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Alternative methods of joint-cost allocation

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Sunshine Oil Company buys crude vegetable oil. Processing this oil results in four products at the split off points: A, B, C, and D. Product C is fully processed at the split off point. Products A, B, and D can be individually further processed into A Plus, B Plus, and D Plus. In the company's most recent month (November), the company's output at the split off point was:

Product A 300,000 gallons
B 100,000 gallons
C 50,000 gallons
D 50,000 gallons

The joint costs of purchasing and processing the crude oil were $100,000. Sunshine had no beginning or ending inventories. Sales of Product C in November were $50,000. Products A, B, and D were refined and then sold. Data relating to November were:

Product Separable Costs Revenues
A Plus $200,000 $300,000
B Plus 80,000 100,000
D Plus 90,000 120,000

Sunshine had the option of selling A, B, and D at the split off point. This alternative would have yielded the following revenues for November production:

Product A $50,000
Product B 30,000
Product D 70,000

Required:
1. Compute the gross margin percentage for each product sold in December using the following methods for allocating the $100,000 joint costs:
a. sales value at split off
b. physical measures method
c. estimated net realizable value.

2. Could Sunshine have increased its November operating income by making different decisions about further processing of Product A, B, or D? Show the effect on income of any changes recommended.

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Solution Summary

The solution explains allocation of joint costs under sales value at split off, physical measures method and estimated net realizable value.

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Comparison of Alternative Joint-Cost-Allocation Methods

The Chocolate Factory manufactures and distributes chocolate products. It purchases cocoa beans and processes them into two intermediate products: Chocolate-powder liquor base and Milk-chocolate liquor base. These two intermediate products become separately identifiable at a single split off point. Every 1,500 pounds of cocoa beans yields 60 gallons of chocolate-powder liquor base and 90 gallons of milk-chocolate liquor base.

The chocolate-powder liquor base is further processed into chocolate powder. Every 60 gallons of chocolate-powder liquor base yield 600 pounds of chocolate powder. The milk-chocolate liquor base is further processed into milk chocolate. Every 90 gallons of mil-chocolate liquor base yield 1,020 pounds of milk chocolate.

Production and sales data for August 2009 are (assume no beginning inventory):
- Cocoa beans processed, 15,000 pounds
- Costs of processing cocoa beans to split off point (including purchase of beans), $30,000

(Please see attached)

Chocolate Factory fully processes both of its intermediate products into chocolate powder or milk chocolate. There is an active market for these intermediate products. In August 2009, Chocolate Factory could have sold the chocolate-powder liquor base for $21 a gallon and the mil-chocolate liquor base for $26 a gallon.

Answer the following:

1. Calculate how the joint costs of $30,000 would be allocated between chocolate powder and milk chocolate under the following methods:

a. Sales value at split off
b. Physical-measure (gallons)
c. NRV
d. Constant gross-margin percentage NRV

2. What are the gross-margin percentages of chocolate powder and milk chocolate under each of the methods in requirement 1?

3. Could Chocolate Factory have increased its operating income by a change in its decion to fully process both of its intermediate products? Show your computations.

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