JOINTS PRODUCTS AND BYPROUCTS
Example 1:
Farmers’ Dairy purchases raw milk from individual farms and processes it until the split off
point, when two products—cream and liquid skim—emerge. These two products are sold to an
independent company, which markets and distributes them to supermarkets and other retail
outlets. In May 2012, Farmers’ Dairy processes 110,000 gallons of raw milk. During
processing, 10,000 gallons are lost due to evaporation and spillage, yielding 25,000 gallons of
cream and 75,000 gallons of liquid skim. Summary data follow:
CREAM LIQUID SKIM
Beginning Inventory (Gallons) 0 0
Production (Gallons) 25,000 75,000
Sales (Gallons) 20,000 30,000
Ending Inventory (Gallons) 5,000 45,000
Selling Price per Gallon Tsh. 8 Tsh. 4
Joint costs (costs of 110,000 gallons
raw milk and processing to splitoff Tshs. 400,000
point)
a) How much of the Tshs.400,000 joint costs should be allocated to the cost of goods sold
of 20,000 gallons of cream and 30,000 gallons of liquid skim, and how much should be
allocated to the ending inventory of 5,000 gallons of cream and 45,000 gallons of liquid
skim?
i. Sales Value at Splitoff Method
ii. Physical Measure Method
b) Assume both cream and liquid skim can be processed further:
• Cream ➞ Buttercream: 25,000 gallons of cream are further processed to yield
20,000 gallons of buttercream at additional processing costs of Tshs.280,000.
Buttercream, which sells for Tshs.25 per gallon, is used in the manufacture of
butter-based products.
• Liquid Skim ➞ Condensed Milk: 75,000 gallons of liquid skim are further
processed to yield 50,000 gallons of condensed milk at additional processing
costs of Tshs.520,000. Condensed milk sells for Tshs.22 per gallon.
• Sales during May 2012 are 12,000 gallons of buttercream and 45,000 gallons of
condensed milk.
c) By Using Constant Gross-Margin Percentage NRV Method, calculate joint costs
allocated in “B” above
d) Please, advice Farmers’ Dairy’s Management team on the decision to either sell the
joint products, cream and liquid skim, at the splitoff point or to further process them
into buttercream and condensed milk.
