Question

Ochre processes tomatoes into tomato sauce, tomato paste, and tomato puree. As part of the cost planning and cost control of operations and activities, the company is currently reviewing the gross-margin percentage of each of its products, using the estimated net realisable value (NRV) method for allocating joint costs. The company processes tomatoes in Department #1, out of which come three products: tomato sauce, tomato paste, and tomato puree. Processing 750,000 kg in Department #1 results in 50,000 kg of tomato sauce, 300,000 kg of tomato paste and 100,000 kg of tomato puree, and the costs in Department #1 are $500,000 in total.

Tomato paste is sold without further processing. Tomato sauce is processed further through Department #2 and the costs are $50,000. Tomato puree is considered a by-product and is processed further through Department #3 and the costs are $50,000. Tomato sauce sells for $4 per kg. Tomato paste sells for $2 per kg. Tomato puree sells for $3 per kg.

Required

1. Calculate the gross-margin percentage of each product using unit costs per kilogram for tomato sauce, tomato paste, and tomato puree, treating tomato puree as a by-product. Deduct the estimated NRV of the by-product produced from the joint cost of tomato sauce and tomato paste.

2. Calculate the gross-margin percentage of each product using unit costs per kilogram for tomato sauce, tomato paste, and tomato puree, treating all three as joint products.

Answer 1

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Ochre
Answer a
Calculation of Joint cost:	Puree	Sauce	Paste	Total (Sauce and Paste)	Note
Sell price	3.00	4.00	2.00		A
Units produced	100,000.00	300,000.00	50,000.00		B
Sales value	300,000.00	1,200,000.00	100,000.00		C=A*B
Less: Further processing costs	50,000.00	50,000.00	-		D
NRV	250,000.00	1,150,000.00	100,000.00	1,250,000.00	E=C-D
Allocation rate (Sauce and Paste)		92.00%	8.00%	100.00%	F=E/Sum of E
	See F	G	H=F*G
Allocation on the basis of NRV	Allocation rate	Joint Cost less Puree	Allocation
Sauce	92.00%	250,000.00	230,000.00
Paste	8.00%	250,000.00	20,000.00
Totals			250,000.00
So correct answer is option A.
Final Answer	Puree	Sauce	Paste	Note
Sales value	300,000.00	1,200,000.00	100,000.00	See C
Less: Joint costs	-	230,000.00	20,000.00	See H
Less: Further processing costs	50,000.00	50,000.00	-	See D
Gross margin	250,000.00	920,000.00	80,000.00	I
Gross margin %	83.33%	76.67%	80.00%	J=I/C
Answer b
Calculation of Joint cost:	Puree	Sauce	Paste	Total	Note
NRV	250,000.00	1,150,000.00	100,000.00	1,500,000.00	See E
Allocation rate	16.67%	76.67%	6.67%		K=E/Sum of E
Joint Cost	500,000.00	500,000.00	500,000.00		L
Joint Cost allocated	83,333.33	383,333.33	33,333.33		M=K*L
Final Answer	Puree	Sauce	Paste	Note
Sales value	300,000.00	1,200,000.00	100,000.00	See C
Less: Joint costs	83,333.33	383,333.33	33,333.33	See M
Less: Further processing costs	50,000.00	50,000.00	-	See D
Gross margin	166,666.67	766,666.67	66,666.67	N
Gross margin %	55.56%	63.89%	66.67%	O=N/C