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Joint cost allocation and Net Realizable Value

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A single production process converts a single raw material into 5,000 kg of joint product A and 5,000 kg of joint product B at a total cost of $100,000. After the split-off point $10,000 is spent on A to convert it into C and $20,000 is spent on B to convert it into D. C and D are both sold for $15 per kg. Joint costs are allocated to A and B using the net realisable value method.

1. Joint costs allocated to A (to the nearest dollar) are:
(a) $45,833
(b) $54,167
(c) $50,000
(d) $64,167
(e) $65,833

2. If A were sold at $13 per kg instead of being converted into C, gross profit would:
(a) remain unchanged
(b) increase by $2,000
(c) decrease by $2,000
(d) increase by $10,833
(e) increase by $9,167.

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Solution Preview

1. The net realisable value is calculated as Sales Value after further processing less the incremental cost of further processing.

Product A - Total sales value is 5,000 kg X 15 = $75,000
Incremental cost is $10,000
Net realisable value is 75,000-10,000=$65,000

Product B ...

Solution Summary

The solution explains how to allocate joint costs using net realizable value method.