Question : 81) Green Paper Company processes wood pulp into two products. During : 1196102

 

81)

Green Paper Company processes wood pulp into two products. During January the joint costs of processing were $144,000. Production and sales value information for the month were as follows:

 

Sales Value at

Product     Kilograms Produced   Split off Point    Separable Costs

Paper130,000$80,000$224,000

Cardboard108,000

70,000

264,000

 

Paper sells for $2.75 a kilogram and cardboard sells for $3.50 a kilogram.

 

There were no beginning inventories for April but ending inventories totalled 10,000 kilograms for paper and 12,000 kilograms for cardboard.

 

Required:

 

Prepare a product line income statement without allocation of joint costs. 81)

_____________

82)

North York Statue Company makes miniature Mountie statues from cast iron. Sales total 40,000 units a year. The statues are finished either rough or polished, with an average demand of 60 percent rough and 40 percent polished. Iron ingots, the direct material, costs $6 per kilogram. Processing costs are $200 to convert 20 kilograms into 40 statues. Rough statues are sold for $15 each and polished statues can be sold for $18 or engraved for an additional cost of $5. Polished statues can then be sold for $30.

 

Required:

 

Determine the product mix for statues that allows maximization of the company’s operating margin. 82)

_____________

83)

BC Lumber Company prepares lumber for companies who manufacture furniture. The main product is

finished lumber with a byproduct of wood shavings. The byproduct is sold to plywood manufacturers.

For July, the manufacturing process incurred $332,000 in total costs. Eighty thousand board feet of

lumber were produced and sold along with 6,800 pounds of shavings. The finished lumber sold for $6.00

per board foot and the shavings sold for $0.60 a pound. There were no beginning or ending inventories.

 

Required:

Prepare an income statement showing the byproduct (1) as a cost reduction during production, and (2) as

a revenue item when sold.

83)

_____________

84)

Distinguish between the two principal methods of accounting for byproducts, the production byproduct

method and the sale byproduct method. Briefly discuss the relative merits (or lack thereof) of each.

84)

_____________

85)

Lumber Company prepares lumber for companies who manufacture furniture. The main product is finished lumber with a byproduct of wood shavings. The byproduct is sold to plywood manufacturers. For July the manufacturing process incurred $166,000 in total costs. Eighty thousand board metres of lumber were produced and sold along with 6,800 kilograms of shavings. The finished lumber sold for $3.00 per boardmetre and the shavings sold for $0.30 a kilogram. There were no beginning or ending inventories.

 

Required:

 

Prepare an income statement showing the byproduct (1) as a cost reduction during production and (2) as a revenue item when sold. 85)

_____________

Cost reduction

when producedRevenue

when sold

Sales:

Lumber

 

 

 

 

 

Shavings$480,000$480,000

4,080

 

 

 

Total Sales:$480,000484,080

Cost of Good Sold:

Total manufacturing costs

Byproduct

$332,000

4,080

 

 

$332,000

0

 

 

 

 

Total COGS327,920332,000

Gross Margin$152,080$152,080

84)

a.Production byproduct method.

This method recognizes byproducts in the financial statements at the time their production is completed. The estimated net realizable value from the byproduct produced is offset against the costs of the main (or joint) products, and it is reported in the balance sheet as inventory. Accounting entries are made and the byproducts are reported in the balance sheet at their selling price.

 

b.Sale byproduct method.

This method delays recognition of the byproducts until the time of their sale. Revenues could be recorded in one accounting period, while the expense in an earlier period. Companies may find it necessary to keep an inventory of the byproduct processing costs in a separate account until the byproducts are sold. This practice can be rationalized on the grounds that the dollar amounts of byproducts are immaterial. But managers can use this method to manage reported earnings by timing when they sell byproducts.

85)

Cost reductionRevenue

when produced          when sold

Sales:

Lumber$240,000$240,000

Shavings

 

 

 

n/a

 

 

2,040

Total sales$240,000$242,040

Cost of goods sold:

Total manufacturing costs $166,000$166,000

Byproduct

 

2,040n/a

163,960

Gross margin$ 76,040$ 76,040 86)

It appears that the company needs to start assigning all extraction costs to a joint cost category. It is unfair that the finished products receive a high cost simply because a certain batch of ore was very expensive to run through the extraction process when the next finished products were produced from gold that was easy to extract.

 

If all extraction costs are considered joint, then each finished product would share in the average cost of extraction, rather than being charged with the cost of a specific batch. This should result in costs that are more reflective of the product’s actual cost.

 

Additional problems may be with the purchasing department. The accounting may help highlight the problem but does not pinpoint the actual problem. Maybe they should buy refined gold or else hire experts in the minerals area as part of the purchasing team.

 

 

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