Question

Al Khoud Chem manufactures two industrial chemicals in a joint process. In October, OMR200,000 of direct materials were processed at a cost of OMR300,000, resulting in 16,000 pounds of product P and 4,000 pounds of product G. Product P sells for OMR35 per pound and product G sells for OMR60 per pound. Management generally processes each of these chemicals further in separable processes to manufacture more refined products. Product P is processed separately at a cost of OMR7.50 per pound, with the resulting product, P-R, selling for OMR45 per pound. Product G is processed separately at a cost of $10 per pound, and the resulting product, G-R, sells for OMR100 per pound.

(a) Compute the company's total joint production costs.

(b) Assuming that total joint production costs amounted to OMR500,000, allocate these costs by using:

1. The physical-units method.

2. The relative-sales-value method.

3. The net-realizable-value method.

(c) Does the firm's cost-of-goods-sold figure influenced by the choice of a joint-cost allocation method? Briefly explain.

Answer 1

a) Total joint costs = 200,000 + 300,000 = 500,000

b)

1.

	Product P	Product G	Total
Physical units	16,000	4000	20,000
Allocation of costs	400000	100000	500,000

2.

	Product P	Product G	Total
Physical units	16,000	4000	20,000
Sales price per unit	35	60
Relative sales	560000	240000	800000
Allocation sales	350000	150000	500000

3.

	Product P	Product G	Total
Physical units	16,000	4000	20,000
Sales price per unit	35	60
Relative sales	560000	240000	800000
Allocation of costs	350000	150000	500000

4.

	Product P	Product G	Total
Sales post split off	16,000	4000	20,000
Selling price	45	100
Sales value	720000	400000
Less: Separable costs	120000	40000
Net realizable value	600000	360000	960000
Allocation of costs	312500	187500	500000

5. The cost of goods sold remains the same overall for the firm irrespective of the choice of allocation of joint costs since the overall cost remains the same. The cost of goods sold however varies for the individual products if they are assessed separately.