The Great Foods Company processes milk into skim milk and butter. This year 70,000 litres of milk will be processed, costing $40,000. If processed to the split-off point, this will yield 40,000 litres of skim milk and 10,000 kilograms of butter. Skim milk is sold to distributors for $1 per litre and butter is sold for $0.75 per kilogram. Great Foods has the option of processing the two products further. Skim milk can be processed into canned, sweetened and condensed skim milk and sold for $0.80 per can. One litre of skim milk makes 2 cans of condensed milk. To process 40,000 litres of skim milk it will cost $18,000. Butter can be processed into cake frosting and sold in containers for $2 each. One kilogram of butter goes into each container of frosting. The cost of processing 10,000 kilograms of butter into frosting costs $15,000.
What is the per-unit joint cost allocated to skim milk and butter if the sales value at split-off method is used?

Question

Quizplus · Accepted Answer

The sales value at split-off method allocates joint costs based on the proportion of sales value at the split-off point. Skim milk's sales value is $40,000 (40,000 litres x $1), and butter's sales value is $7,500 (10,000 kg x $0.75). The total sales value is $47,500. The joint cost of $40,000 is allocated based on these proportions: Skim milk gets $33,684.21 ($40,000 x $40,000/$47,500) and butter gets $6,315.79 ($40,000 x $7,500/$47,500). Per unit, this is $0.8421 per litre for skim milk and $0.6316 per kilogram for butter.

The Great Foods Company Processes Milk into Skim Milk and Butter