Question

SK company purchases crude vegetable oil. Refining this oil results in three products at splitoff point: C, D and E. Product C and D are intermediate products and can individually be further refined into C1 and D1. Product E is a by-product formed after further processed at an additional cost of $2,000 processing cost after the splitoff point. In addition, 30% of revenue is marketing cost on selling of product E. The joint costs of processing the crude vegetable oil were $200,000. The output of product C1, D1 and E are 200.000 gallons. 100,000 gallons and 5,000 gallons respectively. Assume all the products are sold at the end of the year. Additional information related to these products are shown below. Product C1 Product Di Product E Further processing cost to make C1 and D1 $50,000 $70,000 Sales value $300,000 $170,000 $5,000 As a senior accountant, your finance director has suggested two approaches for calculating the cost of these products. Approach 1: NRV method for allocating the cost of joint products and sales method for by- product Approach 2: Physical measure method for allocating the cost of joint products and production method for by-product Required: Discuss the implications of each approach on the company's financial position. Advise management the approach should be adopted. (Total: 15 marks)

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Approach I NRU method cost of goint products & for by e products to allocale sales method ;) Calculation of Nau of By-product E Sale value 5000 Lees: Marketing cost (socox204) (1500) Less: Forthias processing cost | 2000) Net realisable value of BP = $1500 i) Calculation of NRV of c & D Sale less. value Further process cost 300000 170000 50000 70000 Net realisable valuie 50000 100000

) Computation of cost allocated between joint products C&D 200000 Total cost of processing criede o Less Cost/ furu of product E 1500 (Referan goint cost to be allocated 198500 Allocation of cost all Net realisable vale 250000 100000 Ratio 2.5 : I Cost allocation is (198500x gas 'D. 141,786 (198500X31 56714 198500 xentis

Approach 2: Allocation of cost by Physical production method Production 200.000 Jocobo 5000 Ratio 800 : 100 5 Allocation of cost (200000 x 200.9100:5) 13114865574 3978