CMA Study Group

Exam 1 Additional Practice Question

  • 1.  Exam 1 Additional Practice Question

    Posted 18 days ago
    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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  • 2.  RE: Exam 1 Additional Practice Question

    Posted 18 days ago
    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

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------



  • 3.  RE: Exam 1 Additional Practice Question

    Posted 18 days ago
    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

    ------------------------------
    An Le
    Director/Manager
    Ho Chi Minh
    Viet Nam
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  • 4.  RE: Exam 1 Additional Practice Question

    Posted 18 days ago
    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 Accounting


    Please 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

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------



  • 5.  RE: Exam 1 Additional Practice Question

    Posted 18 days ago
    Hi Samer,

    I think we should make it simple as the question given.

    Btw, thank you for your further information.

    Thanks,
    An

    ------------------------------
    An Le
    Director/Manager
    Ho Chi Minh
    Viet Nam
    ------------------------------



  • 6.  RE: Exam 1 Additional Practice Question

    Posted 18 days ago
    Hello Samer,

    Hope you are doing well!
    Actually the solution of An is not coming from his mind actually I found Gleim solved this question by the same way (deducting by-product NRV from Joint Cost before allocation) take a look for the below quiz it's the same concept 


    ------------------------------
    Mohamed Mohamed
    Controller
    Giza
    Egypt
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  • 7.  RE: Exam 1 Additional Practice Question

    Posted 18 days ago
    Thank you for your effort, Mohamed!

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    An Le
    Director/Manager
    Ho Chi Minh
    Viet Nam
    ------------------------------