Question

The Alfarm Corporation processes raw milk up to the splitoff point where two products, cream and liquid skim, are produced and sold. There was no beginning inventory. The following material was collected for the month of February: Direct materials processed: 750,000 gallons (727,500 gallons of good product) Production: Cream 442,500 gallons Liquid skim 285,000 gallons Sales: Cream 421,500 at $110 per gallon Liquid skim 273,000 at $100 per gallon The cost of purchasing 750,000 gallons of direct materials and processing it up to the splitoff point to yield a total of 727,500 gallons of good product was $2,280,000. When using a physical-volume measure, what is the approximate amount of joint costs that will be allocated to cream and liquid skim? A) $1,386,804 and $893,196 B) $1,140,000 and $1,140,000 C) $1,368,000 and $912,000 D) $1,254,00 and $1,026,000

Answer 1

Solution

Alfarm Corporation

Allocation of joint costs based on physical-volume measure:

Answer – A.

Explanation and computations:

Two products - Liquid Skim; Cream

Allocation of Joint Cost - $2,280,000
Products	Proportion of Physical - Volume Measure
Liquid Skim	60.82%	2,280,000 x 60.82%	$1,386,804
Cream	39.18%	2,280,000 x 39.18%	$893,196

Computations –

Products	Physical-Volume	Proportion
Liquid Skim	442,500 gallons	442,500/727,500	60.82%
Cream	285,000 gallons	285,000/727,500	39.18%
Total	727,500 gallons