What is the weighted average method for joint cost allocation and how is it used in Gary's Grooves Co.?
Understanding Joint Cost Allocation with Weighted Average Method
Joint cost allocation is a crucial aspect of accounting for companies that produce multiple products simultaneously through a joint production process. The weighted average method is one of the techniques used to allocate joint costs among the various products produced. In the case of Gary's Grooves Co., the company produces carving knives with two types of handle materials - red oak polymer and walnut wood polymer.
When utilizing the weighted average method, joint production costs are allocated based on a predetermined weighting factor, which in this scenario is the cooling time required for each type of knife handle. The cooling time is used as the basis for distributing the joint costs incurred during the production process.
To allocate the joint production costs with the weighted average method, the total cooling time for each type of knife handle is calculated first. The cooling time per unit is multiplied by the number of units produced to determine the total cooling time for red oak handle knives and walnut handle knives. This calculation helps in determining the percentage of cooling time for each type of knife handle relative to the total cooling time.
After calculating the percentages of cooling time for red oak handle knives and walnut handle knives, the joint production costs are allocated based on the weighted percentages. The amount allocated to each type of knife handle is determined by multiplying the respective percentage of cooling time by the total joint production costs incurred.
In the case of Gary's Grooves Co., the joint production costs allocated to red oak handle knives amount to $3,300, while the joint production costs allocated to walnut handle knives total $2,200. This allocation ensures that the joint costs are distributed in a manner that reflects the resources consumed by each type of product during the production process.