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

Exercise 59

Joint Cost Allocation and Product Profitability

Western Woods, Inc., processes logs into grade A and grade B lumber. Logs cost $12,000 per load. The milling process produces 4,000 units of grade A with a market value of $28,000, and 12,000 units of grade B with a market value of $4,000. The cost of the milling process is $5,120 per load.

Required

a.If the costs of the logs and the milling process are allocated on the basis of units of output, what cost will be assigned to each product?

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b.If the costs of the logs and the milling process are allocated on the basis of the net realizable value, what cost will be assigned to each product?

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c.How much profit or loss does the grade B lumber provide using the data in this problem and your analysis in requirement (a)? Is it really possible to determine which product is more profitable? Explain why or why not.

Step 1 of 4

Joint cost allocation:

Under joint allocation, it is impossible to separate the portion of joint costs attributable to one product from the other product. Therefore, allocating the joint costs is always treated on an approximate basis. Basing on the joint cost allocation decision making is also made to further increase the sales or not.

This method is called sales at split off point. It is the point where it is decided whether to increase the sales or stop further processing.