different countries which will have different tax laws and NRV method become difficult to apply. So the allocation of stones is better in case where company want to do tax savings and NRV is better when the company requires the smooth decision making process.