The following is a sum from Wileys Study Material. This is a Sum from Section D Part1.
(Dout being from where did the 5000 Joint Cost come from?)
Sum: Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon for Big and $4 per gallon for Mini.
The 800 gallons of Big can be processed further into 600 gallons of Giant if $1,000 of additional processing costs are incurred. Giant can be sold for $17 per gallon. If the net-realizable-value method were used to allocate costs to the joint products, the total cost of producing Giant would be:
A. $4,600.
B. $5,600. (Correct Answer)
C. $5,636.
D. $6,000.
Net realizable value (NRV) is defined as the final sales value of the product less any additional processing and distribution costs necessary to get the product to the final sales position. The logic of the NRV method is that joint costs should be allocated based on the product's ability to pay the costs, defined as the product's NRV.
One important note is that NRV is not always based on the sales value available assuming the product is further processed to the final extent possible. In this method we assume that the organization makes an optimal decision for each product in order to maximize its total value. In short, the NRV method is based on allocating joint costs using the highest value that each product can provide the organization.
In this case, NRV of Big would total $7,200 (800 gallons × $9), while NRV of Giant would total $9,200 (see calculation below), so Big would be processed further into Giant.
The NRV of Giant is calculated as:
NRV of Giant = (market value) − (separable processing costs)
Market value of Giant = (600 gallons) × ($17 each) = $10,200
NRV of Giant = ($10,200) − ($1,000) = $9,200
The NRV of Mini at is calculated as follows:
NRV of Mini = (market value) − (separable processing costs)
NRV of Mini = (200 gallons) × ($4 each) = $800
The NRV of Giant and Mini = $9,200 + $800 = $10,000
Therefore, Giant's share of the joint costs is ($9,200 ÷ $10,000) × ($5,000) = $4,600
Cost of using NRV, Giant = (separable costs) + (share of joint processing costs)
Cost of using NRV, Giant = ($1,000) + ($4,600) = $5,600.
Responses would be appreciated.
Greeshma Parackal.