Problem:
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 2012 is as follows:
|
Parts
|
Pounds of Product
|
Wholesale Selling Price per Pound When Production Is Complete
|
|
Breasts
|
100
|
$0.55
|
|
Wings
|
20
|
0.20
|
|
Thighs
|
40
|
0.35
|
|
Bones
|
80
|
0.10
|
|
Feathers
|
10
|
0.05
|
Joint cost of production in July 2012 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 split off 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 split off method
b. Physical-measure method (pounds of finished product)
2. What joint-cost-allocation method would you recommend Quality Chicken use? Explain.