Davenport Company buys Alpha-11 for $6 a gallon. At the end of distilling in Dep

Question

Davenport Company buys Alpha-11 for $6 a gallon. At the end of distilling in Department A, Alpha-11 splits off into three products Beta-1, Beta-2, and Beta-3. Davenport sells Beta-1 at the split-off point, with no further processing; it processes Beta-2 and Beta-3 further before they can be sold. Beta-2 is fused in Department B, and Beta-3 is solidified in Department C. Following is a summary of costs and other related data for the year ended November 30 (1) Distilling $717,000 172,000 150,000 (2) Fusing (3) Solidifying Department Cost of Alpha-11 Direct labor Manufacturing overhead $344,000 162,000 $496,000 407,000 Products Gallons sold Gallons on hand at year-end Sales Beta-1 190,000 122,000 Beta-3 570,000 183,000 Beta-2 380,000 0 $760,000 $2,280,000 $3,420,000 Davenport had no beginning inventories on hand at December 1 and no Alpha-11 on hand at the end of the year on November 30 All gallons on hand on November 30 were complete as to processing. Davenport uses the net realizable value method to allocate joint costs Required Compute the following a. The net realizable value of Beta-1 for the year ended November 30 Net realizable value of Beta-1 b. The joint costs for the year ended November 30 to be allocated Joint costs c. The cost of Beta-2 sold for the year ended November 30. (Do not round intermediate calculations.) Cost of Beta-2 sold d. The value of the ending inventory for Beta-1. (Do not round intermediate calculations.) nding inventory for Beta-1

Explanation / Answer

Ans a – Net realizable value = Sales revenue – Separable costs

For Beta 1 there is no separable cost incurred all costs are joint costs hence Sales = Net Realizable value

NRV of Beta 1 = $760000 or 760000 / 190000 = $4 per gallon

Ans b – Joint costs are the costs incurred in the distilling process which is the same for all products. Total costs incurred in the process are the joint costs which is = $717000 + $172000 + $150000 = $1039000

Ans c – Cost of Beta 2 = Separable costs + Joint costs allocated

Total joint cost to be allocated = $1039000

NRV of Beta 2 = $2280000 – ($344000 + $162000) = $1774000

NRV of Beta 3 = $3420000 – ($496000 + $407000) = $2517000

Total NRV = $1774000 + $2517000 + $760000 = $5051000

Percentage of NRV for Beta 2 = 1774000 / 5051000 = 35.12%

Percentage of NRV for Beta 3 = 2517000 / 5051000 = 49.83%

Joint cost allocated to Beta 2 = 1039000 x 41.34% = $364915

Joint cost allocated to Beta 3 = 1039000 x 58.66% = $517752

Total cost of Beta 2 = $344000 + $162000 + $364915 = $870915

Total gallons of Beta 2 produced = Total gallons sold as there was no beginning or ending inventory

Cost of Beta 2 sold = Total cost / Total gallons sold = 870915 / 380000 = $2.29 per gallon

Ans d – Ending inventory of Beta 1 = 122000 gallons

Price per gallon = $4 (as calculated above)

Total cost of Beta 1 = Joint costs to be allocated

Percentage of NRV for Beta 1 = 760000 / 5051000 = 15.05%

Joint cost allocated to Beta 1 = 1039000 x 15.05% = $156333

Total cost of Beta 1 = $156333

Cost per unit = 156333 / (190000 + 122000) = $0.5 per gallon

Cost of ending inventory = 122000 x 0.5 = $61000

Value of ending inventory = Lower of cost or NRV/price = $61000

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