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

Solution:

Given data,

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.

Now we find requirements.

Total total joint production cost = ($400,000+$500,000)

= $900,000

Answer (1) The physical-units method;

Total no of units manufacturing

Pentex	14,000  pounds
Glaxo	6,000  pounds
Total	20,000 pounds

.

Cost allocation	Amount($)
Pentex($900,000X6,000/20,000)	$270,000
Glaxo ($900,000X14,000/20,000)	$630,000

Answer (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 (6000X$40)

= $240,000

Sales value of at the sepreation point of Glaxco (14000X$70)

= $980,000

Total value of sales ($240,000+$980,000) = $122,0000

Allocation of joint cost	Amount($)
pentax ($900,000X $240,000 / $122,0000)	$177,049
Glaxo   ($900,000X $980,000  / $122,0000)	$722,951

Answer (3) : Allocation of Joint cost as per The net-realizable-value method:

calculation of net realizable value:

Pentex ($50-$10)X6,000	$240,000
Glaxco ($80-$20)X14,000	$840,000
Total	$1,080,000

.

Allocation of joint​	Amount($)
Pentex ($900,000 X $240,000 / $1,080,000)	$200,000
Glaxo ($900,000X$840,000 / $1,080,000)	$700,000

Note : If you have any doubt please comment.

Thank you.