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.

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