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Major Foods, Inc. produces a cereal from oat grain. The company buys unprocessed oats for $400 per ton. It costs $60 per ton to send the oats through a processor, which produces 1,900 pounds of pure oats and 100 pounds of oat shells. The oat shells are ground and packaged at a cost of $100 per hundred pounds. They are sold to a poultry feed company for $3 per pound. The pure oats are cooked and packaged into 4-pound containers at a cost of $350. The packaged oats are sold for $2 per 4-pound container.
-If Major uses the net realizable value method, the joint costs allocated to the oats is
A) $345
B) $110
C) $350
D) $115

Question

Quizplus · Accepted Answer

The net realizable value method allocates joint costs based on the final sales value minus any additional processing costs. The pure oats have a sales value of $950 (475 containers x $2) and additional costs of $350, while the oat shells have a sales value of $300 (100 pounds x $3) and additional costs of $100. The total sales value is $1,250, and the total additional costs are $450, leaving a net realizable value of $800. The joint costs of $460 ($400 + $60) are allocated based on the proportion of net realizable value, resulting in $345 allocated to the oats.

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