Question

5. Joint Cost Allocation—Net Realizable Value Method

Nature's Garden Inc. produces wood chips, wood pulp, and mulch. These products are produced through harvesting trees and sending the logs through a wood chipper machine. One batch of logs produces 20,304 cubic yards of wood chips, 14,100 cubic yards of mulch, and 9,024 cubic yards of wood pulp. The joint production process costs a total of $32,000 per batch. After the split-off point, wood chips are immediately sold for $25 per cubic yard while wood pulp and mulch are processed further. The market value of the wood pulp and mulch at the split-off point is estimated to be $22 and $24 per cubic yard, respectively. The additional production process of the wood pulp costs $5 per cubic yard, after which it is sold for $30 per cubic yard. The additional production process of the mulch costs $4 per cubic yard, after which it is sold for $32 per cubic yard.

Allocate the joint costs of production to each product using the net realizable value method.

Joint Product   Allocation

Wood chips $

Wood pulp $

Mulch $

Totals $

Answer 1

Product	Output	Selling price per cubic yard	net realizable value	Percentage of net realizable value	Allocation of joint cost
Wood chips	20,304 cubic yards	$25	20,304 x 25 = 507,600	48.60%	15,552
Wood pulp	9,024 cubic yards	$22	9,024 x 22 = 198,528	19%	6,080
Mulch	14,100 cubic yards	$24	14,100 x 24 = 338,400	32.40%	10,368
			$1,044,528		$32,000

Exact answer may slightly differ due to rounding off.

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