Question

Wake-Me-Up Company manufactures 800 pounds of regular ground coffee and 1,200 pounds of specialty ground coffee in which $3,000 of joint costs have been incurred at the split-off point

a. If management decides to use the physical units method to allocate joint costs, how much of the cost will be allocated to each of the two final products?

b. Wake-Me-Up can sell each product at the split-off point or process the products further in relatively similar processes, so management has decided that the most appropriate method for allocating joint costs is the market value at split-off point. One pound of regular coffee sells for $7, while one pound of specialty coffee sells for $10. How much of the joint cost is allocated to regular and specialty coffee? Round percentages to the nearest whole percent.

c. Wake-Me-Up decides to incorporate a processing time weight factor of 1 for the regular coffee and 2 for the specialty coffee. How much of the joint cost will be allocated to each product using the weighted average method? Round percentages to the nearest whole percent.

Answer 1

Solution

Wake-Me-Up Company

Allocation Basis	Physical Units Method	Market Value at Split-Off Method	Weighted Average Method
Regular Ground Coffee	$1,200	$960	$750
Specialty Ground Coffee	$1,800	$2,040	$2,250

                                        

Computations:

1. Allocation of joint costs by use of physical units method:

Two products – Regular ground coffee, Specialty ground coffee

Physical units – Regular 800 pounds; Specialty 1,200 pounds

Proportion –

Regular – 800/(800 + 1,200) = 40%

Specialty – 1,200/(800 + 1,200) = 60%

Joint costs = $3,000
Joint cost allocated to Regular Ground Coffee = 3,000 x 40% = $1,200

Joint cost allocated to Specialty Ground Coffee = 3,000 x 60% = $1,800

2. Allocation of joint costs – market value at split-off:

Regular ground coffee total market value at split-off = 800 pounds x $7 = $5,600

Specialty ground coffee, total market value at split off = 1,200 x $10 = $12,000

Proportions -
Regular = 5,600/(5,600 + 12,000) = 31.82%, rounded to nearest whole percent is 32%

Specialty = 12,000/17,600 = 68.18%, rounded to nearest whole percent is 68%

Allocation of joint costs –

Regular = $3,000 x 32% = $960

Specialty = $3,000 x 68% = $2,040

3. Allocation of joint costs – using weighted average method

Joint cost per unit = joint cost/total weighted units

Product	Weights	Units	Weighted Units
Regular Ground Coffee	1	800 pounds	800 pounds
Specialty Ground Coffee	2	1,200 pounds	2,400 pounds
Total			3,200 pounds
Joint Cost per Pound			$3,000/3,200 = $0.9375
Joint cost allocated to Regular = $0.9375 x 800 = $750
Joint cost allocated to Specialty = $0.9375 x 2,400 = $2,250