How to allocate joint costs using the net realizable value method?
Under the net realizable value method, joint costs are allocated based on the total sales value less costs that can be separable for each product. Once you have the net realizable value for each product, you need to figure out what percentage the net realizable value is out of the total amount. That percentage is then applied to joint costs to determine the amount of joint costs that should be allocated to the product.
Let’s take a look at an example as that always simplifies everything.
Example: Let’s say that Wolf Enterprises produces clothing and a backpack. The company had $36,000 of joint costs and had the following information for each product:
Step 1) We’ll start by calculating the total sales from the number of units produced. So, multiply units produced by the selling price. From there, we’ll need to subtract the separable costs, and that gets us down to net realizable value. Since both products have a net realizable value of $60,000, that means each product will get 50% of the allocated joint costs.
Step 2) All we need to do is multiply $36,000 x 50% for each product, and we get $18,000 of joint cost that will be allocated to each product:
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