Pike Seafood Company Purchases And Processes Lobsters
Pike Seafood Company Purchases Lobsters And Processes Them Into Tails
Pike Seafood Company purchases lobsters and processes them into tails and flakes. It sells the lobster tails for $19.9 per pound and the flakes for $14.2 per pound. The company processes 100 pounds of lobster into an average of 56 pounds of tails, 27 pounds of flakes, and 17 pounds of waste. The company purchased 3,600 pounds of lobster at $4 per pound, with additional labor costs of $6,700. No costs are assigned to waste. The company sold 1,882 pounds of tails and 884 pounds of flakes. The assignment involves calculating the allocated cost of the sold items and the ending inventory, using a value basis for joint cost allocation.
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Introduction
The processing of seafood involves significant costs, especially when dealing with joint products such as lobster tails and flakes derived from a common raw material. Pike Seafood Company’s scenario offers a case for examining joint cost allocation based on value, which is crucial for determining profitability and inventory valuation. This paper explores the calculation of the allocated costs for both sold products and ending inventory, emphasizing the importance of an accurate, value-based allocation method.
Understanding the Production Process and Cost Structure
Pike Seafood processes 3,600 pounds of lobster, acquired at $4 per pound, aggregating costs to $14,400 for raw material. In addition, processing incurs a labor cost of $6,700, bringing the total joint costs to $21,100. The processing yields 56 pounds of tails and 27 pounds of flakes from each 100 pounds of lobster, totaling 56 x 36 = 2,016 pounds of tails and 972 pounds of flakes, with 612 pounds of waste (17 pounds per 100 pounds processed).
The distribution of the processing output indicates two main products: tails and flakes, which have different market values. The company sells tails at $19.90 per pound and flakes at $14.20 per pound. The method of allocating joint costs based on the products' relative market value ensures an equitable distribution that reflects each product's economic significance.
Calculation of Total Joint Costs
The total costs incurred include:
- Raw material: 3,600 pounds x $4 = $14,400
- Labor and processing costs: $6,700
Total joint costs = $14,400 + $6,700 = $21,100
Determining the Total Output and Market Values
From the processing:
- Total pounds of tails = 1,882 (sold) + remaining in inventory (to be calculated)
- Total pounds of flakes = 884 (sold) + remaining in inventory
- Total processed output: 56% of 3,600 = 2,016 pounds of tails, 972 pounds of flakes
Remaining inventory of tails = 2,016 - 1,882 = 134 pounds
Remaining inventory of flakes = 972 - 884 = 88 pounds
Market value of the total output:
- Market value of tails = 2,016 pounds x $19.90 = $40,178.40
- Market value of flakes = 972 pounds x $14.20 = $13,802.40
- Total market value = $40,178.40 + $13,802.40 = $53,980.80
Allocation of Joint Costs Based on Relative Market Value
The proportion of total market value attributable to each product:
- Tails: $40,178.40 / $53,980.80 ≈ 0.744
- Flakes: $13,802.40 / $53,980.80 ≈ 0.256
Allocated costs:
- Tails: 0.744 x $21,100 ≈ $15,716.40
- Flakes: 0.256 x $21,100 ≈ $5,383.60
Cost per Pound of Sold and Remaining Inventory
Cost per pound:
- Tails: $15,716.40 / 2,016 ≈ $7.80
- Flakes: $5,383.60 / 972 ≈ $5.54
Cost of goods sold:
- Tails sold: 1,882 pounds x $7.80 ≈ $14,679.60
- Flakes sold: 884 pounds x $5.54 ≈ $4,899.36
Remaining inventory valuation:
- Tails: 134 pounds x $7.80 ≈ $1,045.20
- Flakes: 88 pounds x $5.54 ≈ $487.52
Conclusion
By applying a value basis to allocate joint costs, Pike Seafood ensures an equitable distribution of costs between tail and flake products based on their relative market values. This method provides a fair evaluation of both the cost of goods sold and the ending inventory, facilitating better financial decision-making and inventory management. Accurate allocation is critical for profit analysis, cost control, and financial reporting, particularly in joint production scenarios typical in seafood processing.
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