Costing Joint Products. Hayes Products Company produces three products, X, Y, and Z, from a single joint process. The company uses the average unit cost method for allocating the joint production cost. Some spoilage normally occurs in the joint process, but the company also has been experiencing some unexpected spoilage in the separable process to Product Y. In cost¬ ing the three products for sale, all spoilage costs, together with joint and separable process costs, are included in product cost. LO5 Over the past year, the company has been losing money on Product Z. Sentiments are mixed as to whether to drop Z or make modifications. The con¬ troller is convinced that the entire costing system needs to be revised and she has hired a consultant to present a proposal for a cost study.

Required: As the consultant, prepare a brief proposal for Hayes Products Company, outlining the aspects of its product costing that need to be reviewed. Explain why the areas cited need to be studied.

(SMAC adapted)

C8-3 Joint Cost Analysis for Managerial Decisions. Talor Chemical Company is a highly diversified chemical processing company. The company manufactures swimming pool chemicals, chemicals for metal pro¬ cessing companies, specialized chemical compounds for other companies, and a full line of pesticides and insecticides.

Currently, the Noorwood plant is producing two derivatives, RNA-1 and RNA-2, from the chemical com¬ pound VDB, developed by Talor’s research labs. Each week 1,200,000 pounds of VDB are processed at a cost of $246,000 into 800,000 pounds of RNA-1 and 400,000 pounds of RNA-2. The proportion of these two outputs from this joint process is fixed and cannot be altered. RNA-1 has no market value until it is converted into a product with the trade name Fastkil. The cost to process RNA-1 into Fastkil is $240,000. Fastkil wholesales at $50 per 100 pounds.

RNA-2 is sold as is for $80 per hundred pounds. However, Talor has discovered that RNA-2 can be con¬ verted into two new products through further process¬ ing. The further processing requires the addition of 400,000 pounds of compound LST to the 400,000 pounds of RNA-2. This additional joint process yields 400,000 pounds each of DMZ-3 and Pestrol—the two new products. The additional raw materials and related processing costs are $120,000. DMZ-3 and Pestrol can each be sold for $57.50 per 100 pounds. Talor management has decided not to process RNA-2 further, based on the preceding analysis. Talor uses the average unit cost method to allocate costs arising from joint processing.

A new staff accountant, after reviewing the analysis, comments that it should be revised, stating: “Product costing of products such as these should be done on a market value basis, not an average unit cost basis.”

Required:

(1) Discuss whether the use of the market value method provides data that are more relevant for the decision to market DMZ-3 and Pestrol.

(2) Critique Talor’s analysis and make any revisions that are necessary. The critique and analysis should indicate:

(a) Whether Talor Chemical Company made the correct decision.

(b) What the gross savings (loss) per week will be as a result of Talor’s decision not to process RNA-2 further, if different from the company- prepared analysis.

Sell as Process Further RNA-2 DMZ-3 Pestrol Total Production inpounds.

400,000 400,000 400,000 Revenue.

Costs:

. $320,000

$230,000

$230,000

$460,000 VDBcost*.

Additional raw materials (LST) and processing

$ 82,000

$ 61,500

$ 61,500

$123,000 ofRNA-2.

60,000 60,000 120,000 Totalcost.

$ 82,000

$121,500

$121,500

$243,000 Weekly grossprofit.

$238,000

$108,500

$108,500

$217,000

* If RNA-2 is sold as is, the allocation basis is 1,200,000 pounds; if RNA-2 is processed further, the allocation basis is 1,600,000 pounds for VDB cost.