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 condensed milk and frosting if the net realizable value method is used?

Question

Quizplus · Accepted Answer

The net realizable value (NRV) method allocates joint costs based on the final sales value minus any additional processing costs. For condensed milk: 40,000 liters make 80,000 cans, sold at $0.80 each, yielding $64,000 minus $18,000 processing, equals $46,000. For frosting: 10,000 containers sold at $2 each, yielding $20,000 minus $15,000 processing, equals $5,000. Total NRV is $51,000. Joint costs are $40,000. Condensed milk's share of joint costs: ($46,000/$51,000) * $40,000 = $36,078.43, or $0.45098 per can. Frosting's share: ($5,000/$51,000) * $40,000 = $3,921.57, or $0.3922 per container.

The Great Foods Company Processes Milk into Skim Milk and Butter