Question
In: Accounting
Fantasy Manufacturing produces three products in a joint operation. Information regarding the products appears below: Item...
Fantasy Manufacturing produces three products in a joint
operation. Information regarding the products appears below:
| Item 1 | Item 2 | Item 3 | Total | |||||||||
| Units Produced | 20,000 | 25,000 | 10,000 | 55,000 | ||||||||
| Sales Value at Split-off | $ | 150,000 | $ | 50,000 | $ | 20,000 | $ | 220,000 | ||||
| Additional costs if Processed further | $ | 10,000 | $ | 30,000 | $ | 5,000 | $ | 45,000 | ||||
| Sales Value if Processed Further | $ | 170,000 | $ | 90,000 | $ | 28,000 | $ | 288,000 | ||||
| Joint Costs | $ | 100,000 | ||||||||||
Required:
Allocate the joint costs using the net realizable value method.
Solutions
Expert Solution
Sol. Under Net realizable value method the Cost to be allocated as the excess revenue to be generated from further processing i.e NRV = Estimated Sales Value − Estimated Cost to Further Process and Sell. Thus following are the calculations :
Item 1 - [Joint Cost * Excess revenue from further process for item 1] / [Excess revenue from item 1 + item 2 +item 3]
= [100000 * (170000 - 10000)] / [(170000 - 10000) + (90000 - 30000) + (28000 - 5000)]
= 16000000000 / 243000
= $65,844
Item 2 - [Joint Cost * Excess revenue from further process for item 2] / [Excess revenue from item 1 + item 2 +item 3]
= [100000 * (90000 - 30000)] / [(170000 - 10000) + (90000 - 30000) + (28000 - 5000)]
= 6000000000 / 243000
= $24,691
Item 3 - [Joint Cost * Excess revenue from further process for item 3] / [Excess revenue from item 1 + item 2 +item 3]
= [100000 * (28000 - 5000)] / [(170000 - 10000) + (90000 - 30000) + (28000 - 5000)]
= 6000000000 / 243000
= $9,465
Total allocation = 65844 + 24691 + 9465 = $ 100,000
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