Question

Allocating Joint Costs Using the Sales-Value-at-Split-Off Method

Orchard Fresh, Inc., purchases apples from local orchards and sorts them into four categories. Grade A are large blemish-free apples that can be sold to gourmet fruit sellers. Grade B apples are smaller and may be slightly out of proportion. These are packed in boxes and sold to grocery stores. Apples for slices are even smaller than Grade B apples and have blemishes. Apples for applesauce are of lower grade than apples for slices, yet still suitable for canning.

Information on a recent purchase of 20,000 pounds of apples is as follows: Assume that Orchard Fresh, Inc., uses the sales-value-at-split-off method of joint cost allocation and has provided the following information about the four grades of apples:

Grades	Pounds	Price at Split-Off (per lb.)
Grade A	1,400	$4.00
Grade B	5,000	1.00
Slices	8,000	0.50
Applesauce	5,600	0.10
Total	20,000

Total joint cost is $15,000.

Required:

1. Allocate the joint cost to the four grades of apples using the sales-value-at-split-off method. Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar.

	Joint Cost
Grades	Allocation
Grade A	$
Grade B
Slices
Applesauce
Total	$

2. What if the price at split-off of Grade B apples increased to $1.20 per pound? How would that affect the allocation of cost to Grade B apples? How would it affect the allocation of cost to the remaining grades? Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar.

	Joint Cost
Grades	Allocation
Grade A	$
Grade B
Slices
Applesauce
Total	$

Answer 1

1. Statement showing allocation of joint cost :

Grades	Pounds	Price at Split-Off (per lb.)	Total value at split off [quantity × price at split off]	percentage [each grade value/total value of all grades]	Joint cost allocated [total joint cost × percentage ]
Grade A	1,400	$4.00	$5600	0.3694 or 36.94%	$5541
Grade B	5,000	1.00	$5000	0.3298 or 32.98%	$4947
Slices	8,000	0.50	$4000	0.2639 or 26.39%	$3959
Applesauce	5,600	0.10	$560	0.0369 or 3.69%	$553
Total	20,000		$15160	1 or100%	$15000

2.

Grades	Pounds	Price at Split-Off (per lb.)	Total value at split off [quantity × price at split off]	percentage [each grade value/total value of all grades]	Joint cost allocated [total joint cost × percentage ]
Grade A	1,400	$4.00	$5600	0.3465 or 34.65%	$5198
Grade B	5,000	1.20	$6000	0.3719 or 37.19%	$5578
Slices	8,000	0.50	$4000	0.2475 or 24.75%	$3713
Applesauce	5,600	0.10	$560	0.0347 or 3.47%	$520
Total	20,000		$16160	1 or100%	$15000

Effect on grade B:

Because of increase in price of grade B, the of allocation got changed. Before grade A had highest percentage of allocation, so grade A got allocated with more cost. After the increase in price, grade B got highest percentage of allocation, so grade B got allocated with highest cost.  

Because of increase in price, the cost allocated to grade B has been increased by $631 [$5578 - $4947].

Effect on other grades :

From other three grades $631amount of cost reduced and added to grade B. That means, all other grades joint cost allocation got reduced and that reduced amount got allocated to grade B.