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

Exercise 40

Physical Quantities Method with By-Product

Trans-Pacific Lumber runs a mill in the Northwest that produces two grades of lumber, A and B, and a by-product, sawdust. The company chooses to allocate the costs on the basis of the physical quantities method.

Last month, it processed 125,000 logs at a total cost of $270,000. The output of the process consisted of 25,500 units of grade A, 59,500 units of grade B, and 75,000 units of sawdust. The sawdust can be sold for $10,000. This is considered to be its net realizable value, which is deducted from the processing costs of the main products.

Required

What share of the joint costs should be assigned to grade A and grade B?

Step 1 of 2

Under the quantity method the joint cost is allocated on the basis of quantities of the product produced. TPL Company produces two main products (A and B) and one by-product (SD).

In the last year, the company incurred the joint cost of $270,000. The output of product A and B are 25,500 units and 59,500 units and the output of by product was 75,000 units. The net realizable value of the by-product was $10,000.

The joint cost to be allocated was as under:

Total processing cost	$270,000
Less: Net realizable value of by product	($10,000)
Joint cost to be allocated between main products	$260,000

The joint cost of $260,000 will be allocated on the basis of quantities produced of product A and B.