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

Exercise 38

Net Realizable Value Method

Douglas manufactures four grades of lubricant, W-10, W-20, W-30, and W-40, from a joint process. Additional information follows:

			If Processed Further
Product	Units Produced	Sales Value at Split-Off	Additional Costs	Sales Values
W-10	35,000	$210,000	$22,500	$270,000
W-20	25,000	180,000	18,000	210,000
W-30	20,000	120,000	12,000	150,000
W-40	20,000	90,000	7,500	90,000
	100,000	$600,000	$60,000	$720,000

Required

Assuming that total joint costs of $240,000 were allocated using the sales value at split-off (net realizable value method), what joint costs were allocated to each product?

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.