Business. Joint-cost allocation

Joint-cost allocation. Elsie Dairy Products Corp. buys one input, full-cream milk, and refines it in a churning process. From each gallon of milk Elsie produces three cups of butter and nine cups of buttermilk. During May 2010, Elsie bought 12,000 gallons of milk for $22,250. Elsie spent another $9,430 on the churning process to separate the milk into butter and buttermilk. Butter could be sold immediately for $2.20 per pound and buttermilk could be sold immediately for $1.20 per quart (note: two cups = one pound; four cups = one quart).
Elsie chooses to process the butter further into spreadable butter by mixing it with canola oil, incurring an additional cost of $1.60 per pound. This process results in two tubs of spreadable butter for each pound of butter processed. Each tub of spreadable butter sells for $2.30.
Required
1. Allocate the $31,680 joint cost to the spreadable butter and the buttermilk using the following: a. Physical-measure method (using cups) of joint cost allocation b. Sales value at splitoff method of joint cost allocation c. NRV method of joint cost allocation d. Constant gross margin percentage NRV method of joint cost allocation
2. Each of these measures has advantages and disadvantages; what are they?
3. Some claim that the sales value at split off method is the best method to use. Discuss the logic behind this claim.

SOLUTION

Joint-cost allocation.

1.
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a.
|Physical-measure method: | | | |
| |Butter |Buttermilk |Total |
| | | | |
|Physical measure of total production |36,000 cups |108,000 cups