Question

1. Sinclair Oil & Gas, a large energy conglomerate, jointly processes purchased hydrocarbons to generate two intermediate products: ING4, and XGE3. These intermediate products are further processed separately to produce Crude Oil and Natural Gas Liquids (NGL). In June 2019, the following is the monthly data for all the products:

	Joint costs			Crude Oil		Natural Gas Liquids
Joint Costs (costs of Hydrocarbons and other inputs and processing to split-off point)	$1,800
Separable costs of processing 400 tons of ING4 into 150 tons of Crude Oil			$175
Separable cost of processing 500 tons of XGE3 into 50 tons of Natural Gas Liquids					$105
Transfer for further processing (tons)	ING4	XGE3	Crude Oil		Natural Gas Liquids
Beginning inventory (tons)	0	0	0		0
Production (tons)	400	500	150		50
Sales (tons)	400	500	150		50
Selling price per ton	$8	$5	$18				$15

1. Allocate the joint costs of $1,800 between ING4 and XGE3 under

1. the sales value at split-off method
2. the physical-measure method.

2. Allocate the joint costs of $1,800 between crude oil and natural gas liquids under the NRV method.
3. Should XGE3 be processed further or sold at the split-off point?

Answer 1

(a) Allocation of Joint cost as per sale value at split off point:-

Particulars	ING4	XGE 3
Sale value at split off point	3200 $	2500 $
Ratio	0.56	0.44
Joint cost allocation	$ 1,010.53	$ 789.47

(b) Allocation of Joint cost as per physical Quantity method:-

Particulars	ING4	XGE 3
Physical output	400	500
Ratio	0.44	0.56
Joint cost allocation	$     800.00	$ 1,000.00

Allocation of joint cost to crude oil and natural gas liquid as per NRV method:-

Particulars	Crude Oil	Natural Gas Liquid
Sales value	2700 $	750 $
Less:- further process cost	175 $	105 $
NRV	2525 $	645 $
Ratio	0.80	0.20
Joint cost allocation	$ 1,433.75	$                      366.25

Decision to further process or not:-

Particulars	Crude Oil	Natural Gas Liquid
Value at spit off point	$       3,200	$                        2,500
NRV	$       2,525	$                            645
Benefit of processing	$         -675	$                      -1,855
Further process	No	No