Question

Tango Company produces joint products M, N, and T from a joint process. This information concerns a batch produced in April at a joint cost of $215,000: Product Units Produced and Sold 19,500 13,500 14,500 After Split-Off Total Separable Costs Total Final Sales Value $ 19,800 $ 255,000 14,500 235,000 9,700 44,000 Required: How much of the joint cost should be allocated to each joint product using the net realizable value method? (Do not round intermediate calculations. Enter your final answers in whole dollars.) Product Allocated Joint Cost Cost allocation is often the centerpiece of conflict that is resolved in court cases. The litigation usually involves the dispute over how costs are allocated to a product or product line that is of interest to the plaintiff. This is particularly an issue when a company produces some products or services for a price-competitive market while other products or services are produced for a governmental unit on a cost-plus or reimbursement basis Nursing Care Inc., or NCI, operates both a small nursing home and retirement home. There is a single kitchen used to provide meals to both the nursing home and retirement home, meaning labor costs and utilities costs of the kitchen are shared by the two homes. There is also a centralized cleaning department that provides the cleaning services for both homes as well as the kitchen. The nursing home serves only indigent patients who are on Medicaid. The state Department of Health and Family Services (DHFS) reimburses NCI at Medicaid-approved cost reimbursement rates. The Medicaid reimbursement rates are based on cost information supplied by NCI. The relevant cost and allocation data for the most recent year appear in the following table. Cleaning department Central kitchen Annual Operating cost $ 102,000 $ 138,000 Allocation Base Square feet of space Number of residents Kitchen 1,000 Nursing Home 2,000 Retirement Home 3,000 Required: 1. Management of NCI currently allocates the kitchen and cleaning department costs based on the number of residents in each home. Determine the amount of service department costs assigned to each of the homes using this allocation base. (Round percentages to two decimal places in your calculations.) 2. DHFS auditors believe the step method of allocation should be used by first assigning cleaning costs based on square feet and then kitchen costs based on number of residents. Determine the amount of service department costs assigned to each of the homes using this allocation method. (Do not round percentage answers.) Nursing Home Retirement Total Home $ 1. Direct method 2. Step method

Answer 1

1.

Computation of NRV
Product	M	N	T	Total
Total Final sales value	$2,55,000	$2,35,000	$44,000
-Total Seperable costs	-$19,800	-$14,500	-$9,700
NRV	$2,35,200	$2,20,500	$34,300	$4,90,000
Joint cost allocation in NRV Ratio	$1,03,200	$96,750	$15,050	$2,15,000

Product	Allocated Joint Cost
M	$1,03,200
N	$96,750
T	$15,050

2.

1. Allocation based on no. of residents
	Nursing Home	Retirement Home	Total
No. of Residents	6	4	10
Costs allocated in 6:4 Ratio
Cleaning Department	$61,200	$40,800	$1,02,000
Central Kitchen	$82,800	$55,200	$1,38,000
Total cost allocated	$1,44,000	$96,000	$2,40,000
2. Step Method of allocation
	Kitchen	Nursing Home	Retirement Home	Total
Square feet of space	1000	2000	3000	6000
Cleaning cost allocated based on square feet	$17,000	$34,000	$51,000	$1,02,000
Central Kitchen cost	$1,38,000
Total Kitchen Cost (138000+17000)	$1,55,000
No. of Residents		6	4	10
Total Kitchen Cost allocated based on no. of residents		$93,000	$62,000	$1,55,000
Total cost allocated		$1,27,000	$1,13,000	$2,40,000

		Nursing Home	Retirement Home	Total
1	Direct Method	$1,44,000	$96,000	$2,40,000
2	Step Method	$1,27,000	$1,13,000	$2,40,000