Question

Case 17-36 Comprehensive Case on Joint Cost Allocation (LO 17-4, 17-5)

Valdosta Chemical Company manufactures two industrial chemical products in a joint process. In May, 16,000 gallons of input costing $65,000 were processed at a cost of $155,000. The joint process resulted in 12,000 pounds of Resoline and 4,000 pounds of Krypto. Resoline sells for $25 per pound, and Krypto sells for $50 per pound. Management generally processes each of these chemicals further in separable processes to produce more refined chemical products. Resoline is processed separately at a cost of $7 per pound. The resulting product, Resolite, sells for $42 per pound. Krypto is processed separately at a cost of $12 per pound. The resulting product, Kryptite, sells for $57 per pound.

Required:

2-a. Allocate the company’s joint production costs for May using the physical-units method.

2-b. Allocate the company’s joint production costs for May using the relative-sales-value method.

2-c. Allocate the company’s joint production costs for May using the net-realizable-value method.

3-a. Valdosta’s management is considering an opportunity to process Kryptite further into a new product called Omega. The separable processing will cost $47 per pound. Packaging costs for Omega are projected to be $8 per pound, and the anticipated sales price is $100 per pound. Calculate the incremental profit or loss from processing Kryptite into Omega.

3-b. Should Kryptite be processed further into Omega?

Answer 1

Input cost of 16000 gallons	65000
Processing cost	155000
Total Joint cost	220000

2-a. Allocate the company’s joint production costs for May using the physical-units method.

Under physical units method, we take the ratio of weights of two products = 12000 : 4000 ( or ) 3:1

Resolite share of Joint production cost = 220,000 * 3/4 = 165000

Kryptite share of Joint production cost = 220,000 * 1/4 = 55,000

2-b. Allocate the company’s joint production costs for May using the relative-sales-value method.

Relative sales values are ...... ( at split of point)

Resoline = 12000 * 25 = 300,000 and Krypto = 4000 * 50 = 200,000

Resoline share of Joint production cost = 220,000 * 3/5 = 132,000

Krypto share of Joint production cost = 220,000 * 2/5 = 88,000

Alternative ....... solution - 2(b)

Relative sales values are ...... ( Final sale value is used )

We use the ratio = 504 : 228 or 126 : 57

Resolite share of Joint production cost = 220,000 * 126/183 = 151475.

Kryptite share of Joint production cost = 220,000 * 57/183 = 68525

2-c. Allocate the company’s joint production costs for May using the net-realizable-value method.

	Resolite	Kryptite
Final sales value	504000	228000
(-) Further processing cost	84000	48000
Net realizable value	420000	180000

Now the ratio = 420 : 180 or 7 : 3

Resolite share of Joint production cost = 220,000 * 7/10 = 154,000

Kryptite share of Joint production cost = 220,000 * 3/10 = 66,000

Question - 3 (a)

Incremental sales = 4000 * (100 - 57)	172000
(-) Incremental cost
Processing cost @ 47 per pound	188000
Packing cost @ 8 per pound	32000
Incremental loss	-48000

Question - 3 (b)

No, Krptite cannot be further processed into omega in light of the incremental loss sustained by that process as computed in 3 (a).