Ans. To Question No.1
Before going into the calculation, it is better to have a brief idea of the of the sales value at split off point methods of joint cost allocation.
Split off point is the state at which the joint costs of producing the joint product ends and the cost of further processing that is separate to each joint product begins. As per this method the joint cost is allocated based on the sales value of each joint product at the point of split off.
Statement showing the allocation of joint cost of Sweet and Sugar Company for the month of March using sales value at Split off point method
|
Product |
Sugar ($) |
Sugar Syrup ($) |
Fructose Syrup ($) |
|
Total Joint Cost – $240,000 (to be allocated in the ratio of ($80:$70:$50) [ See Note No. 1 below] |
$96000 |
$84000 |
$60000 |
|
Total |
$96000 |
$84000 |
$60000 |
Working Note:
= $240000*$80/$200
=$96000
=$240000*$70/$200
=$84000
=$240000*$50/$200
=$60000
Ans. To Question No.2
As per this method the joint cost is allocated based on some physical measurement of the joint products generated from the respective process which can be like volume, weight or quantity of the joint product. In this case the costs allocated to each unit of every joint product remain same or equal.
Statement showing the allocation of joint cost of Liquid high, Nil for the month of June using Physical Measure method
|
Product |
Turpentine |
Paint Thinner |
Spot Remover |
|
Total Joint Cost-$240,000 (to be allocated in the ratio of 30:30:15) [See note no. 1 below] |
$96000 |
$96000 |
$48000 |
|
Total |
$96000 |
$96000 |
$48000 |
Working Note:
=$240000*$30/$75
=$96000
=$240000*$30/$75
=$96000
=$240000*$15/$75
=$48000
Ans. To Question No.3
As per the Constant Gross Margin Percentage of NRV method of joint cost allocation at first the overall gross profit margin of the entity is computed, then this gross profit margin is applied separately to each and every joint product so that to trace out the total production cost of each joint product, then out of this total production cost the separate cost of further processing is deducted so that to obtain the joint cost of such product as a balancing figure. At times it results into the negative allocation of the joint cost too just because of keeping the constant gross profit margin on each joint product.
|
Product |
Paper |
Cardboard |
Total |
|
Final Sales |
$338750 |
$297600 |
$636350 |
|
Less: Gross margin on Sales @ 16.24% [see note no. 1 below] |
$55013 |
$48337 |
$103350 |
|
Total Production cost |
$283737 |
$249263 |
$533000 |
|
Less: Separate Cost |
$221000 |
$262000 |
$483000 |
|
Joint cost allocated |
$62737 |
($12737) |
$50000 |
In the above case it is quite evident that the joint Product Cardboard received the negative joint cost allocation of $12737, that reflects an unusual feature of Joint cost allocation under the of Constant Gross Margin Percentage of NRV.
Working Notes:
|
Product Units(Kg) Final Selling price per unit Total Sales Value |
Paper 125,000 $2.71/kg $338750
Cardboard 96,000 $3.10/kg $297600
Total $636350
Less: Total joint Cost $50000
Less: Total Separate Cost ($221000+$262000) $483000
Gross Margin $103350
Gross Margin Percentage of sales =$103350/636350*100
=16.24%
|
Product |
Paper |
Cardboard |
|
Total Joint Cost- $50000 (to be allocated in the ratio of 125:96) [See note no. 2. below] |
$28281 |
$21719 |
|
Total |
$28281 |
$21719 |
Working Note no. 2
Allocation of joint cost under physical measure method
= $50000*$125/$224
=$28281
=$50000*$96/$221
=$21719
|
Product |
Paper |
Cardboard |
|
Incremental Sales [ See Note No.1 below] |
$275750 |
$251600 |
|
Less: Further processing cost |
$221000 |
$262000 |
|
Net Benefit |
$54750 |
($10400) |
From the above analysis it is quite clear that it is beneficial to process paper beyond the split off point that shall accrue a net benefit of $54750 in total, but it is recommended not to process the cardboard further that result into the net loss of $10400.
It is further to be noted that irrespective of the method chosen for the allocation of the Joint cost it won’t any difference in the decision made above, as while taking decision about further processing, there is no need to consider for the joint cost allocation as these are the costs which are mandatorily to be incurred (Covaleski, Evans, Luft, & Shields, 2003). Had there been the case of main product and byproduct then they would have been taken into consideration.
Working Note
=$338750-$63000
=$275750
=$297600-$46000
= $251600
Ans. To Question No.4
The decision of further processing a product or not largely depends on the fact that whether the products we are considering for further processing are joint product having almost similar value or they are main product and by product in which the value of one product seems to be largely higher than the other (Bennouna, Meredith, & Marchant, 2010).
|
Particulars |
Amount ($) |
|
A. Incremental Revenue from further processing (See Working Note No. 1 Below) |
$8,46,00000
|
|
B. Less: Incremental cost |
|
|
Direct Labor |
$800000 |
|
Supervisory Personnel |
$200000 |
|
Heavy Equipment: rental, Operating and maintenance costs ($25000*12) |
$300000 |
|
Contract sizing and cleaning ($3.50*10000000) |
$35000000 |
|
Outbound rail freight |
Nil |
|
Total (B) |
$37600000 |
|
Net Benefit |
$48300000 |
Statement showing Net Benefit from the sale of raw Coal
|
Particulars |
Amount ($) |
|
Sale of Raw Coal [10000000 tones*$27/ton) |
$270000000 |
|
Less Cost of Producing Raw Coal (10000000 tones*$22/Ton) |
$220000000 |
|
Net Benefit |
$50000000 |
Hence from the above analysis it is quite evident that processing of raw coal into cleaned and sized coal would cause a reduction of Net benefit of $1700000($50000000-$10700000), Thus it is suggested not to process it further (Eddy, Filip,R, & Warlop, 2004).
Working Notes:
Input of Raw coal – 10,000,000 tones
Less: loss @ 6% of input- 6,00,000 tones
Net Output of coal sized and cleaned- 9400000 tones
Value of incremental Output – 9400000 Tones ($36-$27) = $84600000
In this case the resultant benefit from selling and producing coal shall increase by [10000000($22-$20)] $20000000 and total net befit would be $70000000, hence the overall net benefit would be $21700000 from the producing and selling of raw coal (Awasthi, Omrani, & Gerber, 2018).
Total quantity of material loss in the process of sizing and cleaning- 600000 tones
Total extracted quantity of Coal fines from the above loss- (600000*75/100) = 450000 tones
Sale value of coal fines [450000*($15-$2)] = $5850000
Add: Net Benefit from sale of Processed Raw coal = $48300000
Total Net Benefit = $54150000
Or
Sales Value of Coal fines [450000($24-$4)] =$9000000
Add: Net Benefit from sale of Processed Raw coal = $48300000
Total Net Benefit =$57000000
In the first case the net benefit from the further processing would be [$54150000-$50000000] $4150000 and in the second case it would be [$57000000-$50000000] = $7000000.
Thus, in both cases our decision would change and would suggest for further processing.
Conclusion
From the above it is quite clear that allocation of joint cost plays a major role in decision making process of an entity and is required to evaluate the prospect of further processing of a product.
References
Awasthi, A., Omrani, H., & Gerber, P. (2018). Investigating ideal-solution based multicriteria decision making techniques for sustainability evaluation of urban mobility projects. Transportation Research Part A: Policy and Practice, 116(2), 247-259.
Bennouna, K., Meredith, G., & Marchant, T. (2010). Improved capital budgeting decision making: evidence from Canada. Journal of Mnagement Decisions, 48(2), 225-247.
Covaleski, M., Evans, J., Luft, J., & Shields, M. (2003). Budegting Research Three Theoretical Prespectives and Criteria for selective Integration. Journal of Management Accounting Research, 15(3), 3-49.
Eddy, C., Filip,R, & Warlop, L. (2004). The Value of Activity-Based Costing in Competitive Pricing Decisions. Journal of Management Accounting Research, 16, 133-148.
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