CMA Study Group

Joint Cost allocation using Net Realizable Value

  • 1.  Joint Cost allocation using Net Realizable Value

    Posted 23 days ago
    Hello,

    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

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    Sadia Khan
    Analyst
    Frisco TX
    United States
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  • 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 
    Regards 
    Michele