Question

West Coast Designs produces three products: super, deluxe, and generic. Super and deluxe are its main products; generic is a by-product of super. Information on the past month’s production processes follows. In Department A, 220,000 units of the raw material X-1 are processed at a total cost of $399,020. After processing in Department A, 50 percent of the units are transferred to Department B, and 50 percent of the units (now unprocessed deluxe) are transferred to Department C. In Department B, the materials received from Department A are processed at an additional cost of $216,000. Seventy percent of the units become super and are transferred to Department D. The remaining 30 percent emerge as generic and are sold at $4.60 per unit. The additional processing costs to make generic salable are $64,600. In Department C, deluxe is processed at an additional cost of $950,000. A normal loss of 10 percent of the units of good output of deluxe occurs in this department. The remaining good output is then sold for $40 per unit. In Department D, super is processed at an additional cost of $86,000. After this processing, super can be sold for $15 per unit. Required: Prepare a schedule showing the allocation of the $399,020 joint cost to super and deluxe using the estimated net realizable value approach. Revenue from the sale of by-products should be credited to the manufacturing costs of the related main product. Also, determine the cost allocation for each product.

Answer 1

Particulars	Super	Deluxe
Sales Value after Completion (Working Note 1)	$1,155,000	$4,000,000
Sales Revenue from Generic (Woking Note 2)	$151,800
Separate Processing Costs
Department B	($216,000)
Department C		($950,000)
Department D	($86,000)
Additional Processing cost for Generic	($64,600)
Approximate Net Realizable Values	$940,200	$3,050,000

Working Note:

1) Sales Value: super = 220000 units * 50% * 70% * $15 = $1,155,000

Sales Value: Deluxe = 220000 units * 50% * (100/110) * $40 = $4,000,000

2) Sales Revenue from Generic = 220000 units * 50% * 30% * $4.6 = $151,800

.

Total Net Realizable Value :- = $940,200 + $3,050,000 = $3,990,200

Total Joint Cost to Super and Deluxe = $399,020

Cost Allocation to Super :- = ($940,200 / $3,990,200) * $399,020 = $94,020

Cost Allocation to Deluxe :- = ($3,050,000 / $3,990,200) * $399,020 = $305.000

.

	Allocation of Cost
Super	$94,020
Deluxe	$305.000