Question

Northern Company processes 100 gallons of raw materials into 75 gallons of product GS-50 and 25 gallons of GS-80. GS-50 is further processed into 50 gallons of product GS-505 at a cost of $18,000, and GS-80 is processed into 50 gallons of product GS-805 at a cost of $15,000. Exhibit 1 depicts this manufacturing flow.

The production process starts at point 1. A total of $46,000 in joint manufacturing costs are incurred in reaching point 2. Point 2 is the split-off point of the process that manufactures GS-50 and GS-80. At this point, GS-50 can be sold for $625 a gallon, and GS-80 can be sold for $125 a gallon. The process is completed at point 3—products GS-505 and GS-805 have a sales price of $812 a gallon and $413 a gallon, respectively.

Allocate the joint product costs and then compute the cost per unit using each of the following methods: (1) physical measure, (2) sales value at split-off, and (3) net realizable value.

Answer 1

Solution: 1. Joint cost allocated based on physical measures: Particulars Units-gallons (A) Units-gallons Joint cost allocated (B) GS-50 75 gallons 75 % $ 34,500 ($ 46,000*75%) $ 460 ($ 34,500 / 75 gallons) GS-80 25 gallons 25 % $ 11,500 ($ 46,000 * 25%) $ 460 ($ 11,500 / 25 gallons) Total 100 gallons 100% $ 46,000 Joint cost per unit C= A/B

2. Allocation based on sales value at split off point Particulars Units - gallons (A) GS-50 75 gallons GS-80 25 gallons Total 100 gallons $625.00 $ 125.00 Selling price per gallon at split off point Total sales value at split off point Sales value % $ 50,000 100% $ 46,875 (75 gallons* $ 625) 93.75% ($ 46,875 / $ 50,000) * 100 $ 43,125 ($ 46,000*93.75%) $575.00 ($ 43,125 / 75 gallons) Joint cost allocated $3,125 (25 gallons* $ 125) 6.25% ($ 3,125 / $ 50,000) * 100 $ 2,875 ($ 46,000*6.25%) $ 115.00 ($ 2,875 / 25 gallons) $ 46,000 Joint Cost per unit

3. Allocation based on net realizable value Total 100 gallons Particulars Final sales in gallons Final selling price Final sales value GS-505 50 gallons $ 812 $ 40,600 ($ 812*50 gallons) ($ 18,000) GS-805 50 gallons $ 413 $ 20,650 ($ 413* 50 units) ($ 15,000) $ 61,250 ($ 33,000) Less: Further processing costs Net realizable value $ 28,250 NRV % 100% $ 22,600 ($ 40,600- $ 18,000) 80% ($22,600 / $ 28,250) * 100 $36,800 ($ 46,000*80%) 75 gallons (GS 50) $ 490.67 ($ 36,800 / 75 gallons) Joint cost allocated based NRV (A) Number of gallons(B) $ 5,650 ($ 20,650 - $ 15,000) 20% ($ 5,650 / $ 28,250)*100 $ 9,200 ($ 46,000*20%) 25 gallons (GS 80) $368 ($ 9,200 / 25 gallons) $ 46,000 100 gallons Cost per gallon C=A/B

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