Question

There are three light fixtures. 70 bronze; 120 gold; & 35 silver.    The common costs for those 225 fixtures was $38,650. Here are some more numbers that production gave me. Gold glass is $2.25 per panel. Bracket is $4.25. Bronze glass is $.75 per panel. Bracket is $3.25.   Silver glass is $1.75 per panel and bracket is $2.73.

Given the processing sequence, is there a split off point or points? What does that mean? If there is a split off point or points, where is it or where are they? Explain.

What allocation method did you use? What base did you use to allocate the common costs?

Allocate the joint costs to the lot of the three fixture types.

Answer 1

Common costs are costs that are assigned to a process which further evolve in different products mean same treatment to some extent in production process to more than one product. So we can say that common costs are a sum of costs for the different products in production process until they different products has one identity.

We can define split off point as a event in production process from where the same treatment on different products will end and each product further will treat in different process with different inputs. So a split off point in a production process can be defined from where we cannot assigned costs commonly to the pool of products means this is the point from where costs to each product will be assigned separately.

In the given problem we can identify split off point where we cannot assign costs commonly means where the common costs ends and assignment of further processing cost such as bronze glass and bracket, gold glass and bracket and silver glass and bracket will start. So split off point in the problem is where different items as per their different nature assigned to them.

There are different allocation methods for allocation of common cost such as physical measurement method, sales value method and net realizable method. But from the base of information given in question we can use only physical measurement method because other two methods required sales value that is not provided in question.

In physical measurement method we can allocate common costs to products on base of total quantity produced by using below formula:-

Allocation of costs =   Qty of product / Qty of total product x common costs

Here, Qty of product bronze = 70 for gold = 120 and for silver = 35

Qty of total product = 70+120+35 = 225

Common costs = $38650

Allocation to product bronze = 70 / 225 * 38650 = $12025

Allocation to product gold = 120 / 225 * 38650 =    $20613

Allocation to product Silver = 35 / 225 * 38650 =     $6012

So in this way we can allocate common costs.