The net realizable value method of joint cost allocation allocates costs based on
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The Western Corporation manufactures product M and product N by processing a single raw material through a common manufacturing process. Product M is sold for $50 per unit and product N is sold for $95 per unit. Show After split-off point, both the products require significant further processing before they can be marketed and sold to customers. The processing cost after split-off point for product M and product N is $10 and $20 respectively. During the month of August, 50,000 units of product M and 40,000 units of product N were completed. The total joint production cost for August was $1,800,000. There were no inventories of raw materials and finished goods on hand at the start and end of the month. Required:
Solution1. Allocation of joint cost using net realizable value methodThe allocation of joint cost under NRV method involves the following four steps: Step 1: Computation of net realizable value Net realizable value = Final sales price – Processing cost after split-off Net realizable value of product M: Net realizable value of product N: Total net realizable value: Step 2: Computation of joint cost allocation ratio Product M: Product N: Step 3: Allocation of joint cost Product M: Product N: Step 4: Per unit cost Product M: Product N: Alternatively, the solution can be presented in the following format: 2. Use of net realizable value methodThe net realizable value (NRV) method allocates joint cost on the basis of net realizable value (also referred to as hypothetical sales value). This method is useful in situations where one or more products cannot be sold at split-off point. When cost accounting, separable costs are incurred after you pass the splitoff point. In many cases, the product won’t be sellable at splitoff, because the product isn’t finished yet. Say you make two types of leather purses. Both purses go through the same production process. Each product incurs a portion of the joint costs of production. But the process doesn’t end there. In this case, you’d expect to have costs after splitoff. You need to add straps and metal accessories to complete the product for sale. Because many products require production after splitoff, it’s important that you review the net realizable value (NRV) method. The net realizable value method allocates joint costs on the basis of the final sales value less separable costs. Final sales value is simply the price tag — the price paid by the customer. That price is paid after all production costs, whether they are joint costs or separable costs incurred after splitoff. What you realize on a sale is usually your profit. You see this term used many times in business. But in this case, realizable value means sale price less separable costs. That doesn’t equal profit. You have to subtract joint costs from the subtotal to get profit. It’s not a perfect comparison, but it’s close. Use the leather-purse example for working through the net realizable value method. Say you sell two types of purses: The Sassy purse line is more expensive than the Everyday model. The separable costs per unit for Sassy purses, as you see, are higher than those of Everyday purses. The following table calculates the net realizable value for each product. Joint Cost — Net Realizable Value CalculationPurse TypeSassyEverydayTotalProduction20,00024,00044,000Unit price$50$35Sales value (A)$1,000,000$840,000$1,840,000Separable costs (B)Per unit$12$10Total$240,000$240,000$480,000Net realizable value (A – B)$760,000$600,000$1,360,000Work your way down the Sassy purse column. The sales value of $1,000,000 is based on the production multiplied by the unit price (20,000 x $50). Then here’s the separable cost calculation: Separable cost = units produced x cost per unit Separable cost = 20,000 x $12 Separable cost = $240,000 The net realizable value is the $1,000,000 sales value less $240,000 separable costs = $760,000. Next, you use net realizable value to allocate joint costs. Take a gander at the next table. Joint Cost — Net Realizable Value Cost CalculationPurse TypeSassyEverydayTotalNet realizable value (NRV)$760,000$600,000$1,360,000Percent of NRV total55.8844.12Joint cost allocation$502,941$397,059$900,000Total costsSeparable costs$240,000$240,000Joint costs$502,941$397,059Total costs$742,941$637,059Cost per unit$37.15$26.54This table starts with the net realizable value amounts from the first table. The Percent of NRV total is the percentage of the total NRV for each product. The $760,000 of NRV for Sassy purses is 55.88 percent of the total of $1,360,000. Then you multiply $900,000 in total joint costs by the percentage, and that allocates joint costs to each purse. Simple, no? No. What about separable costs? The second table displays the separable costs from the first table. Add the separable and joint costs to get total costs. It makes sense that Sassy purses have a higher total cost per unit ($37.15). The Sassy’s per unit separable cost of $12 (from the first table) is higher than that of the Everyday product ($10), so the Everyday unit’s cost is $26.54. The $502,941 joint costs allocated to the Sassy in the second table are also higher than the joint costs for Everyday purses. One issue with the net realizable value (NRV) method is that amounts may change. For starters, your production process after splitoff may change. Hopefully, you’re able to review variance results and improve the process. If you change your production after splitoff, your separable cost totals change. You may not be able to price your product until after production ends. And in a market with heavy competition, to maintain your sales levels, you have to keep your price competitive (for the Sassy purses, say $50 per unit or lower). If your total costs come in lower than expected, maybe you can price the product lower than $50, and that might increase sales. How does the net realizable value method allocate joint costs quizlet?The net realizable value method allocates joint costs to joint products on the basis of the relative net realizable value (the final sales value minus the separable costs of production and marketing) of the total production of the joint products during the accounting period.
What is NRV in joint costing?NRV is used to account for such costs when two products are produced together in a joint costing system until the products reach a split-off point. Each product is then produced separately after the split-off point. NRV is used to allocate previous joint costs to each of the products.
What method is most commonly used for allocating joint processing costs to joint products?The two major methods of allocating joint costs are (1) the net realizable value method and (2) the physical quantities method. The net realizable value method allocates joint costs to products based on their net real- izable values at the split-off point.
What are the methods that allocating joint cost?Three methods of allocating joint product costs are the physical units method, the market value method, and the net realizable method. The constant gross margin percentage method is also used to allocate joint cost.
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