Question

(a) Contrast between scrap, by products and Joint products.

(b) Nestle manufactures chocolates and distributes chocolate products. It purchases cocoa

beans and processes them into two intermediate products:

• Chocolate-powder liquor base

• Milk-chocolate liquor base

These two intermediate products become separately identifiable at a single splitoff point. Every

500 kg of cocoa beans yields 50 litres of chocolate-powder liquor base and 75 litres of milk-

chocolate liquor base.

The chocolate-powder liquor base is further processed into chocolate powder. Every 50 litres of

chocolate-powder liquor base yield 200 kg of chocolate powder. The milk-chocolate liquor base is

further processed into milk chocolate. Every 75 litres of milk-chocolate liquor base yield 340 kg of

milk chocolate.

An overview of the manufacturing operations at Nestle Chocolates follows:

Production and sales data for August are:

• Cocoa beans processed, 5,000 kg

• Costs of processing cocoa beans to split off point (including purchase of beans) = Tk.

5,00,000

Production Sales Selling price

Chocolate powder 2000 Kgs 2000 Kgs Tk. 200 per Kg.

Milk Chocolate 3400 3400 250 per Kg

The August separable costs of processing Chocolate powder liquor base into Chocolate powder

are Tk. 2,12,500. The August separable costs of processing Milk chocolate liquor base into Milk

chocolate are Tk. 4,37,500.

Nestle fully processes both of its intermediate products into Chocolate powder or Milk chocolate.

There is an active market for these intermediate products. In August, Nestle could have sold the

Chocolate powder liquor base for Tk. 420 a litre and the Milk Chocolate liquor base for Tk. 520

a litre.

Required:

(i) Calculate how the joint cost would be allocated under the following methods:

(1) Physical measure

(2) NRV

(3) Constant gross margin % NRV

(ii) What are the gross margin percentages of the Chocolate powder and Milk chocolate

liquor bases under each of the methods in above requirements?

Answer 1

i) 1. Allocation of Joint Cost on Physical Measure Method

Particulars	Chocolate Powder Liquor Base	Milk Chocolate Liquor Base
Production(in Ltrs)	50	75
Allocation of Cost in the Ratio of 50:75,i.e,2:3	Tk.200000 (500000*2/5)	Tk.300000 (500000*3/5)

2.Allocation of Joint Cost on NRV Method

Particulars	Chocolate Powder	Milk Powder
Sale Price	Tk.200 Per Kg	Tk.250 Per Kg
Production(in Kg)	2000	3400
Total Sale Value	Tk.400000	Tk.850000
Less:Separable Cost	Tk.212500	Tk.437500
NRV	Tk.187500	Tk.412500
Allocation of Joint Cost in ratio of 1875:4125	Tk.156250	Tk.343750

3.Allocation of Joint Cost on Constant Gros Margin % NRV Method

Calculation of GP %

Particulars	Chocolate Powder	Milk Powder	Total
Total Sale Value	Tk.400000	Tk.850000	Tk.1250000
Less:Joint Cost			Tk.500000
Less:Separable Cost	Tk.212500	Tk.437500	Tk.650000
Gross Margin			Tk.100000
GP Margin %			8%

Allocation of Cost

Particulars	Chocolate Powder Liquor Base	Milk Chocolate Liquor Base
Sales Value	Tk.400000	Tk.850000
Less:Gross Margin	Tk.32000	Tk.68000
Total Cost	Tk.368000	Tk.782000
Less:Separable Cost	Tk.212500	Tk.437500
Joint Cost Allocation	Tk.155500	Tk.344500

ii) Calculation of Gross Margin %

Chocolate Powder Liquor Base

Particulars	Physical Measure	NRV	Constant Gross Margin %
Sales Value	Tk.400000	Tk.400000	Tk.400000
Less:Separable Cost	Tk.212500	;Tk.212500	Tk.212500
Less: Joint Cost	Tk.200000	Tk.156250	Tk.155500
Gross Margin	-Tk.12500	Tk.31250	Tk.32000
Gross Margin %	-3.125%	7.8125 %	8%

Milk Powder Liquor Base

Particulars	Physical Measure	NRV	Constant Gross Margin %
Sales Value	Tk.850000	Tk.850000	Tk.850000
Less:Separable Cost	Tk.437500	Tk.437500	Tk.437500
Less: Joint Cost	Tk.300000	Tk.343750	Tk.344500
Gross Margin	Tk.112500	Tk.68750	Tk.68000
Gross Margin %	13.24%	8.08%	8%