Question 7-46 Cost Management: A Strategic Emphasis

7-46 Joint Products; By-Products (Appendix) Multiproduct Corporation is a chemical manufacturer that produces two main products (Pepco-1 and Repke-3) and a by-product (SE-5) from a joint process. If Multiproduct had the proper facilities, it could process SE-5 further into a main product. The ratio of output quantities to input quantity of direct materials used in the joint process remain consistent with the processing conditions and activity level. Multiproduct currently uses the physical measure method of allocating joint costs to the main products. The by-product is inventoried at its net realizable value, which is used to reduce the joint production costs before they are allocated to the main products. Jim Simpson, Multiproduct's controller, wants to implement the sales value at split-off method of joint cost allocation. He believes that inventory costs should be based on each product's ability to contribute to the recovery of joint production costs. Multiproduct uses an asset recognition approach in accounting for by-products. Data regarding Multiproduct's operations for November are presented in the following report. The joint costs of production totaled $2,640,000 for November. Main Products By-Product Pepco-1 Repke-3 SE-5 November sales in gallons 800,000 700,000 200,000 November production in gallons 900,000 720,000 240,000 Sales price per gallon at split-off point $2.00 $1.50 50.55* Separable costs after split-off $1,000,000 $420,000 Final sales price per gallon $5.00 $4.00 1 *Selling costs of 5 cents per gallon are incurred to sell the by-product. Required 1. Describe the sales value at split-off method and explain how it would accomplish Jim's objective. 2. Assuming Multiproduct adopts the sales value at split-off method for internal reporting purposes, calculate the allocation of the joint production costs for November. 3. Multiproduct plans to expand its production facilities to further process SE-5 into a main product. Determine the allocation of the joint production costs for November if SE-5 were considered a main product rather than a by-product