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

Exercise 34

Estimated Net Realizable Value Method

Blasto, Inc., operates several mines. At one, a typical batch of ore run through the plant yields three products: lead, copper, and manganese. At the split-off point, the intermediate products cannot be sold without further processing. The lead from a typical batch sells for $40,000 after incurring additional processing costs of $12,000. The copper is sold for $80,000 after additional processing costs of $10,000, and the manganese yield sells for $60,000 but requires additional processing costs of $18,000. The joint costs of processing the raw ore, including the cost of mining, are $100,000 per batch.

Required

Use the estimated net realizable value method to allocate the joint processing costs.

Step 1 of 4

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.