Question

Cole Company manufactures two shampoos, Hi-Volume and Super Shiny, out of a joint production process. The joint (common) costs incurred are $180,000 for a standard production run that generates 75,000 gallons of Hi-Volume and 50,000 gallons of Super Shiny. Hi-Volume sells for $5 per gallon, and Super Shiny sells for $8 per gallon. Additional processing costs beyond the split-off point are $2 per gallon for Hi-Volume and $4 per gallon for Super Shiny and final sales prices are $8 for Hi-Volume and $15 for Super Shiny.Use the physical measure allocation method and the sales price and NRV monetary allocation methods to allocate joint costs. (Round percentages to whole numbers in your calculations to get my check figures.)

Answer 1

Part 1 – Allocation of Joint Costs (Physical Measure Allocation Method)

Physical Measure allocation method apportioned the joint costs on the basis of some physical base, such as weight or measure expressed in gallons, tonnes etc.

Allocation of Joint Costs (Physical Measure Allocation Method)
	Hi-Volume	Super Shiny	Total
Output (in gallons)	75,000	50,000	125,000
Allocation of Joint Costs @ $1.44 per gallon (Total Joint Costs $180,000 / Total Output 125,000 gallons)	$108,000	$72,000	$180,000

Part 2 – Allocation of Joint Costs (Sale Price Allocation Method)

It is assumed that Sale Price allocation method is used at split off point.

Hence, at split off point sales value is taken to allocate joint cost.

	Hi-Volume	Super Shiny	Total
Output (in gallons)	75,000	50,000	125,000
Unit Selling Price at split off point	$5	$8
Total Sales Value at split off point	$375,000	$400,000	$775,000

Allocation of Joint Cost to Hi Volume Product = Total Joint Cost $180,000 * Sales Value $375,000 / Total Sales Value $775,000

= $87,097

Allocation of Joint Cost to Super Shiny Product = Total Joint Cost $180,000 * Sales Value $400,000 / Total Sales Value $775,000

= $92,903

Part 3 – Allocation of Joint Costs (NRV Method)

In this method joint costs are apportioned in the ratio of net realisable value.

Net Realizable Value = Sales Revenue after split off point – Further Processing Cost – Selling and distribution expenses

Allocation of Joint Costs (NRV Method)
Product	Unit Selling Price after further processing	Further Processing Cost per unit $	Net Realizable Value per unit $	Output (In gallons)	Total NRV $ (Output x NRV per unit)	Joint Cost Apportioned Ratio	X Joint Costs	Joint Cost Apportioned in $
Hi-Volume	$8	$2	$6	75,000	$450,000	0.45	$180,000	$81,000
Super Shiny	$15	$4	$11	50,000	$550,000	0.55	$180,000	$99,000
					$1,000,000			$180,000

Allocated Joint Cost to Product Hi-Volume = $81,000

Allocated Joint Cost to Product Super Shiny = $99,000