Student Forums CMA Part 1 Section D: Cost Management D.1. Measurement Concepts Question ID: CMA 1293 3.3 H2 (Topic: Byproducts)

Question ID: CMA 1293 3.3 H2 (Topic: Byproducts)

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  • #232127
    Wenyan Yuan
    Participant

    Hi, I would like to understand why no cost from the $93,000 is allocated to the by product. 

    I understand the difference between production vs sales method. We are using production method here where the cost for Morefeed is inventoried. My question is how do we know those inventory cost was already excluded from the $93K. 

    Thank you!

     

    Atlas Foods produces the following three supplemental food products simultaneously through a refining process costing $93,000.

    Alfa: 10,000 pounds of Alfa, a popular but relatively rare grain supplement having a caloric value of 4,400 calories per pound.
    Betters: 5,000 pounds of Betters, a flavoring material high in carbohydrates with a caloric value of 11,200 calories per pound.
    Morefeed: 1,000 pounds of Morefeed, used as a cattle feed supplement with a caloric value of 1,000 calories per pound.
    The joint products, Alfa and Betters, have a final selling price of $4 per pound and $10 per pound, respectively, after additional processing costs of $2 per pound of each product are incurred after the split-off point. Morefeed, a by-product, is sold at the split-off point for $3 per pound.

    Assuming Atlas Foods inventories Morefeed, the by-product, the joint cost to be allocated to Betters using the weighted-quantity method based on caloric value per pound is
    A. $39,208
    B. $39,600
    C. $50,400correct
    D. $40,920

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  • #232137
    Lynn Roden
    HOCK international

    Hello Wenyan Yuan,

    We know it because we calculate it.

    When the production method is being used, the “cost” amount to be inventoried for the byproduct is its sales value, not the amount of cost that would be allocated to it in an ordinary allocation. This question says that Morefeed, the byproduct, is sold for $3 per pound, and there are 1,000 pounds of it, so the sales value of the Morefeed is $3,000. Therefore, that amount comes off the top of the joint cost and gets allocated to the byproduct; and the remaining cost is then allocated to the two joint products.

    Here, the cost of the joint process is $93,000. We subtract the $3,000 ($3 x 1,000 pounds) from that before doing any other allocation, and we allocate it to Morefeed. Then we allocate the remaining $90,000 between Alfa and Betters.

    When it is done that way, the gross profit from selling the byproduct is zero. In effect, the sales revenue received from selling the byproduct is used to “reimburse” a portion of the joint costs ($3,000 of them), and the “unreimbursed” portion of the joint costs is split between the two main joint products.

    Lynn

    • This reply was modified 1 month, 4 weeks ago by Lynn Roden.
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