CHAPTER 17
Allocation of Support Activity Costs and Joint
Costs
ANSWERS TO REVIEW QUESTIONS
17-1
A service department is a unit in an organization that is not involved directly in
producing the organization’s goods or services. However, a service department does
provide a service that enables the organization’s production process to take place.
Production departments, on the other hand, are units that are directly involved in
producing the organization’s goods and services. An example of a service
department in a bank would be the computer department or the human resources
department. An example of a “production” department in a bank would be the
consumer loan department.
17-2
The term reciprocal services refers to the situation in which two or more service
departments provide services to each other.
17-3 (a) Under the direct method of service department cost allocation, all service
department costs are allocated directly to the production departments, and none
of these costs are allocated to other service departments.
(b) Under the step-down method, a sequence is first established for allocation of
service department costs. Then the costs incurred in the first service department
in the sequence are allocated among all other departments that use that service
department’s services, including other service departments. The method
proceeds in a similar fashion through the sequence of service departments.
(c) Under the reciprocal-services method, a system of simultaneous equations is
established to reflect the reciprocal provision of services among service
departments. Then all of the service departments’ costs are allocated among all
of the departments that use the various service departments’ output of services.
The reciprocal-services method of service department cost allocation is the only
method that fully accounts for the reciprocal provision of services among
departments.
17-4
The first department in the sequence under the step-down method is the service
department that serves the largest number of other service departments. The second
department in the sequence is the service department that serves the second-largest
number of service departments, and so forth. The sequence among tied service
departments usually is an arbitrary choice.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-1
17-5
The dual-allocation approach improves the resulting cost allocations because
variable costs are allocated in accordance with short-run usage, and fixed costs are
allocated in accordance with long-run service requirements.
17-6
A potential behavioral problem that can result from the dual approach to service
department cost allocation is that service department managers may have a
disincentive to provide correct predictions for their departments’ long-run service
department needs.
17-7
Budgeted service department costs should be allocated rather than actual service
department costs. Allocating actual costs would reduce the incentive for cost control
in the service departments.
17-8
Under two-stage allocation with departmental overhead rates, costs first are
distributed to departments; then they are allocated from service departments to
production departments. Finally, they are assigned from production departments to
products or services. Departments play a key role as intermediate cost objects under
this approach. In an activity-based costing (ABC) system, on the other hand, the key
role is played by activities, not departments. First, the costs of various activities are
assigned to activity-cost pools; then these costs are assigned to products or
services. The breakdown of costs by activity in an ABC system is much finer then a
breakdown by departments. The ABC approach generally will provide a much more
accurate cost for each of the organization’s products or services.
17-9 (a) Joint-production process: A production process in which the processing of a
common input results in two or more outputs called joint products.
(b) Joint costs: The costs incurred in a joint production process before the joint
products become identifiable as separate products.
(c) Joint products: The output of a joint production process.
(d) Split-off point: The point in a joint production process at which the joint products
become identifiable as separate products.
(e) Separable costs: Costs incurred to process joint products further after they pass
the split-off point in a joint production process.
(f) By-product: A joint product with very little value relative to the other joint
products.
17-10 Under the physical-units method of joint cost allocation, joint production costs are
allocated among the joint products in proportion to a physical characteristic of those
products, such as weight or volume.
McGraw-Hill/Irwin
17-2
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
17-11 Under the relative-sales-value method of joint cost allocation, joint production costs
are allocated to the joint products in proportion to their sales value at the split-off
point.
17-12 The net realizable value of a joint product is equal to its ultimate sales value minus
the separable costs incurred between the split-off point and the product’s final form.
Under the net-realizable-value method of joint cost allocation, joint production costs
are allocated among the joint products in proportion to their net realizable values.
17-13 Joint cost allocations are useful for product-costing purposes. Product costing is
useful for income determination, for inventory valuation, for third-party
reimbursement situations, and various other purposes.
17-14 The managerial accountant generally should be careful not to use joint cost
allocations for making decisions.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-3
SOLUTIONS TO EXERCISES
EXERCISE 17-15 (15 MINUTES)
Direct Customer Service
Departments Using Services
Deposit
Loan
Provider of Service
HR
Computing
Total
Cost to Be
Allocated
$ 459,000
688,500
$1,147,500
Proportion
(6/9)
(50/85)
Amount
$306,000
405,000
$711,000
Proportion
(3/9)
(35/85)
Amount
$153,000
283,500
$436,500
$1,147,500
Grand total
EXERCISE 17-16 (15 MINUTES)
Costs prior to allocation
Allocation of HR
Department costs
Allocation of Computing
Department costs
Total costs allocated to
each department
Total cost allocated to
direct customer service
departments
HR
Computing
$459,000 $688,500
$459,000
45,900(1/10)
$734,400
Direct Customer Service
Departments Using Services
Deposit
Loan
$275,400(6/10)
432,000(50/85)
$707,400
$137,700(3/10)
302,400(35/85)
$440,100
$1,147,500
EXERCISE 17-17 (30 MINUTES)
Answers will vary widely, depending on the organization chosen. Support departments at
the Mayo Clinic, for example, include Admissions, Patient Records, and Housekeeping,
among others. At Sheraton Hotels, support departments include Registration, Maintenance,
and the Concierge, among others.
McGraw-Hill/Irwin
17-4
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
EXERCISE 17-18 (15 MINUTES)
1. Cost allocation using direct method:
Academic Departments Using Services
Liberal Arts
Sciences
Provider of Service
Library
Computing Services
Total
Cost to Be
Allocated
$ 900,000
360,000
$1,260,000
Proportion
(3/5)
(3/8)
Amount
$540,000
135,000
$675,000
Proportion
(2/5)
(5/8)
Amount
$360,000
225,000
$585,000
$1,260,000
Grand total
2. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: BUILD A SPREADSHEET
EXERCISE 17-19 (15 MINUTES)
1. Cost allocation using step-down method:
Costs prior to allocation
Allocation of Computing
Service costs*
Allocation of Library
costs
Total costs allocated to
each department
Total cost allocated to
academic departments
Service Departments
Computing
Services
Library
$360,000 $900,000
$360,000
72,000(2/10)
$972,000
Academic Departments
Using Services
Liberal
Arts
Sciences
$108,000(3/10)
$180,000(5/10)
583,200(3/5)
388,800(2/5)
$691,200
$568,800
$1,260,000
*Allocated first because Computing Services provides service to the Library, but not vice versa.
2. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: BUILD A SPREADSHEET
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-5
EXERCISE 17-20 (10 MINUTES)
Joint
Cost
Joint
Products
Yummies
Quantity at
Split-Off Point
12,000 kilograms
Relative
Proportion
.60
Crummies
Total
8,000 kilograms
20,000 kilograms
.40
Allocation
of
Joint Cost
$54,000*
$90,000
36,000†
$90,000
*$54,000 = $90,000  .60
†$36,000 = $90,000  .40
EXERCISE 17-21 (15 MINUTES)
Joint
Cost
Joint
Products
Yummies
Quantity at
Split-Off
12,000 kg
Sales
Price
$6.00
Crummies
Total
8,000 kg
7.50
Allocation
Sales Value at Relative
of
Split-Off Point Proportion Joint Cost
$ 72,000
.545*
$49,050†
$90,000
60,000
$132,000
.455*
40,950**
$90,000
*Rounded
†$49,050 = $90,000  .545
**$40,950 = $90,000  .455
EXERCISE 17-22 (25 MINUTES)
1.
Decision analysis:
Incremental revenue per kilogram:
Sales price of mulch ..................................................................
Sales price of Crummies ...........................................................
Incremental revenue ..................................................................
Incremental processing cost per kilogram ..............................
Incremental revenue less incremental cost .............................
$10.50
7.50
$3.00
1.50
$1.50
The Crummies should be processed further into the mulch.
McGraw-Hill/Irwin
17-6
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
EXERCISE 17-22 (CONTINUED)
2.
Joint cost allocation using net-realizable-value method:
Joint
Cost
Joint
Sales Value of
Products
Final Product
Yummies $72,000 (12,000  $6.00)
Net
Allocation
Separable Cost Realizable Relative
of
of Processing Value* Proportion Joint Cost
-0$ 72,000
.50
$45,000†
$90,000
Mulch
84,000 (8,000  $10.50)
$12,000
(8,000  $1.50)
72,000
.50
$144,000
45,000†
$90,000
*Net realizable value = sales value of final product – separable cost of processing
†$45,000 = $90,000  .50
EXERCISE 17-23 (25 MINUTES)
(a)
First, specify equations to express the relationships between the service
departments.
Notation: H denotes the total cost of Human Resources
C denotes the total cost of Computing
Equations: H = 459,000 + .15C
(1)
C = 688,500 + .10H
(2)
Solution of equations: Substitute from equation (2) into equation (1).
H
=
459,000 + .15(688,500 + .10H)
.985H
=
562,275
H
=
570,838 (rounded)
Substitute the value of H into equation (2).
McGraw-Hill/Irwin
Managerial Accounting, 8/e
C
=
688,500 + .10(570,838)
C
=
745,584 (rounded)
 2009 The McGraw-Hill Companies, Inc.
17-7
EXERCISE 17-23 (CONTINUED)
(b)
Cost allocation using the reciprocal-services method:
Traceable costs
Allocation of HR
Department costs
Allocation of Computing
Department costs
Total cost allocated to
each direct customer
service department
Total costs allocated
Service Departments
Human
Resources
(HR)
Computing
$459,000
$688,500
(570,838)
57,084*(.1)
111,838*(.15) (745,584)
Direct Customer Service
Departments
Deposit
Loan
$342,503*(.6)
$171,251*(.3)
372,792(.50)
$715,295
260,954*(.35)
$432,205
$1,147,500
*Rounded
McGraw-Hill/Irwin
17-8
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
SOLUTIONS TO PROBLEMS
PROBLEM 17-24 (40 MINUTES)
1.
Direct method:
Production Department
Etching
Finishing
Cost to Be
Provider of Service
Allocated
Proportion Amount
Maintenance
$ 96,000
(1/9)
$ 10,667*
Computing
500,000
(7/8)
437,500
Total service department costs allocated ...................... $448,167
Overhead costs traceable to
production departments ................................................ 400,000
Total overhead cost ......................................................... $848,167
Direct-labor hours (DLH)
(20  2,000) ...................................................................
(80  2,000) ...................................................................
Overhead rate per hour
(total overhead ÷ DLH) ..................................................
Proportion
(8/9)
(1/8)
Amount
$ 85,333*
62,500
$147,833
640,000
$787,833
40,000
160,000
$21.204*
Check on allocation procedure:
Service department costs allocated to Etching .................................................
Service department costs allocated to Finishing ..............................................
Total costs to be allocated ($96,000 + $500,000) ...............................................
$4.924*
$448,167
147,833
$596,000
*Rounded
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-9
PROBLEM 17-24 (CONTINUED)
2.
Step-down method:
Service Departments
Computing Maintenance
$500,000 $ 96,000
Production Departments
Etching
Finishing
Costs prior to allocation
Allocation of Computing
Department costs
$500,000 100,000(2/10) $350,000(7/10) $ 50,000(1/10)
Allocation of Maintenance
Department costs
$196,000
21,778(1/9)
174,222(8/9)
Total service department cost allocated ............................... $371,778
$224,222
Overhead costs traceable to
production departments ....................................................... 400,000
640,000
Total overhead cost ................................................................ $771,778
$864,222
Direct-labor hours (DLH)
(20  2,000) ..........................................................................
40,000
(80  2,000) ..........................................................................
Overhead rate per hour
(total overhead ÷ DLH) ......................................................... $19.294*
160,000
$5.401*
Check on allocation procedure:
Service department costs allocated to Etching .................................................$371,778
Service department costs allocated to Finishing .............................................. 224,222
Total costs to be allocated ($96,000 + $500,000) ...............................................$596,000
*Rounded
McGraw-Hill/Irwin
17-10
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-25 (40 MINUTES)
1.
Direct method:
Production Departments
Machining
Finishing
Provider of Service
HR
Maintenance
Design
Total
Cost to Be
Allocated
$250,000
230,000
350,000
$830,000
Proportion
(4/9)
(35/75)
(45/60)
Amount
Proportion Amount
$111,111*
(5/9)
$138,889*
107,333* (40/75)
122,667*
262,500
(15/60)
87,500
$480,944
$349,056
$830,000
Grand total
*Rounded
2.
Sequence for step-down method:
1st: HR (serves 2 other service departments)
2nd: Maintenance (serves 1 other service department)
3rd: Design (serves no other service departments)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-11
PROBLEM 17-25 (CONTINUED)
3. Step-down method:
HR
Costs prior to
allocation
Allocation of HR
Department costs
Allocation of
Maintenance
Department costs
Allocation of Design
Department costs
Total cost
allocated to each
department
$250,000
$250,000
Service Departments
Maintenance
$230,000
12,500(5/100)
$242,500
Design
Production Departments
Machining
Finishing
$350,000
12,500(5/100)
$100,000(40/100)
$125,000(50/100)
15,156*(5/80)
106,094*(35/80)
121,250(40/80)
283,242(45/60)
94,414(15/60)
$377,656
$489,336
$340,664
$830,000
Total cost allocated to production departments
*Rounded
4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: BUILD A
SPREADSHEET
McGraw-Hill/Irwin
17-12
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-26 (70 MINUTES)
1.
Direct method combined with dual allocation:
(a) Variable costs:
Production Departments
Machining
Finishing
Provider of Service
HR
Maintenance
Design
Total variable cost**
Cost to Be
Allocated
$ 50,000
80,000
50,000
$180,000
Proportion*
(4/9)
(35/75)
(45/60)
Amount
Proportion* Amount
†
$ 22,222
(5/9)
$ 27,778†
†
37,333
(40/75)
42,667†
37,500
(15/60)
12,500
$ 97,055
$ 82,945
*Short-run usage proportions (from preceding problem)
†Rounded
**$97,055 + $82,945 = $180,000
(b) Fixed costs:
Production Departments
Machining
Finishing
Provider of Service
HR
Maintenance
Design
Total fixed cost**
Cost to Be
Allocated
$200,000
150,000
300,000
$650,000
Proportion*
(35/85)
(48/72)
(48/60)
Amount
Proportion* Amount
†
$82,353
(50/85)
$117,647†
100,000
(24/72)
50,000
240,000
(12/60)
60,000
$422,353
$227,647
*Long-run proportions (from this problem)
†Rounded
**$422,353 + $227,647 = $650,000
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-13
PROBLEM 17-26 (CONTINUED)
(c) Total costs allocated:
Variable costs ............................................................................
Fixed costs .................................................................................
Total costs ..................................................................................
Grand total ..................................................................................
2.
Machining
$ 97,055
422,353
$519,408
Finishing
$ 82,945
227,647
$310,592
$830,000
Step-down method combined with dual allocation:
As in the preceding problem, the sequence of allocation is HR, Maintenance, and
Design, respectively.
McGraw-Hill/Irwin
17-14
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-26 (CONTINUED)
(a) Variable costs:
HR
Costs prior to
allocation
Allocation of HR
Department costs
Allocation of
Maintenance
Department costs
Allocation of Design
Department costs
Total variable cost
allocated to each
department
$50,000
$50,000
Service Departments
Maintenance
$80,000
2,500(5/100)*
$82,500
Design
Production Departments
Machining
Finishing
$50,000
2,500(5/100)
$20,000(40/100)
$25,000(50/100)
5,156† (5/80)
36,094† (35/80)
41,250(40/80)
43,242(45/60)
14,414(15/60)
$57,656
$99,336**
*Short-run usage proportions are used (from preceding problem).
†Rounded.
**$99,336 + $80,664 = $180,000
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-15
$80,664**
PROBLEM 17-26 (CONTINUED)
(b) Fixed costs:
HR
Costs prior to
allocation
Allocation of HR
Department costs
Allocation of
Maintenance
Department costs
Allocation of Design
Department costs
Total fixed cost
allocated to each
department
$200,000
$200,000
Service Departments
Maintenance
$150,000
10,000(5/100)*
$160,000
Design
Production Departments
Machining
Finishing
$300,000
20,000(10/100)
16,000(8/80)
$336,000
$70,000(35/100)
$100,000(50/100)
96,000(48/80)
48,000(24/80)
268,800(48/60)
67,200(12/60)
$434,800†
*Long-run usage proportions are used (from this problem).
†$434,800 + $215,200 = $650,000
McGraw-Hill/Irwin
17-16
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
$215,200†
PROBLEM 17-26 (CONTINUED)
(c) Total costs allocated:
Machining
Variable costs ............................................................................$ 99,336
Fixed costs ................................................................................. 434,800
Total costs ..................................................................................$534,136
Grand total ..................................................................................
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Finishing
$ 80,664
215,200
$295,864
$830,000
 2009 The McGraw-Hill Companies, Inc.
17-17
PROBLEM 17-27 (50 MINUTES)
1.
Plantwide overhead rates:
Departments (numbers in thousands)
Molding Component Assembly
Total
Manufacturing departments:
Variable overhead ......................
Fixed overhead ...........................
Total manufacturing
department overhead ...........
Service departments:
Power ..........................................
Maintenance ...............................
Total estimated overhead........
Estimated direct-labor hours (DLH):
Molding .......................................
Component .................................
Assembly ....................................
Total estimated
direct-labor hours .................
Plantwide overhead rate
McGraw-Hill/Irwin
17-18
$ 7,000
35,000
$20,000
12,400
$33,000
12,200
$ 60,000
59,600
$42,000
$32,400
$45,200
$119,600
36,800
8,000
$164,400
500
2,000
1,500
4,000
=
estimated overhead
estimated DLH
=
$164,400
4,000
=
$41.10 per direct-labor hour
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-27 (CONTINUED)
2.
Departmental overhead rates:
Departments (numbers in thousands)
Service
Manufacturing
Power Maintenance Molding
Component Assembly
Departmental overhead
costs ................................... $36,800
a. Allocation of maintenance costs
(direct method)
Proportions: 90/125,
25/125, 10/125 ..............
b. Allocation of power
costs (dual, direct
method)
Fixed costs
($24,000):
Proportions:
500/1000, 350/1000,
150/1000 ..................... (24,000)
Variable costs
($12,800):
Proportions:
360/800, 320/800,
120/800
(12,800)
Total allocated
departmental
overhead costs .......... $
0
$ 8,000
$42,000
$32,400
$45,200
(8,000)
5,760
1,600
640
12,000
8,400
3,600
5,760
5,120
1,920
$65,520
$47,520
$51,360
875
MH
2,000
DLH
1,500
DLH
$74.88
per
MH
$23.76
per
DLH
$34.24
per
DLH
$
0
c. Cost driver .......................
Rate (departmental overhead
÷ units of cost driver) .........................................
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-19
PROBLEM 17-27 (CONTINUED)
3.
Memorandum
Date:
Today
To:
President, Travelcraft, Inc.
From:
I.M. Student
Subject: Use of departmental overhead rates
Travelcraft should use departmental rates to assign overhead to its products. The
criterion for choosing an allocation base is a close relationship between cost
incurrence and use of the base. This relationship exists with different bases in
different departments, necessitating the use of departmental rates. The company’s
production departments are dissimilar in that the Molding Department is machineintensive while the other two departments are labor-intensive.
PROBLEM 17-28 (40 MINUTES)
1.
Net-realizable-value method of allocation:
Joint
Cost
per Run
$1,360,000
Additional
Joint
Sales Value of
Cost of
Products Final Product* Processing
HTP-3 .......................
$2,240,000 ........................
$699,200 ......
PST-4 .......................
1,680,000 ........................
652,800 ......
RJ-5 .........................
680,000 ........................
48,000 ......
Total
Net
Allocation
Realizable
Relative
of Joint
Value
Proportion†
Cost
$1,540,800 .......................
48.15% ..... $ 654,840
1,027,200 .......................
32.10% ..... 436,560
632,000 .......................
19.75% ..... 268,600
$3,200,000
$1,360,000
*Sales price  quantity produced
†Net
realizable value ÷ $3,200,000, which is the sum of the net realizable values of the three joint
products
McGraw-Hill/Irwin
17-20
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-28 (CONTINUED)
2.
October production cost per gallon:
Product
Joint cost allocation .................................
Additional processing costs ....................
Total cost
HTP-3
$ 654,840
699,200
$1,354,040
PST-4
$ 436,560
652,800
$1,089,360
RJ-5
$268,600
48,000
$316,600
Quantity produced (gallons) ....................
Cost per gallon (rounded) ........................
700,000
$1.93
350,000
$3.11
170,000
$1.86
HTP-3
18,000
700,000
718,000
650,000
68,000
 $1.93
$131,240
PST-4
52,000
350,000
402,000
325,000
77,000
 $3.11
$239,470
RJ-5
3,000
170,000
173,000
150,000
23,000
 $1.86
$ 42,780
Inventory valuation:
Product
October 1 inventory (gallons) ...................
October production (gallons) ...................
Quantity available (gallons) ......................
October sales (gallons) .............................
October 31 inventory (gallons) .................
 Cost per gallon .....................................
October 31 inventory (dollars) ..................
3.
LeMonde Company should sell PST-4 at the split-off point. The incremental revenue
of sales beyond the split-off point is less than the incremental cost of further
processing.
Per gallon sales value beyond the split-off point .....................................................
$4.80
Per gallon sales value at the split-off point ..............................................................
3.04
Incremental sales value ..............................................................................................
$1.76
Less: Additional processing costs per gallon
($652,800 ÷ 350,000 gallons) ....................................................................................
1.87 (rounded)
Per gallon gain (loss) of further processing .............................................................
$ (.11)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-21
PROBLEM 17-29 (35 MINUTES)
1.
Joint cost allocations using the relative-sales-value method:
Gamma: joint cost allocation
 Gamma' s sales value at split - off 
  joint cost
= 
 total sales value at split - off 
 $19,500 
  $78,000 = $11,700
= 
 $130,000 
Beta: joint cost allocation
= total joint cost – Alpha’s allocation
– Gamma’s allocation
= $78,000 – $46,800 – $11,700 = $19,500
Summary of joint cost allocations:
Alpha ............................................................................................................................
$46,800(given)
Beta ..............................................................................................................................
19,500
Gamma ........................................................................................................................
11,700
Total .............................................................................................................................
$78,000
2.
 Alpha' s sales value at split - off 
  joint cost
Alpha’s joint cost allocation = 
 total sales value at split - off 
X


  $78,000
$46,800 = 
 $130,000 
 $130,000 

X = $46,800  
 $78,000 
X = $78,000
Alpha’s sales value at split-off = $78,000
McGraw-Hill/Irwin
17-22
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-29 (CONTINUED)
3.
Joint cost allocation using the net-realizable-value method:
Joint
Cost
$78,000
Joint
Sales Value of
Products Final Product
$ 91,000
 Alpha
32,500
 Beta
Gamma
26,000

Total
$149,500
Separable
Cost of
Processing
$ 9,100
6,500
3,900
Net
Realizable
Value
$ 81,900
26,000
22,100
$19,500
$130,000
Relative
Proportion
.63
.20
.17
Allocation
of Joint
Cost
$49,140
15,600
13,260
$78,000
PROBLEM 17-30 (30 MINUTES)
1.
Physical-units method of allocation:
Joint
Cost
$750,000
Joint
Quantity at
Relative
Allocation of
Products
Split-Off Point
Proportion
Joint Cost
MSB .............
60,000 .............. 40% .....................$300,000
CBL .............
90,000 .............. 60% ..................... 450,000
Total ............
150,000
$750,000
The joint cost allocated to CBL is $450,000.
2.
Relative-sales-value method of allocation:
Joint
Cost
$750,000
Joint
Sales Value at
Relative
Allocation of
Products
Split-Off Point
Proportion
Joint Cost
MSB .............
$ 300,000 ..........
25% .....................$187,500
CBL .............
900,000 ..........
75% ..................... 562,500
Total ............
$1,200,000
$750,000
The joint cost allocated to MSB is $187,500.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-23
PROBLEM 17-30 (CONTINUED)
3.
Net-realizable-value method of allocation:
Sales
Additional
Net
Allocation
Joint
Joint
Value of
Cost of
Realizable
Relative
of Joint
Cost Products Final Product Processing
Value
Proportion
Cost
$750,000 MSB .......................
$ 750,000* .... $ 250,000 ..... $ 500,000
1/3 ............. $250,000
†
CBL .......................
2,000,000 .... 1,000,000 ..... 1,000,000
2/3 ............. 500,000
Total ......................
$1,500,000
$750,000
*$12.50  60,000
†$25  (90,000 – 10,000)
The unit cost of CBL is computed as follows:
4.
Joint cost allocation ..................................................................
Additional processing costs .....................................................
Total cost ....................................................................................
$ 500,000
1,000,000
$1,500,000
Quantity (good units) .................................................................
80,000
Cost per unit ($1,500,000 ÷ 80,000) ...........................................
$18.75
Sales value if coated (60,000  $12.50) ....................................
Additional cost of coating .........................................................
Incremental contribution if coated ...........................................
Sales value if uncoated (60,000  $5) .......................................
Decline in contribution if uncoated ..........................................
$ 750,000
250,000
$ 500,000
300,000
$ 200,000
The contribution would decrease by $200,000 if the mine support braces are not
processed further.
5.
The allocation of joint costs is irrelevant to the decision about coating the mine
support braces. The decision should be based entirely on information pertaining to
events from the split-off point forward. Thus, the joint cost allocation results were
not used in making this production decision.
McGraw-Hill/Irwin
17-24
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-31 (40 MINUTES)
1.
Joint costs arise from the simultaneous processing or manufacturing of two or more
products made from the same process. These joint costs are not traceable to any
single product.
The split-off point is the stage in the manufacturing process at which joint products
can be identified as individual units. Future costs are then accounted for separately.
2.
The dollar value of the finished-goods inventories on November 30 for products MJ-4
and HD-10 are calculated as follows:
Joint costs to be allocated:
Total joint costs incurred .................................................................
Less: Net realizable value (NRV) of FT-5* .......................................
Joint costs to be allocated ...............................................................
$3,136,000
136,000
$3,000,000
*NRV = 85,000 gal.  ($1.80$.20)
Allocation of joint costs:
MJ-4
November production (in gallons) ...........................
600,000
Final sales value per gallon .....................................
$8.00
Total sales value ....................................................... $4,800,000
Less: Separable-costs ..............................................
1,440,000
NRV at split-off .................................................... $3,360,000
Divided by total NRV at split-off ..............................  5,600,000
Percentage allocation ...............................................
.60
Joint cost to be allocated .........................................  $3,000,000
Joint cost allocation ................................................. $1,800,000
HD-10
320,000
 $12.75
$4,080,000
1,840,000
$2,240,000
 5,600,000*
.40
 $3,000,000
$1,200,000
*Total NRV at split-off equals $5,600,000 ($3,360,000 + $2,240,000).
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-25
PROBLEM 17-31 (CONTINUED)
Inventory values on November 30:
MJ-4
Joint cost allocation ................................................. $1,800,000
Additional processing costs ....................................
1,440,000
Total cost ............................................................. $3,240,000
Gallons produced .....................................................  600,000
Cost per gallon .......................................................... $
5.40
Finished-goods inventory (gallons) ........................ 
9,000
Inventory value................................................... $ 48,600
3.
HD-10
$1,200,000
1,840,000
$3,040,000
 320,000
$
9.50

26,000
$ 247,000
Wyalusing Chemicals should continue to process HD-10 beyond the split-off point,
since the incremental revenue is $1.00 greater per gallon than the incremental cost.
The joint cost is irrelevant to the decision because it will not change regardless of
the decision to sell as is or process further. The analysis follows:
Per Unit
Per-gallon sales value after split-off .......................
Per-gallon sales value at split-off ............................
Incremental sales value ............................................
Additional processing cost ......................................
Incremental revenue .................................................
$12.75
6.00
$ 6.75
5.75†
$ 1.00
Total
$2,160,000*
1,840,000
$ 320,000
*320,000 gal.  $6.75
†$1,840,000/320,000 gal.
McGraw-Hill/Irwin
17-26
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-32 (45 MINUTES)
1.
Physical-units method:
Joint
Cost
per Run
$750,000
Joint
Quantity at
Products
Split-Off Point
Compod …….. 120,000 gallons .........
Ultrasene ....... 80,000 gallons .........
Relative
Allocation of
Proportion
Joint Cost
60% ..................
$450,000
40% ..................300,000
Total…………. 200,000 gallons……..
$750,000
The joint cost allocated to Compod is $450,000.
2.
Relative-sales-value method:
Joint
Cost
per Run
$750,000
Joint
Sales Value at
Relative
Allocation of
Products
Split-Off Point
Proportion
Joint Cost
Compod ......... $ 720,000 .....
48% .....................
$360,000
Ultrasene .......
780,000 ............ 52% .....................
390,000
Total…………..
$1,500,000……
$750,000
The joint cost allocated to Ultrasene is $390,000.
3.
Now there are additional processing costs beyond the split-off point.
a. Additional processing costs have no effect on the physical-units method of
allocation. The joint cost allocated to Ultrasene is $300,000, as calculated in
requirement (1).
b. Net-realizable-value method:
Joint
Net
Allocation
Cost
Joint
Sales Value of Separable Cost Realizable
Relative
of Joint
per Run Products Final Product of Processing
Value
Proportion
Cost
$750,000 Compod ...................
$720,000......... $ 36,000 ........ $ 684,000
57%...........$427,500
Ultrasene...................
780,000......... 264,000 ........ 516,000
43%........... 322,500
Total………
$1,200,000
$750,000
The joint cost allocated to Compod is $427,500.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-27
PROBLEM 17-32 (CONTINUED)
4.
Incremental revenue per gallon from further processing
into Compodalene ($7.80 – $6.00) ...........................................................................$1.80
Incremental cost per gallon from further processing:
Processing cost .......................................................................................................
$1.20
Sales commission ($7.80  10%) ...........................................................................
.78
1.98
Incremental loss per gallon from further processing
into Compodalene .....................................................................................................$(.18)
Conclusion: Do not process Compod into Compodalene. The firm should sell
Compod. (Note that the $.30 per gallon separable processing cost to obtain Compod
is irrelevant. The question is what to do with the Compod after it has been obtained.
The relevant data are the incremental costs and benefits associated with turning
Compod into Compodalene.)
5.
The director of research, Jack Turner, acted improperly in asking the assistant
controller to alter her analysis in favor of producing Compodalene. If he believes the
further processing of Compod is in Chemco’s best interests, he should try to back
up his claim with some projected cost reductions and the potential impact on the
company’s market. He could present his own estimates to Christine Dalton, or
directly to the managers responsible for making the final decision.
The assistant controller, Christine Dalton, should not alter her analysis to support
the production of Compodalene. In the absence of any further information, she
should recommend against the further processing of Compod. Several ethical
standards for management accountants (listed in Chapter 1) are relevant, including
the following:
Competence
 Prepare complete and clear reports and recommendations after appropriate
analyses of relevant and reliable information.
Objectivity
 Communicate information fairly and objectively.
 Disclose fully all relevant information that could reasonably be expected to
influence an intended user’s understanding of the reports, comments, and
recommendations presented.
McGraw-Hill/Irwin
17-28
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-32 (CONTINUED)
6.
It is preferable to sell Compod than to sell Compodalene, as the solution to
requirement (4) showed. Nevertheless, it is preferable to sell Compodalene than to
sell nothing, since each gallon of Compodalene makes a positive contribution
toward covering the joint production cost, fixed costs, and profit.
Incremental revenue from sale of a gallon of
Compodalene (if the alternative is no sale) ............................................................$7.80
Incremental cost (if the alternative is to stop
production at the split-off point):
Separable processing to produce Compod after
the split-off point ...................................................................................................
$.30
Further processing cost to turn Compod into Compodalene ..............................
1.20
Sales commission ...................................................................................................
.78
Total ......................................................................................................................... 2.28
Contribution to the joint production cost, fixed costs,
and profit ...................................................................................................................$5.52
PROBLEM 17-33 (30 MINUTES)
1.
Reciprocal-services method:
Equations:
M = 96,000 + .2C
C = 500,000 + .1M
Where M denotes the total cost of the Maintenance Department
C denotes the total cost of the Computing Department
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-29
PROBLEM 17-33 (CONTINUED)
Solution of equations:
M = 96,000 + .2 (500,000 + .1M)
M = 96,000 + 100,000 + .02M
.98 M = 196,000
M = 200,000
C = 500,000 + .1 (200,000)
C = 520,000
Allocation:
Service Departments
Production Departments
Maintenance Computing
Etching
Finishing
Traceable costs ....................... $ 96,000
$500,000
Allocation of Maintenance
Department costs .................. (200,000)
20,000(.1) $ 20,000(.1)
$160,000(.8)
Allocation of Computing
Department costs .................. 104,000(.2) (520,000)
364,000(.7)
52,000(.1)
Total service department costs allocated ............................. $384,000
$212,000
Overhead costs traceable to production departments ........ 400,000
640,000
Total overhead cost ................................................................ $784,000
$852,000
Direct-labor hours (DLH)
(20  2,000) ..........................................................................
40,000
(80  2,000) ..........................................................................
160,000
Overhead rate per hour (total overhead ÷ DLH) ...................
$19.60
$5.325
Check on allocation procedure:
Service department costs allocated to Etching ................
$384,000
Service department costs allocated to Finishing .............
212,000
Total .....................................................................................
$596,000
2.
The direct allocation method ignores any service rendered by one service
department to another. Allocation of each service department’s total cost is made
directly to the production departments. The step-down method recognizes one
service department’s usage of services, but ignores the other’s usage of services.
The reciprocal services allocation method recognizes all service department support
to other service departments through the use of simultaneous equations. This
allocation procedure should lead to more accurate results that would be of greater
value to management.
McGraw-Hill/Irwin
17-30
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
PROBLEM 17-34 (55 MINUTES)
1.
Variable costs:
Notation:
R denotes the total variable cost of Patient Records
H denotes the total variable cost of Human Resources
A denotes the total variable cost of Administration and Accounting
Equations:
R = 24,000 + .05P (1)
H = 15,000 + .05A (2)
A = 47,500 + .20P (3)
These equations are based on the variable costs and short-run usage proportions
given in Exhibit 18-2.
Solution of equations: Substitute from equation (3) into equation (2).
H = 15,000 + .05(47,500 + .20H)
.99H = 17,375
H = 17,551 (rounded)
Substitute the value of H into equations (1) and (3).
R
R
A
A
=
=
=
=
24,000 + .05(17,551)
24,878 (rounded)
47,500 + .20(17,551)
51,010 (rounded)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-31
PROBLEM 17-34 (CONTINUED)
Allocation of variable costs:
Human
Resources
Traceable costs ........................ $15,000
Allocation of Human
Resources
Department costs ................... (17,551)
Allocation of Administration
and Accounting
Department costs ................... 2,551*(.05)
Allocation of Patient
Records Department costs ...
(0)
Total variable cost allocated
to each direct-patient-care
department ...............................
Service Departments
Administration
and
Patient
Accounting
Records
$47,500
$24,000
3,510(.20)
(51,010)
(0)
878*(.05)
-0-(0)
(24,878)
Direct-Patient-Care
Departments
Orthopedics
Internal Medicine
$ 4,388*(.25)
$ 8,776*(.50)
17,854*(.35)
30,606(.60)
7,463*(.30)
17,415*(.70)
$29,705†
*Rounded
†$29,705
+ $56,797 = $86,502; differs from the total variable cost ($86,500) because of cumulative rounding.
McGraw-Hill/Irwin
17-32
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
$56,797†
PROBLEM 17-34 (CONTINUED)
2.
Fixed costs:
Notation:
R denotes the total fixed cost of Patient Records
H denotes the total fixed cost of Human Resources
A denotes the total fixed cost of Administration and Accounting
Equations:
R = 76,000 + .10P
H = 45,000 + .10A
A = 142,500 + .10P
(4)
(5)
(6)
These equations are based on the fixed costs given in Exhibit 18-2 and the long-run
usage proportions given in Exhibit 18-5.
Solution of equations: Substitute from equation (6) into equation (5).
H = 45,000 + .10(142,500 + .10H)
.99H = 59,250
H = 59,848 (rounded)
Substitute the value of H into equations (4) and (5).
R
R
A
A
=
=
=
=
76,000 + .10(59,848)
81,985 (rounded)
142,500 + .10(59,848)
148,485 (rounded)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-33
PROBLEM 17-34 (CONTINUED)
Allocation of fixed costs:
Human
Resources
Traceable costs ........................ $45,000
Allocation of Human
Resources Department
costs ....................................... (59,848)
Allocation of Administration
and Accounting
Department costs ................... 14,849*(.10)
Allocation of Patient
Records Department costs ...
-0-(0)
Total fixed cost allocated
to each direct-patient-care
department ...............................
Direct-Patient-Care
Departments
Service Departments
Administration
and
Patient
Accounting
Records
$142,500
$76,000
5,985*(.10)
(148,485)
-0-(0)
Orthopedics
Internal Medicine
5,985*(.10)
$11,970*(.20)
$35,909*(.60)
-0-(0)
66,818*(.45)
66,818*(.45)
32,794 (.40)
49,191(.60)
(81,985)
$111,582†
*Rounded
†$111,582
+ $151,918 = $263,500
McGraw-Hill/Irwin
17-34
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
$151,918†
PROBLEM 17-34 (CONTINUED)
Total costs allocated:
Orthopedics
Variable costs ............................................................................$ 29,705
Fixed costs ................................................................................. 111,582
Total costs ..................................................................................$141,287
Grand total ..................................................................................
Internal
Medicine
$ 56,797
151,918
$208,715
$350,002*
*Differs from the total cost to be allocated ($350,000) due to cumulative rounding in
the allocation of the variable costs.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
 2009 The McGraw-Hill Companies, Inc.
17-35
SOLUTIONS TO CASES
CASE 17-35 (40 MINUTES)
1.
Product output in pounds:
Product
Slices
Crushed
Juice
Animal feed
Total
Proportion
.35
.28
.27
.10
Total
Pounds
189,000
151,200
145,800
54,000
540,000
Pounds
Lost in
Processing
—
—
10,800*
—
10,800
Net
Pounds
189,000
151,200
135,000*
54,000
529,200
*Evaporation loss is 8% of the remaining good output. Let X denote the remaining
quantity of juice:
145,800 – .08X
=
X
145,800
=
1.08 X
135,000
=
X
Check: evaporation loss = (8%)(135,000) = 10,800
2.
Net realizable value at the split-off point:
Product
Slices
Crushed
Juice
Total
McGraw-Hill/Irwin
17-36
Pounds of
Production
189,000
151,200
135,000
Selling
Price
1.20
1.10
.60
Sales
Revenue
$226,800
166,320
81,000
$474,120
Separable Net Realizable Value
Cost
Amount Percent
$18,800
$208,000
52%
42,320
124,000
31%
13,000
68,000
17%
$74,120
$400,000
100%
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
CASE 17-35 (CONTINUED)
3.
Allocation of joint costs:
Cutting department costs .........................................................
Less net realizable value of by-product
Sales value (10%  540,000  $.20) ........................................
Separable cost ........................................................................
Net realizable value of animal feed ....................................
Balance of joint cost to be allocated to main products
in proportion to net realizable value .......................................
Allocation of joint cost:
Slices
52% ........................................................
Crushed
31% ........................................................
Juice
17% ........................................................
Total ............................................................................................
McGraw-Hill/Irwin
Managerial Accounting, 8/e
$240,000
$10,800
(2,800)
8,000
$232,000
$120,640
71,920
39,440
$232,000
 2009 The McGraw-Hill Companies, Inc.
17-37
CASE 17-36 (50 MINUTES)
1.
Diagram of joint production process:
10,000
gallons of
input costing
$180,000
Joint
production
process costing
$450,000
Total joint cost:
$630,000 for
a 10,000 gallon
batch
McGraw-Hill/Irwin
17-38
Resoline,
sales value:
$600,000
(8,000 x $75)
Separable
process costing:
$120,000
(8,000 x $15)
Resolite,
sales value:
$840,000
(8,000 x $105)
Separable
process costing:
$90,000
(2,000 x $45)
Kryptite,
sales value:
$570,000
(2,000 x $285)
Split-off point
Krypto,
sales value:
$300,000
(2,000 x $150)
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual
CASE 17-36 (CONTINUED)
2.
Allocation of joint costs:
a. Physical-units method:
Joint
Cost
$630,000
Joint
Products
Resoline
Krypto
Total
Quantity at
Split-Off Point
8,000 pounds
2,000 pounds
10,000 pounds
Relative
Proportion
8/10
2/10
Allocation of
Joint Cost
$504,000
126,000
$630,000
Sales Value at
Split-Off Point
$600,000
300,000
$900,000
Relative
Proportion
2/3
1/3
Allocation of
Joint Cost
$420,000
210,000
$630,000
b. Relative-sales-value method:
Joint
Cost
$630,000
Joint
Products
Resoline
Krypto
Total
c. Net-realizable-value method:
Joint
Cost
Joint
Products
Resolite
$630,000 
Kryptite
Total
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Sales
Value of
Final Product
$840,000
570,000
Separable
Cost of
Processing
$120,000
90,000
Net
Allocation
Realizable
Relative
of Joint
Value
Proportion
Cost
$ 720,000
.60
$378,000
480,000
.40
252,000
$1,200,000
$630,000
 2009 The McGraw-Hill Companies, Inc.
17-39
CASE 17-36 (CONTINUED)
3.
Decision analysis:
Incremental revenue per pound:
Sales price of Omega .............................................................
Sales price of Kryptite ...........................................................
Incremental revenue ..............................................................
$390
285
$105
Incremental cost per pound:*
Separable processing ............................................................
Packaging ...............................................................................
Incremental cost .....................................................................
$120
18
Incremental loss per pound ......................................................
138
$(33)
Conclusion: The Kryptite should not be processed further into Omega.
*Notice that these are the separable costs incurred after Kryptite has already been
produced. The separable costs of processing Krypto into Kryptite are properly
excluded.
4.
The joint cost allocation should not be used in the decision analysis. The total joint
cost will not be affected by the decision.
5.
In the electronic version of the solutions manual, press the CTRL key and click on
the following link: BUILD A SPREADSHEET
McGraw-Hill/Irwin
17-40
 2009 The McGraw-Hill Companies, Inc.
Solutions Manual