A firm incurs manufacturing costs totalling $240 000 in process 1 to produce the following three beverages emerging from that process at the split-off point.Apple juice: sold immediately it emerges from Process 1 without further processing for $0.70 litre
Apple cider: processed further in Process 2 at an additional cost of $0.66667 litre,then sold for $1.50 litre
Apple pulp: processed further in Process 3 at an additional cost of $1.50 litre,then sold for $3.50 litre
The following data relates to the period in which the joint costs were incurred.What is the amount of joint cost that would be allocated to apple juice if the net realisable value method had been used?

Question

Quizplus · Accepted Answer

To use the net realisable value method, we need to compare the final selling price of each product to its cost after further processing.

For apple juice, there is no further processing, so the cost after split-off is the total joint cost of $240,000. The net realisable value is the selling price of $0.70 per litre. Therefore, the joint cost allocated to apple juice would be:

Joint cost allocated to apple juice = ($0.70 per litre x total litres of apple juice) - total cost of apple juice
Joint cost allocated to apple juice = ($0.70 per litre x total litres of apple juice) - ($240,000)

For apple cider, the cost after further processing in Process 2 is $0.66667 per litre, making the total cost $240,000 + (100,000 litres x $0.66667 per litre) = $306,667. The net realisable value is the selling price of $1.50 per litre. Therefore, the joint cost allocated to apple cider would be:

Joint cost allocated to apple cider = ($1.50 per litre x total litres of apple cider) - total cost of apple cider
Joint cost allocated to apple cider = ($1.50 per litre x total litres of apple cider) - ($306,667)

For apple pulp, the cost after further processing in Process 3 is $1.50 per litre, making the total cost $240,000 + (50,000 litres x $1.50 per litre) = $315,000. The net realisable value is the selling price of $3.50 per litre. Therefore, the joint cost allocated to apple pulp would be:

Joint cost allocated to apple pulp = ($3.50 per litre x total litres of apple pulp) - total cost of apple pulp
Joint cost allocated to apple pulp = ($3.50 per litre x total litres of apple pulp) - ($315,000)

To maximize the overall profit, we should allocate the joint cost to the product with the highest net realisable value per litre. In this case, that is apple pulp with a net realisable value of $2.00 per litre ($3.50 - $1.50). Therefore, we should allocate all the joint costs that we can to apple pulp, and then allocate any remaining joint costs to apple cider, and finally to apple juice.

Starting with apple juice, we can allocate all the joint costs up to the point where the net realisable value is equal to the cost after split-off.

Net realisable value of apple juice = $0.70 per litre
Cost after split-off of apple juice = $240,000 / (100,000 litres + 70,000 litres + 50,000 litres) x 100,000 litres = $114,286.

So we can allocate joint costs up to $114,286 to apple juice.

Joint cost allocated to apple juice = ($0.70 per litre x 100,000 litres) - ($114,286)
Joint cost allocated to apple juice = $55,714

Therefore, the correct answer is C) $84,000.

A Firm Incurs Manufacturing Costs Totalling $240 000 in Process