Question

Joint cost allocation

Lovely Lotion Inc. produces three different lotions: hand, body, and foot. The lotions are produced jointly in a mixing process that costs a total of $250 per batch. At the split-off point, one batch produces 80, 40, and 25 bottles of hand, body, and foot lotion, respectively. After the split-off point, hand lotion is sold immediately for $2.50 per bottle. Body lotion is processed further at an additional cost of $0.25 per bottle and then sold for $5.75 per bottle. Foot lotion is processed further at an additional cost of $0.85 per bottle and then sold for $4.00 per bottle. Assume that body and foot lotion could be sold at the split-off point for $3.00 and $3.20 per bottle, respectively.

1. Using the market value at split-off method, allocate the joint costs of production to each product. Round your answers to two decimal places.

Joint Product	Bottles per Batch	Market Value per Bottle at Split-Off	Total Market Value at Split-Off	Percent of Total MV at Split-Off	Joint Costs	Allocation
Hand lotion		$	$	%	$	$
Body lotion				%
Foot lotion				%
Totals			$			$

2. A lotion manufacturing company produces three types of lotions. After the split-off point the company continues to sell the body lotion and makes $0.25 profit per bottle. The foot lotion generates $0.05 loss per bottle if it continues after the split-off point. Which lotion should be continued after the split-off point?

a. Hand lotion

b. Body lotion

3. Allocate the joint costs of production to each product using the net realizable value method. Round your answers to two decimal places. Bottles per Batch Market Value per Bottle at Split-Off Total Market Value at Split-Off Market Price per Bottle Added Cost per Bottle NRV per Bottle Total Net Realizable Value Joint Product Hand lotion Body lotion Foot lotion Totals

Answer 1

1) Allocation of joint costs by split-off method (Amounts in $)

Joint Product	Bottles per Batch (A)	Market Value per Bottle at Split-Off (B)	Total Market Value at Split-Off (C = A*B)	Percent of Total MV at Split-Off (D)	Joint Costs (E)	Allocation (D*E)
Hand lotion	80	2.50	200	50% [(200/400)*100]	250	125
Body lotion	40	3.00	120	30% [(120/400)*100]		75
Foot lotion	25	3.20	80	20% [(80/400)*100]		50
Totals			400			$250

2) The body lotion generates $0.25 profit per bottle if it continues after the split-off point whereas the foot lotion generates $0.05 loss per bottle if it continues after the split-off point. Hence the company should continue body lotion after the split off point. The correct option is b) Body lotion.

3) Allocation of Joint Cost by Net Realizable Value Method

Joint Product	Bottles per Batch (A)	Market Value per Bottle at Split-Off (B)	Total Market Value at Split-Off (C = A*B)	Market Price per Bottle (C)	Added Cost per Bottle (D)	NRV per bottle (E = C-D)	Total Net Realizable value (E*A)	Greater of Total NRV and Total Market Value at Split-off	Proportion (F)	Joint Costs (G)	Allocation (F*G)
Hand lotion	80	2.50	200	$2.50	$0	$2.50	$200	200	40% [(200/500)*100]	$250	$100
Body lotion	40	3.00	120	$5.75	$0.25	$5.50	$220	220	44% [(220/500)*100]		$110
Foot lotion	25	3.20	80	$4.00	$0.85	$3.15	$78.75	80	16% [(80/500)*100]		$40
Totals			$400				$498.75	$500			$250