Question

Joint manufacturing costs: $900,000 Quantity Produced Price at Split-OffGrade (Board Feet) (per 1,000 Board Ft.)Firsts and seconds 1,500,000 $300No. 1 common 3,000,000 225No. 2 common 1,875,000 140No. 3 common 1,125,000 100 Total 7,500,0001Allocate the joint manufacturing costs to each grade, and calculate the cost per board foot for each grade: (a) using the physical units method of allocation and (b) using the sales-value-at-split-off method. Which method should the mill use? Explain. What is the effect on the cost of each proposed job if the mill switches to the sales-value-at-split-off method?.

Answer 1

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.