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Forums › FIA Forums › MA2 Managing Costs and Finance Forums › joint costs
A production process has joint costs of $12,000 for the input of 1,000 kgs of material.
Two products are produces from this:
Product A: 600 kgs. Selling price = $25/unit. Separate costs = $4,000
Product B: 400 kgs. Selling price = $40/unit. Separate costs = $7,000
Calculate the inventory value of the production using
(a) Weigh to apportion the joint costs
(b) Net realisable value to apportion the joint costs
Please help me
(a) The weights of the two final products are 600kg and 400kg, so the joint cost of $12,000 would be split 6:4 between A and B ie 7,200 to 4,800. The inventory values are therefore:
A 7,200 + 4,000 = 11,200
B 4,800 + 7,000 = 11,800
(b) NRV at split off = final selling value less all further costs of completion (Ie the separate costs)
NRV A = 600 x $25 – 4,000 = 11,000
NRV B = 400 x $40 – 7,000 = 9,000
The joint costs are therefore split 11:9 or 11/20 and 9/20, so for A $6,600 and for B 5,400
Inventory values: A 6,600 + 4,000 = 10,400
B 5,400 + 7,000 = 12,400
Note that in both cases total inventory value = $23,000, the sum of all the input costs (12,000 + 4,000 + 7,000)
Also, as inventory is valued at the lower of cost and NRV, we should check that the sales values are not less than the costs. Sales value of A = 600 x 25 = 15,000 and for B = 400 x 40 = 16,000. These are both higher than the costs calculated above so the inventory costs calculated above will be the inventory values.