Cost Allocation Techniques Paper 4

Answer (A) is correct. With no beginning inventory, cost of goods manufactured is simply the sum of direct labor, direct materials, variable overhead, and fixed overhead, or $637,500 ($187,500 + $100,000 + $150,000 + $200,000). The cost of the ending inventory is equal to $159,375 [$637,500 × (25,000 units ÷ 100,000 units)].

Answer (D) is correct. Under variable costing, product cost includes only the variable portion of manufacturing costs. Thus, the direct manufacturing labor, the variable manufacturing overhead, and the direct materials costs are all included in the cost of goods sold calculation. The total variable manufacturing cost is equal to $437,500 ($187,500 + 100,000 + 150,000), and the total variable manufacturing cost per unit is equal to $4.375 ($437,500 ÷ 100,000 units manufactured). Since 100,000 units were produced but only 75,000 were sold, the cost of goods sold is $328,125 ($4.375 × 75,000 units sold).

Answer (D) is correct. Joint costs are useful for inventory costing when two or more identifiable products emerge from a common production process. The joint costs of production must be allocated on some basis, such as relative sales value.

Answer (A) is correct. Joint products are created from processing a common input. Joint costs are incurred prior to the split-off point and cannot be identified with a particular joint product. As a result, joint costs are irrelevant to the timing of sale. However, separable costs incurred after the split-off point are relevant because, if incremental revenues exceed the separable costs, products should be processed further, not sold at the split-off point.

Answer (A) is correct. Joint costs are most often assigned on the basis of relative sales values or net realizable values. Basing allocations on physical quantities, such as pounds, gallons, etc., is usually not desirable because the costs assigned may have no relationship to value. When large items have low selling prices and small items have high selling prices, the large items might always sell at a loss when physical quantities are used to allocate joint costs.

Answer (C) is correct. Because of the relatively small sales value, a cost-effective allocation method is used for by-products. The net realizable value of by-products is usually deducted from the cost of the main products.

Answer (D) is correct. Joint products must be valued for external financial reporting purposes based on the full (absorption) cost of the product. Any common costs attributable to the joint production process must therefore be allocated on a systematic and rational basis.

Answer (C) is correct. A by-product is one of relatively small total value. The first question that must be answered in regard to by-products is: Do the benefits of further processing and bringing them to market exceed the costs; that is, is the incremental revenue worth the effort? Market price determines this. The same can essentially be said for the main products of the production process.

Answer (A) is correct. In a production process where joint products are produced, the primary factor that will distinguish a joint product from a by-product is the relative total sales value of the products.

Answer (C) is correct. No “separable production cost method” is recognized for allocating joint costs. The nature of the problem is such that all costs are joint and cannot be separated.