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

Exercise 35

Net Realizable Value Method to Solve for Unknowns

GG Products, Inc., prepares tips and stems from a joint process using asparagus. It produced 240,000 units of tips having a sales value at the split-off point of $63,000. It produced 240,000 units of stems having a sales value at split-off of $15,750. Using the net realizable value method, the portion of the total joint product costs allocated to tips was $36,000.

Required

Compute the total joint product costs before allocation.

Step 1 of 2

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.