Figure 6-7
Suppose that a concrete manufacturer produces four grades of concrete totaling 500,000 cubic yards as follows at a joint cost of £2,000,000: $$\begin{array} { c c c }
\text { Grade } & \text { Cubic Yards } & \text { Sales Value } \
\text { A } & 75,000 & £ 375,000 \
\text { B } & 200,000 & 1,200,000 \
\text { C } & 100,000 & 700,000 \
\text { D } & 125,000 & 850,000
\end{array}$$
-Refer to Figure 6-7. What amount of joint costs will be allocated to Grade C using the constant gross margin percentage method?

Question

Figure 6-7
Suppose that a concrete manufacturer produces four grades of concrete totaling 500,000 cubic yards as follows at a joint cost of £2,000,000: $$\begin{array} { c c c } 
\text { Grade } & \text { Cubic Yards } & \text { Sales Value } \
\text { A } & 75,000 & £ 375,000 \
\text { B } & 200,000 & 1,200,000 \
\text { C } & 100,000 & 700,000 \
\text { D } & 125,000 & 850,000
\end{array}$$
-Refer to Figure 6-7. What amount of joint costs will be allocated to Grade C using the constant gross margin percentage method?

Quizplus · Accepted Answer

The constant gross margin percentage method allocates joint costs based on the sales value of the total production. First, calculate the total sales value: £375,000 (A) + £1,200,000 (B) + £700,000 (C) + £850,000 (D) = £3,125,000. The overall gross margin is (£3,125,000 sales - £2,000,000 joint costs) / £3,125,000 sales = 36%. The sales value of Grade C is £700,000, so the allocated joint costs for Grade C are £700,000 * 36% = £252,000. This calculation is incorrect; the correct method involves finding the proportion of each grade's sales value to total sales and then applying that proportion to the joint costs. The correct calculation is as follows: First, find the total sales value, which is correct at £3,125,000. However, to allocate costs, we should not apply the gross margin but rather the proportion of each grade's sales to the total sales. For Grade C: £700,000 / £3,125,000 = 22.4% of total sales. Then, 22.4% of the joint costs (£2,000,000) is allocated to Grade C: 0.224 * £2,000,000 = £448,000.

Figure 6-7 Suppose That a Concrete Manufacturer Produces Four Grades

Figure 6-7
Suppose That a Concrete Manufacturer Produces Four Grades