Exercise-4: Joint product costing – average unit cost and market value methods

Exercise-4 (a)

The Monster Company runs a joint production process to produce three different products. The joint production cost for July is $200,000. The information about quantity produced, ultimate market value and processing cost after split-off point for each product is given below:

Required:

1. Allocate the joint production cost to each product using using average unit cost method and compute the total production cost of each product.
2. Allocate the joint production cost to each product using market value method and compute the total production cost of each product.

Solution

1. Average unit cost method

*Average unit cost:
Total joint cost/total number of units produced
= $300,000/20,000 units
= $15

2. Market value method

*Joint production cost is 60% of hypothetical market value as computed below:
$300,000/$500,000
= 0.6 or 60%

Hypothetical market value is computed by subtracting processing cost after split-off from the ultimate market value.

Exercise-4 (b)

The IGI firm produces three joint products, product X, Product Y, and product Z. The following data was collected during June:

Required:

1. Allocate the joint production cost to joint products using market value method and compute the total cost of each product.
2. How would you justify the treatment of a joint product as by-product?

Solution

1. Allocation of joint production cost under market value method:

*The joint cost is 50% of the hypothetical market value

Hypothetical market value is equal to ultimate market value less separable processing cost.

2. Justification of the treatment of joint product as by-product:

A joint product is normally treated as a by-product if its sales value is relatively minor compared to other joint products.