Answer:
a) using the physical units method of allocation
Grade Units Allocated Joint Cost ($)
Firsts and seconds 1500000 180000
No. 1 common 3000000 360000
No. 2 common 1875000 225000
No. 3 common 1125000 135000
7500000 900000
The joint cost in the above table is allocated on the basis of units. For e.g. for Firsts & Seconds Cost = 900000 * 1500000 / 7500000 = $180000
b) using the sales-value-at-split-off method
Grade Units Price Sales Value ($) Allocated
Joint Cost ($)
Firsts and seconds 1500000 300 450000000 270000
No. 1 common 3000000 225 675000000 405000
No. 2 common 1875000 140 262500000 157500
No. 3 common 1125000 100 112500000 67500
7500000 1500000000 900000
If physical quantity of joint-products closely reflect their costs then joint cost may be allocated using physical quantity method but when physical quantity of joint products does not reflect their value and a reliable estimate of sale value at split off point can be easily made then sales-value-at-split-off method should be used.
If the mill switches to the sales-value-at-split-off method, then cost allocated to No 2 & 3 common would decrease while for First & Seconds & No 1 common would increase since the selling price of First & Seconds & No 1 common is higher.
