Hello An Le,
Hope you are safe & doing well
We all know the basic facts related to By-Products:
- The purpose of the joint process is not to create by-products
- By-products value is not significant to the organization.
- The accounting system doesn't allocate joint process costs to by-products.
In this case study, there are many points should be considered before we judge on how to treat Omega as "By-product". Actually, we can find many conflicts included here:
1. Omega is sold at the split-off point ..... Similar to main products
2. Omega is sold by $6 ..... 75% of Alpha main product's price ... (Against the concept of "Insignificant value")
3. Selling value of Omega $6,000 equal to 3.3% of total value of Alpha & Beta !!!!
4. The joint cost is allocated to main products by using the sales value at split-off method ... (Not a production volume base)
5. The company inventories Omega
Just because it is mentioned that Omega is a "By-Product", so we should ignore its real actual cost by considering the "Sale Value" is equal to cost ??!!
Based on given information, I don't think it make any sense. Assuming that the total units produced of Omega is 7,500 (75% of Alpha units compared to selling prices), should we use the same approach and ignore $45,000 cost ???
Actually, based on your approach, we should offset the joint process cost with the by-product revenue before computing the joint cost allocation. Then we use the physical units produced to allocate the cost, rather than sales value, but in this funny case study we have a mix of weird assumptions. Please pay attention that total joint cost $186,000 is equal to the total selling value of (3) products, which makes it more intended to be funny.
Doing some research online, I have found this reading, which makes more sense to me :
By-products and GAAP:The by-product production and sales methods both fail to comply with GAAP as production costs are not properly allocated to the by-product. The proper method would be to treat the by-product equally with the main products from the process i.e as a joint product. Due to the minimal value of the by-product, an analysis would show that the costs of complying with GAAP would far outweigh the benefits of doing so.Resources:
Byproduct Accounting .....
By-Products: Meaning and AccountingPlease accept my apologies for adding this long discussion, hoping that it will result in more benefit for all concerned members.
Wish you best of luck, success, safe & healthy condition
Kind regards
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Samer Ahmad, FMVA, SCA
Kuwait
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Original Message:
Sent: 06-19-2020 03:12 AM
From: An Le
Subject: Exam 1 Additional Practice Question
Hi there,
The question shows the point product including Alpha and Beta only, while Omega is by product then the processing cost for both will be $180,000 (186,000 - (1000x6)).
Sales value at split-off point:
Alpha = 10,000 x $8 = $80,000
Beta = 5,000 x $20 = $100,000
--------------------
Total $180,000
Cost allocate to Alpha = 180,000 x (80,000 / 180,000)= 80,000.
Hope this would help.
An
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An Le
Director/Manager
Ho Chi Minh
Viet Nam
Original Message:
Sent: 06-18-2020 04:47 PM
From: Samer Ahmad
Subject: Exam 1 Additional Practice Question
Hello Carla,
The question is asking to calculate Alpha product's share of the allocated joint cost based on the sales value at split-off, taking in consideration that Omega (By product) is also sold at the split-off point at $6 per pound (It is a valuable "By product" compared to Alpha's value $8)
Sales value at split-off point:
Alpha = 10,000 x $8 = $80,000
Beta = 5,000 x $20 = $100,000
Omega = 1,000 x $6 = $6,000
--------------------
Total $186,000
Alpha product share of allocated process cost = $186,000 x ($80,000 / $186,000) = $80,000
Wish you best of luck, success, safe & healthy condition
Kind regards
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Samer Ahmad, FMVA, SCA
Kuwait
Original Message:
Sent: 06-18-2020 12:18 PM
From: Carla Loera
Subject: Exam 1 Additional Practice Question
Hi, I am currently studying to hopefully take Part 1 in September and need a bit of help with the following question, the answer is B but there is no explanation.
A company produces products simultaneously through a refining process costing $186,000. The
joint products, Alpha and Beta, have selling prices of $8 and $20 per pound, respectively, after
additional processing costs of $4 per pound of each product are incurred after the split-off point.
Omega, a by-product, is sold at the split-off point for $6 per pound. The number of pounds
produced is shown below.
Alpha 10,000 pounds
Beta 5,000 pounds
Omega 1,000 pounds
Assuming the company inventories Omega, the joint cost allocated to Alpha using the sales
value at split-off method is
a. $72,000.
b. $80,000.
c. $82,666.
d. $100,000.
TIA
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Carla Loera
Student
Laredo TX
United States
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