Effect of By Product versus Joint Cost Accounting
Black Corporation processes xyrex into three outputs: Xy 1, Xy 2, and Xy 3. Xy 1 accounts for 60 percent of the net realizable value at the split off point, Xy 2 accounts for 30 percent, and Xy 3 accounts for the balance. The joint costs total $365,500. If Xy 3 is accounted for as a by product, its $37,600 net realizable value at split off is credited to the joint manufacturing costs using method 1 described in the text, which credits the by product’s net realizable value as a reduction in the joint costs.
Required
a. What are the allocated joint costs for the three outputs
(1) If Xy 3 is accounted for as a joint product?
(2) If Xy 3 is accounted for as a by product?
b. Management does not understand why joint costs are allocated to Xy 3 differently when it is accounted for as a by product. Write a brief memo explaining why this occurs.