CMA practice question 4 of 35

Whitehall Corporation produces chemicals used in the cleaning industry During the previous month, Whitehall incurred $300,000 of joint costs in…

Whitehall Corporation produces chemicals used in the cleaning industry During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-i 2 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90000.Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is true?

Answer options

A: The operating profit last month was $50,000, and the inventory value is $15,000.

B: The operating profit last month was $50,000, and the inventory value is $45,000. Correct answer

C: The operating profit last month was $125,000, and the inventory value is $30,000.

D: The operating profit last month was $200,000, and the inventory value is $30,000.

Correct Answer:

B. The operating profit last month was $50,000, and the inventory value is $45,000.

Explanation

Joint cost is allocated on the physical-measure basis. AM-12 units = 60,000 of 100,000 total; joint cost to AM-12 = 60% × $300,000 = $180,000. Further-processing cost (given) = $90,000. Unit cost after processing = ($180,000 + $90,000) ÷ 60,000 = $4.50. Revenue recognised (50,000 × $5.50) = $275,000. Cost of goods sold (50,000 × $4.50) = $225,000. Operating profit = $275,000 – $225,000 = $50,000. Ending inventory (10,000 × $4.50) = $45,000.

Why Incorrect

A. Inventory valued at $4.50 × 10,000 = $45,000, not $15,000.
C. Profit of $125,000 and inventory $30,000 result from using selling price at split-off, not relevant here.
D. Computes revenue on all 60,000 units but ignores unsold inventory; profit overstated at $200,000.

References

1. Horngren

Datar & Rajan

Cost Accounting 16e

Ch.16

pp. 576-578 (physical-measure joint-cost allocation).

2. MIT OpenCourseWare 15.516

Session “Joint‐Product Costing”

slides 6-10 (cost per unit and inventory valuation).

3. IMA Statement on Management Accounting

“Treatment of Joint Costs”

§3.2 (allocation methods and inventory costing).

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