alternative methods of joint cost allocation ending inventories 267529

Alternative methods of joint cost allocation, ending inventories. The Evrett Company operates a simple chemical process to convert a single material into three separate items, referred to here as X, Y, and Z. All three end products are separated simultaneously at a single splitoff point.

Products X and Y are ready for sale immediately upon splitoff without further processing or any other additional costs. Product Z, however, is processed further before being sold. There is no available market price for Z at the splitoff point.

The selling prices quoted here are expected to remain the same in the coming year. During 2012, the selling prices of the items and the total amounts sold were as follows:

X—75 tons sold for $1,800 per ton

Y—225 tons sold for $1,300 per ton

Z—280 tons sold for $800 per ton

The total joint manufacturing costs for the year were $328,000. Evrett spent an additional $120,000 to finish product Z.

There were no beginning inventories of X, Y, or Z. At the end of the year, the following inventories of completed units were on hand: X, 175 tons; Y, 75 tons; Z, 70 tons. There was no beginning or ending work in process.

A new federal law has recently been passed that taxes crude oil at 30% of operating income. No new tax is to be paid on natural gas liquid or natural gas. Starting August 2012, Sinclair Oil & Gas must report a separate product line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the joint cost of producing the three separate saleable outputs. Assume no beginning or ending inventory.

Required

1. Compute the cost of inventories of X, Y, and Z for balance sheet purposes and the cost of goods sold for income statement purposes as of December 31, 2012, using the following joint cost allocation methods:

a. NRV method

b. Constant gross margin percentage NRV method

2. Compare the gross margin percentages for X, Y, and Z using the two methods given in requirement 1.