Question

Company 1 has the following operational units and supervisors.

                                Operational Unit                                                                                          Supervisor

                Farm management (growing, harvesting, storage) K B

                Processing M M

                Marketing                                                                                                                          S L

                Administration S L

One of the activities of the Processing Unit is to take the coconuts from the Farm Management unit and process them into bottled coconut water, coconut powder, and coconut oil. The process is a mixture of labor and machinery but up to the point of split-off, the process generates common costs of $80,000. On a typical day of production, the operational results are:

Product	Amount at split-off	Weight (lbs.) at split-off	Cost beyond split-off	Selling price
Coconut water	5,200 liters	11,440	$2.00 per liter	$20.00 per liter
Coconut powder	5,000 lbs.	5,000	$8.20 per lb.	$10.00 per lb.
Coconut Oil	1,250 liters	2,520	$2.50 per liter	$30.00 per liter

At present, the company allocates joint or common costs based on relative weight of the product at split-off point. As the consultant, you want to recommend the net realizable approach and decided to do the calculations first.

Required: Prepare an analysis of the two methods of allocating the common or joint costs and then decide what recommendation (if any) you would make to the company.

Answer 1