Chapter 24, Problem 5BPSB

To determine

Introduction When a cost in incurred in a joint process, it is termed as joint cost. Normally, there are some products used in joint process which require single input and in return produce multiple outputs. These products can be termed as joint products.

• Cost allocations on a sales value basis to the three grades of tomatoes.
• Income statement using joint costs allocated on a sales value basis
• To analyze whether delivery costs fit the definition of a joint cost.

Answer to Problem 5BPSB

Solution

1.

Allocation of Costs
Particulars	No.1	No.2	No.3	Combined	Note
Sales	900000	500000	40000	1440000
Sales in percentage	62%	35%	3%	100%	(a)
Costs:
Land preparation, seeding & cultivation	434000	245000	21000	700000	(b)
Harvesting, sorting and grading	24800	14000	1200	40000	©
Delivery costs	10866	6134	3000	20000	(d)

2. The income statement is as follows:

Particulars	Allocation of Costs
No.1	No.2	No.3	Combined
Sales(A)	900000	500000	40000	1440000
Sales in percentage	62%	35%	3%	100%
Less Costs:
Land preparation, seeding & cultivation	434000	245000	21000	700000
Harvesting, sorting and grading	24800	14000	1200	40000
Delivery costs	10866	6134	3000	20000
Total costs (B)	469666	265134	25200	760000
Net Income (A-B)	430334	234866	14800	680000

3. Yes. Definitely delivery costs fit the definition of a joint cost as the No.1 & 2 grades of tomatoes are allocated delivery costs which are incurred on transporting them to the buyer as their destination is the same. No.3 graded tomatoes delivery costs are directly linked with the produce going to the cannery.

Explanation of Solution

1. A cost object can be referred to any item or any activity. The process of assigning costs to cost objects is known as cost allocation.
Therefore, allocation of cost on departmental sales can be computed on the percentage of contribution of each department to the total revenue earned by Sales.

Calculation of cost allocated based on sales
Note	Particulars	Formula	Allocation of Costs No.1 No.2 No.3
(a)	$\frac{DivisonalSales}{TotalSales}$	Sales in percentage	$\frac{\begin{array}{l}900000\hfill \end{array}}{1440000}=62\%$	$\frac{\begin{array}{l}500000\hfill \end{array}}{1440000}=35\%$	$\frac{\begin{array}{l}40000\hfill \end{array}}{1440000}=3\%$
(b)	$\begin{array}{l}TotalLand\\ preparation,seeding\\ \&cultivation*Sales\\ inpercentage\end{array}$	Land preparation, seeding & cultivation	$\begin{array}{l}700000*\frac{62}{100}\\ =434000\end{array}$	$\begin{array}{l}700000*\frac{35}{100}\\ =245000\end{array}$	$\begin{array}{l}700000*\frac{3}{100}\\ =21000\end{array}$
©	$\begin{array}{l}TotalHarvesting,\\ sortingandgrading\\ *Salesinpercentage\end{array}$	Harvesting, sorting and grading	$\begin{array}{l}40000*\frac{62}{100}\\ =24800\end{array}$	$\begin{array}{l}40000*\frac{35}{100}\\ =14000\end{array}$	$\begin{array}{l}40000*\frac{3}{100}\\ =1200\end{array}$
(d)	$\begin{array}{l}TotalDeliverycosts\\ *Salesinpercentage\end{array}$	Delivery costs	$\begin{array}{l}17000*\frac{62}{97}\\ =10866\end{array}$	$\begin{array}{l}17000*\frac{35}{97}\\ =6134\end{array}$	3000

Note:

i) The total of sales percentage taken is 97% instead of 100% as for No.3 the delivery cost has already been allocated.
ii) It has been given that the delivery cost to be directly allocated to No.3 is 3000$. So, the balance of $17000 ($20000-$3000) has to be allocated to No. 1 & No. 2 tomatoes based on their sales percentages.

2. Income statement shows the financial position of a business firm in a given period. Being one of the final accounts statements, it represents the revenue earned and expenses incurred for a given period. The excess of revenue over expenses is the net income and on the other hand the shortage of revenue when compared to expenses incurred is termed as net loss. The business may incur profit or loss at some point or the other.

3. Yes. Definitely delivery costs fits the definition of a joint cost as the No.1 & 2 grades of tomatoes are allocated delivery costs which are incurred on transporting them to the buyer as their destination is the same. The No.3 graded tomatoes delivery costs are directly linked with the produce going to the cannery.