Question

Explain the "Net Realisable Value" (NRV) method approach to allocate joint costs.
[8 marks]

Answer 1

Net REalisbale Value method to allocate joint costs is used in cases where two or more produdcts undergo a common process upto a certain stage and after that stage they also undergo a seprate process and incur separate costs as well.

For example a company processes a raw material and after a process two intermediate products are manufactured. These products then further undergo a separate process to complete and finish the products.

In this case, the joint cost of the first process is allocated by calculating the Net Realisable of the product at the end of first process . This is calculated as

Final sale value of the products less separte cost incurred to finish the products.

The ratio of Net Realisable Value calcualted using above formula is used to allocate the joint costs to manufacture the product under the first stage.

For Example, a raw material cost of $100 and processing cost of $50 is incurred to generate two products A and B. However the products are not finished yet and would undergo a futher manufacting process with seprate costs of $ 50 and 20. The products are sold for $ 200 and 120.

The joint cost of $100+$50 = $150 is allocated as follows

	A	B
Sale Value per item	200	120
Less: Separate costs	50	20
Net Realizable Value	150	100

Cost of $150 will be allocated in ratio of 150:100 i.e. 3:2

The costs of product will be calculated as

	A	B
Sale Value per item	$200	$120
Cost per item
Separate costs	50	20
Joint Costs	90	60
Total Cost per item	140	80
Profit per item	60	40