Question

West Coast Designs produces three products: super, deluxe, and generic. Super and deluxe are its main products; generic is a by-product of super. Information on the past month’s production processes follows:

• In Department A, 352,000 units of the raw material X-1 are processed at a total cost of $585,108. After processing in Department A, 50 percent of the units are transferred to Department B, and 50 percent of the units (now unprocessed deluxe) are transferred to Department C.

• In Department B, the materials received from Department A are processed at an additional cost of $242,000. Seventy percent of the units become super and are transferred to Department D. The remaining 30 percent emerge as generic and are sold at $5.60 per unit. The additional processing costs to make generic salable are $55,600.

• In Department C, deluxe is processed at an additional cost of $860,000. A normal loss of 10 percent of the units of good output of deluxe occurs in this department. The remaining good output is then sold for $31 per unit.

• In Department D, super is processed at an additional cost of $95,000. After this processing, super can be sold for $15 per unit.

Required:

Prepare a schedule showing the allocation of the $585,108 joint cost to super and deluxe using the estimated net realizable value approach. Revenue from the sale of by-products should be credited to the manufacturing costs of the related main product. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

Super Deluxe Sales value after completion Sales revenue from Generic Separate processing costs: Department B Department Department D Additional processing cost for Generic Approximate net realizable values Cost Allocation Super Deluxe

Answer 1

Net Realizable value is a method by which Joint costs are allocated among different products originating from a single Raw material and split off after further processing . In the given case we see that X-1 raw material is used and after incurring Joint cost of $585108, total units of 352000 units is split off in following ways:
From department A, 50% goes to Department B which is 176000 units. Out of these 70% of units which is 123200 units is SUPER and remaining 30% which is 52800 units is GENERIC
From Department A, 50% goes to Department C where after processing of 176000 units, 10% is normal loss so remaining 90% units of DELUXE will be 158400 units.
Hence we have SUPER = 123200 units sold at $15 per unit, GENERIC = 52800 units sold at $5.60 per unit and DELUXE = 158400 units sold at $31 per unit.
The following statement shows computation of NET REALIZABLE VALUE

Computation of Approximate Net Realizable Value

Particulars	SUPER	DELUXE
Sale value after completion	$1848000 (123200 X $15)	$4910400 (158400 X $31)
Sale value from Generic	$295680 (52800 X $5.6)
Separate processing costs:
Department B	-$242000
Department C		-$860000
Department D	-$95000
Additional processing cost for Generic	-$55600
Approximate Net Realizable Value	$1751080	$4050400

If we were to divide $585108 of Total cost between SUPER and DELUXE in Net realizable value ratio than it will be as follows:

Particulars	Cost Allocations
SUPER = $585108 X (1751080/ 5801480)	$176605
DELUXE = $585108 X (4050400/ 5801480)	$408503

(Note: $1751080 + $4050400 = $5801480)