Question

The Bean Company provides fresh coffee beans for restaurants, hotels, and other foodservice companies. Bean offers three types of coffee beans: Premium, Gourmet, and Quality. Each of the three coffees is produced in a joint process in which beans are cleaned and sorted. The sorting process is the split-off point in this joint process, and the output is the three types of beans.

The beans can be sold at the split-off point or processed further, with different types of roasting and additional sorting. The additional processing requires additional separable processing costs, as shown next. Separable processing requires no special facilities, and the production costs of further processing are entirely variable and traceable to the products involved. Last year all three products were processed beyond split-off. Joint production costs for the year were $90,000,000.

Sales values and costs needed to evaluate Bean’s production policy follow:

	Premium	Gourmet	Quality	Total
Pounds produced	10,000,000	12,000,000	2,000,000	24,000,000
Separable processing cost	$9,000,000	$7,000,000	$5,000,000	$21,000,000
Total joint cost	$90,000,000
Sales price at split-off	$5.00	$4.00	$1.00
Sales price/pound (after additional processing)	$7.00	$5.00	$2.00

Required

1. Determine last year’s unit cost for each product assuming Bean allocates joint production costs using:
   1. the physical measure method
   2. the NRV method.
2. The Bean Company assesses the division manager's performance based on the profitability of the product division. In your opinion, what method of joint cost allocation is preferred by the Quality manager? Explain.
3. Which of The Bean’s products should be processed further? Explain

Answer 1

As per the given information,

Total joint cost for three products of bean company = $90,000,000

No.of pounds produced of three products Premium, Gourmet and Quality are 10,000,000, 12,000,000 and 2,000,000 respectively

separable processing cost of three are $9,000,000 ,$7,000,000 and $5,000,000 respectively

sales value at split-off per pound $ 5.00 , $4.00and $1.00 respectively

sales value after processing per pound $7.00,$5.00, and $2.00, respectively

So, we have to calculate Last year unit cost for each product  

1. Physical measure method : in this method , the joint cost is allocated on the basis of volume of poduction   

  premium gourmet   quality total

pounds produced : 10,000,000 12,000,000 2,000,000 24,000,000

% 41.66% 50% 8.333% 100%

joint cost    $37,500,000 $ 45,000,000 $ 7,500,000 $ 90,000,000

cost per unit

(cost /no.of pounds )$3.75 $3.75 $3.75 $11.25

2.NRV method  

   premium      gourmet quality total

pounds produced 10,000,000 20,000,000 2,000,000 24,000,000

unit price $7 $5 $2

sales A :     $70,000,000 $100,000,000 $4,000,000 $174,000,00

seperable costB:   $9,000,000     $7,000,000 $5,000,000 $21,000,000

Net realizable $61,000,000 $93,000,000 - $1,000,000  $153,000,000

value (A-B):

% of total  : 39.87%    60.78% -0.65% 100%

joint cost :     $35,883,000 $54,702,000    - $585,000    $90,000,000

separable

cost : $9,000,000 $7,000,000 $5,000,000 $21,000,000

total cost: $44,883,000 $61,702,000 $4,415,000 $111,000,000

cost p.unit : $4.4883 $5.142 $2.21 $11.8403

Under physical value method , the cost per unit is low.So,the profit is high in phyiscal value method. I prefer physical value method. In my opinion further processesd or not is based on the profit/loss we get .

premium gourmet quality total

sale $7 $5 $ 2 $14

(-) seperable cost $0.9 $0.583 $2.5 $3.983

profit/loss    $6.1 $4.417 -$0.5  

So, quality is not further processed.