PROBLEM 14 - 1: Allocation of Joint Cost

Bulacan Chemicals purchases coconut and processes it into products such as copra, vinegar and alcohol.
In July 2018, Bulacan purchased coconut for P40,000. Conversion costs of P60,000 were incurred up to the split-off point,
at which time two salable products were produced: copra and vinegar.
Vinegar can be further processed into alcohol.

The July 2018 production and sales data are:

Production (tons) Sales (tons) Sales Price per Ton
Copra 1,200 1,200 50.00
Vinegar 800 75.00
Alcohol 500 500 200.00

All 800 tons of vinegar were further processed, at an incremental cost of P20,000, to yield 500 tons of alcohol.
There were no beginning or ending inventories of copra, vinegar, or alcohol in July.
There is an active market for vinegar. Bulacan Products could have sold all of its July production of vinegar at P75 a ton.

Required:
1. Allocate the joint costs of P100,000 between copra and vinegar under the:
(a) Sales Value at Split-off Method
Copra Vinegar
1. Sales value at spilt-off point: 60,000.00 60,000.00
2. Ratio: 50% 50%
3. Allocated Joint Costs: 50,000.00 50,000.00

(b) Physical Measure (tons) Method

Copra Vinegar
1. Physical Measures (tons) 1,200 800
2. Ratio: 60% 40%
3. Allocated Joint Costs: 60,000.00 40,000.00

(c) Net Realizable Value (NRV) Method

Copra Alcohol
1. Sales value before allocation: 60,000.00 100,000.00
2. LESS: Incremental cost - 20,000.00
3. Adjusted Sales Value 60,000.00 80,000.00
4. Ratio: 43% 57%
5. Allocated Joint Costs: 42,857.14 57,142.86

2. What is the gross margin percentage of (a) copra and (b) alcohol under the three allocation methods in no. 1?
(a) Sales Value at Split-off Method
Bulacan Products
Income Statement
For July 2018
Copra Alcohol
 Revenues: 60,000.00 100,000.00
COGS: Joint Costs 50,000.00 50,000.00
Incremental cost - 20,000.00
Gross Margin 10,000.00 30,000.00
Gross Profit Rate: 17% 30%

(b) Physical Measure (tons) Method

Bulacan Products
Income Statement
For July 2018
Copra Alcohol
Revenues: 60,000.00 100,000.00
COGS: Joint Costs 60,000.00 40,000.00
Incremental Cost - 20,000.00
Gross Margin - 40,000.00
Gross Profit Rate: 0% 40%

(c) Net Realizable Value (NRV) Method

Bulacan Products
Income Statement
For July 2018
Copra Alcohol
Revenues: 60,000.00 100,000.00
COGS: Joint Costs 42,857.14 57,142.86
Incremental Cost - 20,000.00
COG available for sale 42,857.14 77,142.86
Gross Margin 17,142.86 22,857.14
Gross Profit Rate 29% 23%

3. Laguna Chemicals offers to purchase 800 tons of vinegar in August 2018 at P75 a ton. This sale would mean that no alcohol
in August. How would accepting this offer affect Bulacan's August 2018 operating income?

Incremental revenues from further processing of vinegar into alcohol:

Sales from alcohol: 100,000.00
Sales from vinegar: 60,000.00
Difference of the sales: 40,000.00
Incremental cost: 20,000.00
Incremental operating income: 20,000.00

EXPLAIN: It can be sought that the Bulacan will get higher operating income if they sold alcohol (vinegar after further processin
So if the Bulacan will accept the offer of Laguna Chemicals of purchasing the 800 tons of vinegar (without further pr
Therefore, the effect on Bulacan's August 2018 operating income would be reduced by P20,000 if Bulacan sold the
p to the split-off point,

s of alcohol.

vinegar at P75 a ton.

Total
120,000.00

100,000.00

Total
2,000

100,000.00

Total
160,000.00
20,000.00
140,000.00

100,000.00

hods in no. 1?

Total
 160,000.00
100,000.00
20,000.00
40,000.00
25%

Total
160,000.00
100,000.00
20,000.00
40,000.00
25%

Total
160,000.00
100,000.00
20,000.00
120,000.00
40,000.00
25%

would mean that no alcohol would be produced

negar after further processing) with gaining an amount of P100,000 of sales.

vinegar (without further processing) at P75 per ton, then Bulacan's operating income will decrease P20,000.
P20,000 if Bulacan sold the 800 tons of vinegar at P75 per ton.