Joint Cost Allocation Your firm pays for mineral rights at the Lego Mine, which
ID: 2580645 • Letter: J
Question
Joint Cost Allocation
Your firm pays for mineral rights at the Lego Mine, which contains diamonds, citrine, rubies, and emeralds, as well as large quantities of plain rock. Your firm uses the stones that are mined for the following products:
A ring needs 4 stones.
A bracelet needs 10 stones.
Your firm has two kinds of employees: miners and jewelers. Miners go through the rocks in the mine, sort the diamonds, citrine, rubies, emeralds into individual transportation containers, and bag up the plain rock for sale landscapers. The transportation containers are then sent on to the jewelers, who make rings and bracelets.
Go through one production period, and keep track of times for the following:
Mining: 36 seconds
Making diamond rings: 12.5 seconds
Making citrine bracelets: 12.5 seconds
Making ruby bracelets: 12.5 seconds
Making emerald rings: 12.5 seconds
After all products are manufactured and ready for sale, complete the requirements below. Plain rock is treated as a byproduct. Plain rock are 20 stones. Calculate following costs were incurred this period:
Bags of rock sell for $100 at splitoff. The following are per-unit prices your firm charges for each jewelry product, as well as how much each individual stone could sell for (at splitoff):
1. Calculate total joint costs, separable costs for each product, and NRV for each product
2. Calculate the allocated joint costs and the profitability of each product line under each of the following assumptions:
a. The byproduct is accounted for at the time of sale, and sales value at the splitoff point is the allocation base for joint costs
b. The byproduct is accounted for at the time of production, and NRV is the allocation base for joint cost
c. The byproduct is accounted for at the time of production, and number of stones is the allocation base for joint cost
3. Briefly, state which cost allocation base is the most appropriate for this company, and explain why.
Diamond rings 2 Citrine bracelets 2 Ruby bracelets 2 Emerald rings 3 Bags of rockExplanation / Answer
Q-1 Joint cost, & Seperable costs for each products, is as follows Quantity Cost of Mining Time in seconds wage rate Total wages setting Seperable costs Total cost Mining 2000 36 5 180 628 2808 Joint Cost Making diamonds 2 12.5 10 125 50 218 393 Seperable cost Making Citrine Bracelets 2 12.5 10 125 100 218 443 Seperable cost Making Ruby Bracelets 2 12.5 10 125 100 218 443 Seperable cost Making Emerald Bracelets 3 12.5 10 125 50 218 393 Seperable cost Total 86 1500 1500 Net Realisable Value for each product Diamonds Citrine Ruby Emeralds price of jewellary 1000 500 700 800 No. of units 2 2 2 3 Sales of jewellery 2000 1000 1400 2400 Less : seperable costs 393 443 443 393 NRV 1607 557 957 2007 Q-2 Allocation of Joint cost & Profitability of each products under following assumptions a Diamonds Citrine Ruby Emeralds Total Sales of jewellery A 2000 1000 1400 2400 6800 Sales price of stone at spilt off 400 100 175 200 No. of stones 8 20 20 12 Sales Value 3200 2000 3500 2400 11100 Joint cost B 810 506 885 607 2808 Seperation Costs C 393 443 443 393 1672 Add : By product revenue D 100 profit A-B-C+D 797 51 72 1400 2420 b Diamonds Citrine Ruby Emeralds Total Sales of jewellery A 2000 1000 1400 2400 6800 NRV 1607 557 957 2007 5128 Joint cost B 880 305 524 1099 2808 Seperation Costs C 393 443 443 393 1672 Total cost before by product sale =B+C 4480 Less : revenue from by products 100 Total cost D 4380 profit A-D 727 252 433 908 2420 c Diamonds Citrine Ruby Emeralds Total Sales of jewellery A 2000 1000 1400 2400 6800 No. of stones 8 20 20 12 60 Joint cost B 374 936 936 562 2808 Seperation Costs C 393 443 443 393 1672 Total cost before by product sale =B+C 4480 Less : revenue from by products 100 Total cost D 4380 profit A-D 1233 -379 21 1445 2420 3 The most appropriate cost allocation base for company is NRV since it gives rational results.
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