Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 54

Estimated Net Realizable Value and Effects of Processing Further

Fletcher Fabrication, Inc., produces three products by a joint production process. Raw materials are put into production in Department X, and at the end of processing in this department, three products appear. Product A is sold at the split-off point with no further processing. Products B and C require further processing before they are sold. Product B is processed in Department Y, and product C is processed in Department Z. The company uses the estimated net realizable value method of allocating joint production costs. Following is a summary of costs and other data for the quarter ended June 30.

No inventories were on hand at the beginning of the quarter. No raw material was on hand at June 30. All units on hand at the end of the quarter were fully complete as to processing.

Products	A	B	C
Pounds sold	20,000	59,000	70,000
Pounds on hand at June 30	50,000	-0-	40,000
Sales revenues	$45,000	$265,500	$367,500

Departments	X	Y	Z
Raw material cost	$168,000	$ -0-	$ -0-
Direct labor cost	72,000	121,350	287,625
Manufacturing overhead	30,000	31,650	109,875

Required

a. Determine the following amounts for each product: (1) estimated net realizable value used for allocating joint costs, (2) joint costs allocated to each of the three products, (3) cost of goods sold, and (4) finished goods inventory costs, June 30.

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b. Assume that the entire output of product A could be processed further at an additional cost of $6.00 per pound and then sold for $12.90 per pound. What would have been the effect on operating profits if all of product A output for the quarter had been further processed and then sold rather than being sold at the split-off point?

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c. Write a memo to management indicating whether the company should process product A further and why.

Step 1 of 5

a.

?		Departments
	Production Costs	X		Y		Z
	Raw materials?	$168,000		—		—
	Direct labor?	72,000		$121,350		$  287,625
	Manufacturing overhead?	30,000		31,650		109,875
	Total?	$270,000		$153,000		$397,500

?A diagram of the problem follows:

*$2.25 = $45,000 ÷ 20,000 lbs; $4.50 = $265,500 ÷ 59,000 lbs;

$5.25 = $367,500 ÷ 70,000 lbs.

		Product A		Product B		Product C		Total
1.	Selling price per pound:
	?X: $45,000 ¸ 20,000?	$2.25
	?Z: $367,500 ¸ 70,000?					$5.25
	Multiply by pounds produced:
	?A: 20,000 + 50,000?	x 70,000
	?C: 70,000 + 40,000?	??		??		x 110,000
	Gross sales values?	$157,500		$265,500a		$577,500b
	Less costs of separate processing:
	?A: —?	—		—		—
	?B: $121,350 + $31,650?	—		153,000		—
	?C: $287,625 + $109,875?	—		—		397,500
	Estimated net realizable values at split-off point?	$157,500		$ 112,500		$180,000		$450,000
	Percentage of total?	35%		25%		40%		100%

a Given

b Or: $367,500

x

(110,000 ÷ 70,000)

=

$577,500