CMA Study Group

Joint Cost allocation using Net Realizable Value

  • 1.  Joint Cost allocation using Net Realizable Value

    Posted 23 days ago

    For Joint cost allocation, how can we determine when to ignore the by-product cost or include in the calculation

    Atlas Foods produces the following three supplemental food products simultaneously through a refining process costing $93,000:

    • Alfa-10,000 pounds of Alfa, a popular but relatively rare grain supplement having a caloric value of 4,400 calories per pound
    • Betters-5,000 pounds of Betters, a flavoring material high in carbohydrates with a caloric value of 11,200 calories per pound
    • Morefeed-1,000 pounds of Morefeed, used as a cattle feed supplement which has a caloric value of 1,000 calories per pound

    The joint products, Alfa and Betters, have a final selling price of $4 per pound and $10 per pound, respectively, after additional processing costs of $2 per pound of each product are incurred after the split-off point. Morefeed, a byproduct, is sold at the split-off point for $3 per pound.

    Assuming that Atlas Foods does not inventory Morefeed, the byproduct, the joint cost to be allocated to Betters using the net realizable value method is:

    Based on the question mentioning that Atlas does not inventory Morefeed, I reduced $3,000 from total Joint cost of $93,000 and used 90,000 for allocation but the answer included all 93,000 for allocation cost. It did ignore Morefeed in determining the allocation %. My confusion is when Morefeed was not included in determining the allocation %, why $93,000 cost was used. It should have been $90,000....Please advise

    Sadia Khan
    Frisco TX
    United States

  • 2.  RE: Joint Cost allocation using Net Realizable Value

    Posted 22 days ago
    The problem says that the byproduct is not inventoried therefore its value cannot be deducted from total joint costs