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Problems in by-Product Costing allocation

Problems in by-Product Costing. The Denim Incorporation, producer of papers from wood pulp, markets and sells its products to intermediate converters for processing into paper bags, paper boxes, etc.
Logs are collected from the wood yard and are barked in large drums. The bark saved is dried and used as fuel for the steam boilers. The corporation estimates that 20% of the steam generated comes from the wood bark. Even though this fuel seems to cost nothing, the cost accountant credits that proportion of the total cost of steam distributed in the period to the cost of paper.

In the production process of cooking or digesting the chipped wood, in addition to the wood pulp, a fatty soap is manufactured which is siphoned off and refined into a by-product known as Tall Oil which is marketed and sold and used in the making of paints, solvents and soaps etc. For every 20 tons of paper, one ton of Tall Oil is generated.

Actual data:
(a) 2 million MBTU's of steam were distributed from the boiler during the period at a cost of $0.250 per MBTU.

(b) 60,000 tons of paper were sold at a selling price of $75 per ton. Costs for the period were
Materials $2.7 million
Labour 264,000
Factory overhead 876,000
(c) The selling price for tall oil was $40 per ton. Costs after separation were:

Additional materials $12,000
Labour 7,000
Factory overhead 6,500

Required: An income statement for the month of January for paper using the market value (reversal cost) method for costing the paper and Tall Oil. Include a credit to the cost of paper for steam.
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