Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 39

Physical Quantities Method

The following questions relate to Kyle Company, which manufactures products KA, KB, and KC from a joint process. Joint product costs were $126,000. Additional information follows:

			If Processed Further
Product	Units Produced	Sales Value at Split-Off	Sales Values	Additional Costs
KA	56,000	$160,000	$220,000	$36,000
KB	40,000	140,000	180,000	28,000
KC	16,000	100,000	160,000	20,000

Required

a.Assuming that joint product costs are allocated using the physical quantities (units produced) method, what was the total cost of product KA (including $36,000 if processed further)?

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b.Assuming that joint product costs are allocated using the sales value at split-off (net realizable value method), what was the total cost of product KB (including the $28,000 if processed further)?

Step 1 of 3

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Joint cost

Joint cost is the cost of manufacturing for a production process that produces multiple products. For example, during mining process of coal there are variety of coal generated like low, medium, high grade etc. The main challenge arises when the joint cost need to apportioned over the multiple products generated.

Net realizable value method

Under this method joint costs are allocated on the basis of estimated sales value of products at split off point. For example, if company mines two types of coals such as hi grade and low-grade coal and market value of hi grade coal is $5,000 and low-grade coal is $3,000, then joint coat shall be allocated in the ratio of 5000:3000 i.e. 5:3.

Physical quantities method

Under this method the joint cost is allocated in the ratio of physical quantities of products produced. This method is used when market value of the products is not available or it is highly fluctuating. For example, if company mines two types of coals such as hi grade and low-grade coal and quantity of hi grade coal is 1,000 tons and low-grade coal is 2,000 tons, then joint coat shall be allocated in the ratio of 1000:2000 i.e. 1:2.