How to Allocate Joint Costs to Products Using Different Methods?
What are the two methods used to allocate joint costs to products?
1. Discuss the Net Realizable Value Method.
2. Explain the Physical Quantities Method.
Net Realizable Value Method:
To allocate joint costs to each product, we need to use the net realizable value method and the physical quantities method separately. Let's calculate the joint costs allocated to each product using both methods.
Physical Quantities Method:
Barrett Chemicals uses the physical quantities method to allocate joint costs to the products Chem-1, Chem-2, Chem-3, and Chem-4 based on the relative quantities.
Barrett Chemicals manufactures four chemicals, Chem-1, Chem-2, Chem-3, and Chem-4, from a joint process. The total joint costs in May were $564,000. The company uses different methods to allocate joint costs to each product.
Net Realizable Value Method:
The net realizable value method allocates joint costs based on the relative sales value of each product. Barrett Chemicals provided the sales values for each product at the split-off point: Chem-1: $100,000, Chem-2: $150,000, Chem-3: $80,000, Chem-4: $120,000.
To calculate the percentage of the total sales value for each product, we divide the individual sales value by the total sales value. Then, we allocate the total joint costs to each product based on the percentages.
Physical Quantities Method:
The physical quantities method allocates joint costs based on the relative quantities of each product. Barrett Chemicals provided the physical quantities for each product: Chem-1: 5,000 units, Chem-2: 3,000 units, Chem-3: 4,000 units, Chem-4: 2,000 units.
Similarly, we calculate the percentage of the total physical quantity for each product and allocate the total joint costs accordingly.