Question (1)

Allocate joint cost between output products , and prepare income statement under
the following each methods

1. Sales value at splitoff method

2. Physical measures method

Liquid
Cream Total
Skin
Sales value of total production at splitoff point
gallons x $8 per gallon ; 75,000 gallon x$4 per 25,000
$200,000 300,000$ $500,000
) gallon
Weighting ($200,000 ÷$500,000;$300,000÷500,000) 0.40 0.60
Joint cost allocated )400,000 * 0.60( )400,000 * 40.( $160,000 $240,000 $400,000
Join production cost per gallon
))gallon ;$240,000÷75,000 gallons 25,000÷$160,000 $0.6.40 $3.20
PANEL A: Allocation of Joint Costs Using Sales Value at Splitoff Method

Solution

Panel B

income statement ‘ sales value at splitoff point

 Liquid
Cream Total
Skin
Revenues (20,000 gallon x $8per gallon ;30,000
$160,000 $120,000 $280,000
gallon x$4per gallon)
Cost of goods sold (joint costs)
Production costs (0.40x
160,000 240,000 400,000
$400000;0.60x$400,000)
(-) Deduct ending inventory (5000 gallon x $6.40
(32,000) (144000) (176000)
per gallon ;45,000 gallons x $3.20 per gallon)
Cost of goods sold (joint costs) 128,000 96,000 224,000
Gross margin $32,000 $ 24,000 $56,000
Gross margin percentage ($32,000÷$160,000 ;
20% 20% 20%
$24.000÷$120,000;$56,000÷$280,000)

May 2012
Physical Measures method
PANEL A: Allocation of Joint Costs Using Physical - Measure Method

Liquid
Cream Total
Skin
Physical Measure of total production (gallon) 25,000 75,000 100,000
Weighting (25,000 gallons ÷ 100,000 gallons ;
0.25 0.75
75,000 gallon ÷100,000 gallons )
Joint cost allocated (0.25x$400,000; 0.75x $100,00 $300,00 $400,00
$400,000) 0 0 0
Joint production cost per gallon ($100,000÷
$ 4,00 $ 4,00
25,000 gallon ; $300,000÷ 75,000 gallon)

Panel B : income statement ‘ physical measures method ‘

May 2012

Cream Liquid Total

 Skin
Revenues (20,000 gallons x $8per gallon ;30,000 gallons
$160,000 $120,000 $280,000
x$4per gallon)
Cost of goods sold (joint costs)
Production costs (0.25x $400,000;0.75x$400,000) 100,000 300,000 400,000
(-) Deduct ending inventory (5000 gallon x $ 4 per
(20,000) (180,000) (200,000)
gallon;45,000 gallons x $4 per gallon)
= Cost of goods sold (joint costs) 80,000 120,000 200,000
Gross margin $80,000 0$ $ 80,000
Gross margin percentage
50% 0% 28.6%
($80,000÷$160,000÷120,000;$800,00÷$280,000)

Net realizable value (NRV) method

 NRV = Final Sales Value – Separable Costs

Question (2)
 Required

Allocate joint cost between output products, and prepare income statement under the
NRV method

Solution

PANEL A: Allocation of Joint Costs Using Net Realizable Value Method

Butter
Condensed Milk Total
cream
Final sales value of total during accounting period
20,000gallons x $25 per gallon ;50,000 gallons x (
$500,000 $1,110,000 $1,600,000
) $22 per gallon
Deduct separable costs )280,000( (520,000 ) (800,000)
Net realize value at splitoff point $220,000 580,000$ 800,000
Weighting (220,000 ÷800,000 ; 580,000 ÷
0.275 0.725
800,000
Joint cost allocated (0.275x$400,000; 0.725x
$110,000 290,000$ 000$ ,400
$400,000)
Production cost per gallo
gallons; [$290,000 $20,000 ÷ ]280,000 + $110,000[(
19.50 $ $ 2016.
)+ $520,000]÷50.000 gallons
 Panel B : income statement ‘ Net Realizable value method NRV ‘

May 2012

Butter Condensed
Total
cream Milk
Revenues (12,000 gallons x $25 per gallon ;45,000
$300,000 $990,000 $1,290,000
gallons x$22 per gallon)
- Cost of goods sold
Joint costs (0.275 x $400,000;0.725 x $400,000) 110,000 290 000 400,000
Separable costs 280,000 520,000 800,000
Production cost 390,000 810,000 1,200,000
Deduct ending inventory (8,000 gallons x $19.50 per
(156,000) (81,000) (237,000)
gallon ; 5,000 gallons x $16.20 per gallon)
Cost of goods sold 234,000 729,000 963,000
Gross margin $ 66,000 $ 261,000 $ 327,000
Gross margin percentage ( $66,000 ÷ $300,000;
22.0% 26.4% %25.3
$261,000 ÷ $990,000; $327,000 ÷ $1,290,000)

Constant gross margin NRV method.

Joint costs are calculated as a residual amount by subtracting the separable costs
and gross margin from the final sales value.

Constant Gross - Margin Percentage NRV Method :

3 steps

* The constant gross - margin percentage NRV method can be broken down into 3
steps:

Compute the overall gross margin percentage

Compute the total production costs for each product
Compute the assigned joint costs.
 PANEL A: Allocation of Joint Costs Using constant gross margin Net Realizable Value
Method

Step (1)
Final sales value of total during accounting period
20,000gallons x $25 per gallon ;50,000 gallons x (
$1,600,000
) $22 per gallon
Deduct separable costs + joint cost
)1200,000(
280,000+520,000 + 400,000
Gross margin $400,000
Gross margin percentage (400,000/1600,000) 25%
Step (2) Butter
Condensed Milk Total
Final sales value of total during accounting period cream
20,000gallons x $25 per gallon ;50,000 gallons x (
500,000 1,100,000 1,600,000
) $22 per gallon
Deduct gross margin using over all gross margin
125,000 275,000 400,000
percentage (.25 * 500,000) (.25 * 1,100,000)
Total production cost
375,000 825,000 1,200,000

Step (3)
Deduct separable cost 280,000 520,000 800,000

95,000 305,000 400,000

Joint cost allocated
Cost per gallon (95,000 +280,000)/20,000 gallons
18.75 16.50
gallons 50,000 /)520,000+ 305,000(

Panel B : income statement using constant gross margin percentage ‘ Net Realizable value method NRV ‘

May 2012

Butter Condensed
Total
cream Milk
Revenues (12,000 gallons x $25 per gallon ;45,000
$300,000 $990,000 $1,290,000
gallons x$22 per gallon)
- Cost of goods sold
Joint costs from panel A 95,000 305,000 400,000
Separable costs 280,000 520,000 800,000
Production cost 375,000 825,000 1,200,000
Deduct ending inventory (8,000 gallons x $18.75 per
(150,000) (82,500) (232,500)
gallon ; 5,000 gallons x $16.50 per gallon)
Cost of goods sold 225,000 742,500 967,500
Gross margin $ 75,000 $ 247,500 $ 322,500
Gross margin percentage ( $75,000 ÷ $300,000;
25% 25% %25
$247,500 ÷ $990,000; $322,500 ÷ $1,290,000)