Gem Potato Processors produces three products: fries, nuggets and crunchy peels.

Question

Gem Potato Processors produces three products: fries, nuggets and crunchy peels.

They are all made from a cull potatoes they purchase from sorting sheds.

Follow is information about each product.

                                                             Fries                           Nuggets              Peelings

Pounds Produced                          50,000                            40,000                  10,000

Pounds Sold at Retail Point          45,000                            35,000                 10,000

Sales Price at Split-off                  $3.00                             $2.00                    $1.00

Retail Sales Price                                $5.00                              $4.00                    $1.00

Separate Costs                               $50,000                          $20,000                       $0

Joint Costs before Split-off Point is $200,000.

Required:

1. Allocate the joint costs using the NRV method.

2. Allocate the joint costs using the physical unit’s method.

3. What is the other acceptable method used to allocate joint costs?

4. Which is the best method and why?

Explanation / Answer

Gem Potato Processors All Amounts in $ 1. Allocation of Joint Costs using NRV Method Fries Nuggets Peelings Qty Sold 45000 35000 10000 Sales Price per pound 5 4 1 Retail Sales Price Total Sales Value 225000 140000 10000 Separate Costs 50000 20000 0 Net Realisable Value (NRV) 175000 120000 10000 305000 Joint Costs before Split off 200000 Allocation of Joint Costs 114754 78689 6557.4 Net Profit 60246 41311 3442.6 2. Allocation of Joint Costs using physical units method Fries Nuggets Peelings Qty. Produced 50000 40000 10000 100000 Joint Costs before Split off 200000 Allocation of Joint Costs 100000 80000 20000 Sales Price at Split off 3 2 1 Total Sales Value 150000 80000 10000 Net Profit 50000 0 -10000 3. Allocation of Joint Costs based on Sales Price at Split Off Method (Alternative) Fries Nuggets Peelings Qty Sold 45000 35000 10000 Sales Price per pound 3 2 1 Total Sales Value 135000 70000 10000 215000 Joint Costs before Split off 200000 Allocation of Joint Costs 125581 65116 9302.3 Net Profit 9419 4883.7 697.67 4. Method of allocation based on the Net Realisable Value or NRV is considered to be the most economical, since the Net Profit per product is higher than the other methods.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.