Question

Problem 17-87 Lowrey Chemical manufactures two...

Lowrey Chemical manufactures two industrial chemicals in a joint process. In October, $400,000 of direct materials were processed at a cost of $500,000, resulting in 6,000 pounds of Pentex and 14,000 pounds of Glaxco. Pentex sells for $40 per pound and Glaxco sells for $70 per pound. Management generally processes each of these chemicals further in separable processes to manufacture more refined products. Pentex is processed separately at a cost of $10.00 per pound, with the resulting product, Pentex-R, selling for $50 per pound. Glaxco is processed separately at a cost of $20 per pound, and the resulting product, Glaxco-R, sells for $80 per pound.

Required:

Compute the company's total joint production costs.

Assuming that total joint production costs amounted to $900,000, allocate these costs by using: (1) The physical-units method; (2) The relative-sales-value method; (3) The net-realizable-value method.

Answer 1

Ans. Total total joint production cost is (400000+500000) = 900000

Allocation of Joint production cost

Method of allocation of joint cost

1.) The Physical Unit method = Total no of units manufacturing

Pentex   = 14000

Glaxo     = 6000

Total = 20000

Cost allocation to Pentex = 900000X14000/20000 = 630000

Cost allocation to Glaxo = 900000X6000/20000 = 270000

2. The Relative Sales value method :- in this method we will allocate the joint cost in the ratio of sales value of at the point of seperation.

Sales value of at the sepreation point of Pentex (6000X40)   = 240000

Sales value of at the sepreation point of Glaxco (14000X70) = 980000

Total value of sales = 1220000

Allocation of joint cost of to pentax = 900000X24/122 = 177049

Allocation of joint cost to Glaxo = 900000/98/122 = 722951

Allocation of Joint cost as per The Net-realizale value method

Step 1: calculation of net realizable value

Pentex (50-10)X6000    = 240000

Glaxco (80-20)X14000 = 840000

Total                                  =   1080000

Allocation of joint to pentex = 900000X24/108 = 200000

Allocation of joint to Glaxco = 900000X84/108 = 700000