Question

Problem 2: The Green Company processes unprocessed goat milk up to the splitoff point where three products, condensed goat milk, skim goat milk, and cream result. The following information was collected for the month of October: Direct Materials processed: Production: 240,000 gallons (after shrinkage) 92,500 gallons 105,500 gallons 42,000 gallons $12.50 per gallon $4.50 per gallon $20 per gallon Condensed goat milk Skim goat milk Cream Sales Condensed goat milk Skim goat milk Cream The costs of purchasing the of unprocessed goat milk and processing it up to the splitoff point to yield a total of 240,000 gallons of saleable product was $1,884,480. There were n<o beginning inventory balances of any product. Condensed goat milk may be processed further to yield 92,000 gallons (the remainder is shrinkage) of a medicinal milk product, Xvla, for an additional processing cost of $4 per usable gallon. Xyla can be sold for $25 per gallon Skim goat milk can be processed further to yield skim goat ice cream, for an additional processing cost per usable gallon of $6. The product can be sold for $9 per gallon. No gallons are lost in this process There are no beginning and ending inventory balances Required: A. Using estimated net realizable value, what amount of the joint costs would be allocated to each product? B. Using the sales value at split-off method, how would you allocate joint costs between each of the product? C. Using the constant gross margin percentage NRV method, what amount of the joint costs would be allocated to each product? D. Should Green continue to process skim goat milk into ice cream? Provide support for vour response. E. What do you recommend in terms of the method to allocate joint costs?

Answer 1

(A)-Using estimated realizable value
Particulars	Condensed Goat Milk	Skim Goat Milk	Cream	Total
Sale value after further processing	25	9	20
Less: Further processing cost	4	6	-
Estimated Realizable Value	21	3	20
Quantity	92,000	1,05,500	42,000	2,39,500
Realizable Value	19,32,000	3,16,500	8,40,000	30,88,500
Weight	63	10	27
Joint Cost allocation in the above ratio	11,78,830	1,93,116	5,12,535	18,84,480
(B)-Using sale value at split off Point
Particulars	Condensed Goat Milk	Skim Goat Milk	Cream	Total
Sales value at split off point per unit	25	9	20
Quantity	92,500	1,05,500	42,000	2,40,000
Sales value	23,12,500	9,49,500	8,40,000	41,02,000
Weight	56	23	20
Joint Cost allocation in the above ratio	10,62,374	4,36,205	3,85,900	18,84,480
(C)-Cost Gross Margin NRV Method
Final Sales value of production	19,32,000	3,16,500	8,40,000	30,88,500
Less: Gross Margin @6.5734% (Note-1)	1,26,998	20,805	55,217	2,03,019
Cost goods sold available for sale(A)	18,05,002	2,95,695	7,84,783	28,85,481
Less: Separable cost(B)	3,68,000	6,33,000	-	10,01,000
Joint Cost Allocated(C=A-B)	14,37,002	-3,37,305	7,84,783	18,84,481
Note-1
Final sales value of production	30,88,500
Less: Join Cost	18,84,480
Less: Separable Cost(92000*4+105500*6)	10,01,000
Gross Margin	2,03,020
Gross Margin (%)	6.5734
D:
No, Green should not continue to process skim goat milk into ice cream, because revenue from Direct sale of skim goat milk is more than ice cream
Particulars	Without Skimming	With Skimming
Sale price	4.5	9
Less: Extra Cost	0	6
Realisable Value	4.5	3
Quantity	42000	42000
Realisable Value	189000	126000