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

Exercise 55

Finding Missing Data: Net Realizable Value

Athens, Inc., manufactures argon, xon, and zeon from a joint process. Each gas can be liquified and sold for a higher price. Data on the process are as follows:

Product	Argon	Xon	Zeon	Total
Units produced	16,000	8,000	4,000	28,000
Joint costs	$ 60,000a	(b)	(a)	$120,000
Sales value at split-off	(c)	(d)	$30,000	200,000
Additional costs to liquify	14,000	$10,000	6,000	30,000
Sales value if liquified	140,000	60,000	40,000	240,000

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a This amount is the portion of the total joint cost of $120,000 that had been allocated to argon.

Required

Determine the value for each lettered item.

Step 1 of 7

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.