Question

Indigo Company began operations on 1/1/20 and produces tumbling mats and rebound mats for cheerleading. Both types of mats are manufactured from a joint process. During January 2020, the company incurred joint production costs of $89,500 and produced 2,000 tumbling mats and 500 rebound mats. Indigo believes the tumbling mats will require separate costs past the split-off point of $14.00 per unit, and the company believes it will be able to sell the tumbling mats for $150.00 per unit. Indigo believes the rebound mats will require separate costs past the split-off point of $10.00 per unit, and the company believes it will be able to sell the rebound mats for $100.00 per unit.

1. What amount of joint costs should be allocated to each product using the physical units method?
2. What amount of joint costs should be allocated to each product using the constant gross margin percentage method?

Answer 1

Answer:

Part (a)

Allocation of joint cost to each product using the physical Units method.

Joint Product	Units	Share of Joint Cost
Tumbling Mats	2000	(2000/2500) x 89500= $71,600
Rebound Mats	500	(500/2500) x 89500= $ 17,900
Total	2500	$ 89,500

Part (b)

Allocation of joint cost to each product using the Constant Gross margin

Calculation of Gross Margin

Particulars	Amount
Sales Revenue from:
Tumbling Mats (2000x150)=$3,00,000
Rebound Mats(500x100)=$50,000	$3,50,000
Less: Total Cost
Further processing Cost of Tumbling Mats (2000x14)= $28,000
Further Processing Cost of Rebound Mats (500x 10)=$5,000	$33,000
Joint Cost of Tumbling & Rebound Mats	$89,500
Gross Margin	$2,27,500

Now,

Gross Margin ratio= (Gross margin/Sales)x100

= $2,27,500/$3,50,000

= 65%*

Allocation of joint cost to each product using the Constant Gross margin

Particulars	Tumbling Mats	Rebound Mats
Sales Revenue	$3,00,000	$ 50,000
Less: Gross margin (65%)*	$1,95,000	$32,500
Less: Further Processing Cost	$28,000	$5,000
Share in Joint Cost	$77,000	$12,500