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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

    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.