Q 1 Mr Abdullah is having training in Omar Co. Omar Co produces three different
ID: 2598397 • Letter: Q
Question
Q 1 Mr Abdullah is having training in Omar Co.
Omar Co produces three different products which will be sold to XYZ company. The production size for each product, and the selling price per unit, is given below.
The joint costs of processing the 1,120,000 units of products were SAR 250,000.
Mr Abdullah collected the information related to production size, selling price per unit in the split-off point and Sales value at split – off, he prepared the following table for these informations.
Product
Production Size
(units)
Selling Price per unit in the split-off point
Total Sales Value at Split-Off
Product 1
603,680
0.75
452,760
Product 2
296,800
0.45
133,560
Product 3
219,520
0.25
54,880
Total
1,120,000
641,200
The work supervisor of Mr Abdullah requested him to allocate the joint costs to each product using the physical volume method. How the allocation of joint cost will be prepared by Mr Abdullah?
The academic supervisor of Mr Abdullah discussed with him the arguments explaining why he will have to use this method for allocation of joint costs?
The academic supervisor requested Mr Abdullah also to describe the
split-off point and explain its significance for joint product costing.
What will be the answers of Mr Abdullah to the questions of his
supervisor?
Product
Production Size
(units)
Selling Price per unit in the split-off point
Total Sales Value at Split-Off
Product 1
603,680
0.75
452,760
Product 2
296,800
0.45
133,560
Product 3
219,520
0.25
54,880
Total
1,120,000
641,200
Explanation / Answer
Solution:
Answers of Mr. Abdullah to the question of his Supervisor:-
1. Physical Volume Method :- Joint costs are allocated based on number of units or physical quantity such as weight ,volume or length of each product relative to total production. This method can be represented in the following formula:
= (quantity of the product * Total joint cost)/Quantity of total production
Product 1
( 603680*250000)/1120000
=SAR 134750
Product 2
(296800*250000)/1120000
=SAR 66250
Product 3
( 219520*250000)/1120000
=SAR 49000
2.Benefits of Physical Volume Method:
a) Simplicity: Physical Volume method is the simplest wat to allocate the joint product cost.
b) Not affected by volatility of selling price: Even if sales price differs this method is not affected by the instability in the selling price.
3.Split-off point: A spilt-off point is the location in a production process where jointly manufactured products are henceforth manufactured separately; thus, their cost can be identified individually after the split-off point. Costs are allocated to jointly manufactured products.
Significance of Split-off point for joint product costing
a)Cost incurred after split-off point on product separately identifiable shall be measured for the resources consumed for each joint product.
b)Net Relisable value at split-off point is also used as the method for allocation of joint cost.
c)At split-off point decesion of further processing or sales at split-off is also taken.
Thus from the above statements it is concluded that split-off point is very important for joint product.
.
Net Relisable value at split-off point Method for joint cost allocation
Formula (Sales value of product at split-off * Total Joint cost)/Total Sales value at split-off
Product 1 (452760*250000)/641200
= SAR 176528.38
Product 2 (133560*250000)/641200
= SAR 52074.24
Product 3 (54880*250000)/641200
= SAR 21397.38
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