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

Exercise 58

Effect of By-Product versus Joint Cost Accounting

Black Corporation processes xyrex into three outputs: Xy-1, Xy-2, and Xy-3. Xy-1 accounts for 60 percent of the net realizable value at the split-off point, Xy-2 accounts for 30 percent, and Xy-3 accounts for the balance. The joint costs total $365,500. If Xy-3 is accounted for as a by-product, its $37,600 net realizable value at split-off is credited to the joint manufacturing costs using method 1 described in the text, which credits the by-product’s net realizable value as a reduction in the joint costs.

Required

a.What are the allocated joint costs for the three outputs

(1) If Xy-3 is accounted for as a joint product?

(2) If Xy-3 is accounted for as a by-product?

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b.Management does not understand why joint costs are allocated to Xy-3 differently when it is accounted for as a by-product. Write a brief memo explaining why this occurs.

Step 1 of 3

a.?(1)?Accounted for as a joint product.

??Allocation:

Xy-1:		60%	x	$365,500	=	$219,300
Xy-2:		30%	x	$365,500	=	$109,650
Xy-3:		10%	x	$365,500	=	$?36,550