Your Ask Joey ™ Answer

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:


Back To All Questions

You might also be interested in...

  • Discontinued Operations on the FAR CPA Exam

    Overview of Discontinued Operations In financial reporting, discontinued operations refer to a component of a company’s core business or product line that have been divested or shut down. Discontinued operations will be reported (net of tax) separately from continuing operations on the income statement. The reason that discontinued operations are reported separately is so that...

  • Equity Method Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on the equity method, please click the link below to download the Excel workbook: Equity Method Lecture Example https://youtu.be/QE4flnmuSkw

  • How Hard is the CPA Exam?

    So you’re thinking about taking the CPA exam? Whether you have a dream of becoming a tax advisor, feel as though you need public accounting experience, or just want to solidify your business acumen, the CPA license is one of the most prestigious and well respected licenses in the business world. The exam itself is...