Joint-cost allocation, insurance settlement Quality Chicken grows and processes chickens. Each chicken is disassembled into five main parts. Information pertaining to production in July 2009 is: Wholesale Selling Price per Pound
Parts Pound of Product When Production Is Complete
Joint cost of production in July 2009 was $50.
A special shipment of 40 pounds of breasts and 15 pounds of wings has been destroyed in a fire. Quality Chicken’s insurance policy provides reimbursement for the cost of the items destroyed. The insurance company permits Quality Chicken to use a joint-cost-allocation method. The splitoff point is assumed to be at the end of the production process.
1. Compute the cost of the special shipment destroyed using the following:
a. Sales value at splitoff method.
b. Physical-measure method (pounds of finished product).
2. What joint-cost-allocation method would you recommend Quality Chicken use? Explain.

Question Completion:

                  Sales Qty        Sales

                in Pound (A)   Rate (B)

Breasts           100            $0.55

Wings              20              $0.20

Thighs             40              $0.35  

Bones             80              $0.10    

Feathers          10              $0.05

Quality Chicken

1. The cost of the special shipment destroyed using the following:

a. Sales value at splitoff method:

Product Line cost of the special shipment destroyed

                                  Breasts      Wings       Total

Qty Lost

(in Pound)                       40             15            55

Joint cost Per Pound  $0.34     $0.12

Cost of destroyed     $13.50      $1.84       $15.34

b. Physical-measure method (pounds of finished product):

Product Line cost of the special shipment destroyed

                                  Breasts      Wings       Total

Qty Lost

(in Pound)                       40             15            55

Joint cost Per Pound  $0.20     $0.20

Cost of destroyed       $8.00      $3.00      $11.00

2. The sales value at split-off method is recommended.  It assess different inventories according to their relative market values instead of their historical costs.

Explanation:

a) Data and Calculations:

                  Sales Qty     Sales    Sales value  Joint Cost

                   in Pound      Rate    at Split-off      Allocated

Breasts           100          $0.55      $55.00      $33.74 ($55/$81.50) * $50

Wings              20            $0.20          4.00          2.45 ($4/$81.50) * $50

Thighs             40            $0.35         14.00          8.59 ($14/$81.50) * $50  

Bones             80            $0.10            8.00          4.91 ($8/$81.50) * $50  

Feathers          10           $0.05           0.50          0.31 ($0.50/$81.50) * $50  

Total            250                              $81.50    $50.00

           Joint Cost

          Per Pound

Breasts    $0.34 ($33.74/100)

Wings       $0.12 ($2.45/20)

Thighs     $0.21 ($8.59/40)

Bones     $0.06 ($4.91/80)

Feathers $0.03 ($0.31/10)

Product Line cost of the special shipment destroyed

                                  Breasts      Wings       Total

Qty Lost

(in Pound)                       40             15            55

Joint cost Per Pound  $0.34     $0.12

Cost of destroyed     $13.50      $1.84       $15.34

Physical-Measure Method:

                            Breasts    Wings    Thighs     Bones    Feathers     Total

Qty in Pound                  100          20          40            80             10           250

Allocation of joint cost $20         $4         $8          $16          $2          $50

Weights                          40%        8%       16%         32%         4%        100%

Cost per unit               $0.20     $0.20   $0.20      $0.20      $0.20

Cost of Product destroyed:

Breasts = $8 ($0.20 * 40)

Wings =   $3 ($0.20 * 15)

Total =     $11

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