Question

Allocating Joint Costs Using the Physical Units Method Orchard Fresh, Inc., purchases apples from local orchards and sorts them into four categories. Grade A are large blemish-free apples that can be sold to gourmet fruit sellers. Grade B apples are smaller and may be slightly out of proportion. These are packed in boxes and sold to grocery stores. Apples for slices are even smaller than Grade B apples and have blemishes. Apples for applesauce are of lower grade than apples for slices, yet still suitable for canning. Information on a recent purchase of 29,000 pounds of apples is as follows: Grades Pounds Grade A 2,320       Grade B 8,700       Slices 13,050       Applesauce 4,930       Total 29,000         Total joint cost is $23,200. Required: 1. Allocate the joint cost to the four grades of apples using the physical units method. Joint Cost Grades Allocation Grade A $ Grade B Slices Applesauce   Total $ 2. Allocate the joint cost to the four grades of apples by finding the average joint cost per pound and multiplying it by the number of pounds in the grade. Round the average cost answer to the nearest cent. Average cost = $ per pound. Joint Cost Grades Allocation Grade A $ Grade B $ Slices $ Applesauce $ 3. What if there were 2,900 pounds of Grade A apples and 8,120 pounds of Grade B? How would that affect the allocation of cost to these two grades? How would it affect the allocation of cost to the remaining common grades? Joint Cost Grades Allocation Grade A $ Grade B $ Slices $ Applesauce $

Answer 1

Data available:

Grade of Apples	Quantity Purchased (In Pounds)	Characteristics
Grade A	2320	large blemish-free
Grade B	8700	Smaller and may be slightly out of proportion
Slices	13050	Smaller than Grade B apples with blemishes
Apple Sauce	4930	lower grade

Total Joint Cost       : $ 23,200

Total Apples            : 29,000 Pounds

1. Allocation of Joint Cost using Physical Units Method

This method says allocate the joint cost in proportion to some Physical Measurement .Here Physical measurement is Pound. So the cost of apples in

Grade A = 23200 X (2320/29000) = $ 1856

Grade B = 23200 X (8700/29000) = $ 6960

Slices = 23200 X (13050/29000) = $ 10440

Apple Sauce = 23200 X (4930/29000) = $ 3944

2. Allocation of Joint Cost using Average Joint cost Method

This method says allocate the joint cost based on the average cost of the total output before splitting point. So :

Average Cost = 23200/29000 = $0.80 per pound

Therefore Allocated cost of Apple for :

Grade A = 2320 X $ 0.80 = $ 1856

Grade B = 8700 X $ 0.80 = $ 6960

Slices = 13050 X $ 0.80 = $ 10440

Apple Sauce = 4930 X $ 0.80 = $ 3944

3. Allocation of Joint Cost using Average Joint cost Method if quantity of A grade and B grade apple changed.

Now here the question input data has changed so we need to write again the data available.

Grade of Apples	Quantity Purchased (In Pounds)	Characteristics
Grade A	2900	large blemish-free
Grade B	8120	Smaller and may be slightly out of proportion
Slices	13050	Smaller than Grade B apples with blemishes
Apple Sauce	4930	lower grade

Total Joint Cost       : $ 23,200

Total Apples            : 29,000 Pounds

Average Cost = 23200/29000 = $0.80 per pound

Therefore Allocated cost of Apple for :

Grade A = 2900 X $ 0.80 = $ 2320

Grade B = 8120 X $ 0.80 = $ 6496

Slices = 13050 X $ 0.80 = $ 10440

Apple Sauce = 4930 X $ 0.80 = $ 3944

As seen above by changing the Quantity in Grade A & B the cost allocation between these two grades has changed but there is no change in per unit cost as we are using average cost method. At the same time there is no change in other two grades as there is no change in their quantities and average rate is also same.

Note :- It can be seen from above calculation that in both the methods of allocation the allocated cost are coming same as the question is silent about many other information which leads to separate result.