CT MD3 Allocating Joint Costs
Posted: August 26th, 2021
CT MD3 Allocating Joint Costs
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CT MD3 Allocating Joint Costs
Net Realizable Value (NRV)
NVR is a valuation method used in accounting to estimate the disposable costs of an asset where it undergoes further processing. The asset cost is allocated according to the hypothetical sales value. Equally, joint costs in a manufacturing company occur when the company produces two products to process single raw material by conventional manufacturing processes (Deevski, 2016). Hence, at the split-off point, the two products undergo significant further processing before marketing and sales made to consumers. The split-off points require additional costs that are allocated to the two products to the valuation of the final product.
Table 1: Allocating of joint cost using the NRV method
| Sunscreen | Hot Cocoa Mix | Total | |
| Final sales value | $ 2,200,000 | $ 2,550,000 | $ 4,750,000 |
| Deduct separable costs | $ 600,000 | $ 500,000 | $ 1,100,000 |
| Net realizable Value at split-off point | $ 1,600,000 | $ 2,050,000 | $ 3,650,000 |
| Weighting | 0.44 | 0.56 | 1 |
| Joint costs Allocation | $ 626,849 | $ 803,151 | $ 1,430,000 |
| Production Costs per Gallon | $ 13.63 | $ 10.43 | $ 24 |
| Prod 90,000 pounds | Prod 125,000 pounds |
Table 2: Product line income statement using the NRV method
| Sunscreen | Hot Cocoa Mix | Total | ||
| Revenues | 2,812,000 | 5,472,000 | $ 8,284,000 | |
| costs of goods sold | ||||
| Joint costs | 626,849 | 803,151 | $ 1,430,000 | |
| Separable costs | 600,000 | 500,000 | $ 1,100,000 | |
| Production costs | 1,226,849 | 1,303,151 | 2,530,000 | |
| Ending inventory | 190,843 | 114,677 | $ 305,520 | |
| Cost of goods sold | 1,036,006 | 1,188,473 | $ 2,224,480 | |
| Gross margin | 190,843 | 114,677 | $ 305,520 | |
| Gross margin % | 6.79% | 2.10% | 8.88% |
Table 1 summarizes the allocation of joint costs based on net realizable value. According to the evaluation, the respective allocations include $13.63 per gallon for Sunscreen and $ 10.43 per gallon for Hot Cocoa mix. The total units per gallon for the two products are $ 24.In table 2, the income statement reveals an estimated gross margin of 6.79% for Sunscreen and 2.10% for Hot Cocoa mix. Thus, using the NRV, it is effective to obtain the required production value and estimate the returns for each product.
References
Deevski, S. (2016). Cost Allocation Methods for Joint Products and By-products. Economic Alternatives, (1).
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