Major Foods, Inc. produces a cereal from oat grain. The company buys unprocessed oats for $400 per ton. It costs $60 per ton to send the oats through a processor, which produces 1,900 kilograms of pure oats and 100 kilograms of oat shells. The oat shells are ground and packaged at a cost of $100 per hundred kilograms. They are sold to a poultry feed company for $3 per kilogram. The pure oats are cooked and packaged into 4-kilogram containers at a cost of $350. The packaged oats are sold for $2 per 4-kilogram container.
If Major uses the net realizable value method, the joint costs allocated to the oats is:

Question

Quizplus · Accepted Answer

The net realizable value method allocates joint costs based on the final sales value minus any additional processing costs. The sales value of the pure oats is $950 (475 containers x $2), and the sales value of the oat shells is $300 (100 kg x $3). The additional processing costs are $350 for pure oats and $100 for oat shells. The net realizable value for pure oats is $600 ($950 - $350), and for oat shells, it is $200 ($300 - $100). The total net realizable value is $800. The joint costs of $460 ($400 + $60) are allocated based on the proportion of net realizable value: $600/$800 for oats, which is $345.