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MAC-II
White flour
Suji
Wholemeal
flour
Bran
Selling prices
Rs 2100
Rs 2480
Cost Prices
Rs 1850
Rs 1850
Separable
Costs
Rs 78
Rs 84
Rs 2000
:Rs. 1140.
Rs 1850
Rs 1850
Rs 34
Rs 16
MAC-II
From the above points, it is evident that the problem is due to the
allocation of the joint costs based on physical distribution.
Range of possible Solutions: When there are two are more products that
undergo the same process at the same time in the course of conversion,
the joint costs should be allocated to each of the products based on some
allocation basis.
The allocation basis can be of different types:
1. Physical Quantity method: This is the method currently followed
by Lilac Flour mills. This is not yielding the required results as we
end up allocating high cost to bran and so not able to sell it.
Product
While
Flour
Suji
Whole
meal
Flour
Bran
Productio
n
Joint
cost
allocated
basis
on
physical
quantity
Joint
cost
per
ton
Separa
ble
Cost
per ton
Total
Cost
per
ton
Sales
price
per
ton
Profit
per
ton
Total
profit
540
90
999000
166500
1850
1850
78
84
1928
1934
2100
2480
172
546
92880
49140
90
166500
1850
34
1884
2000
116
180
900
333000
1665000
1850
16
1866
1140
-726
10440
13068
0
2178
MAC-II
0
Table I
Product
While
Flour
In sales value method, we use the sales value as the basis for
allocation.
Producti Sales
on
in price
tons
per ton
540
2100
Suji
Whole
meal
Flour
90
2480
90
2000
Bran
180
1140
900
Sales
Value
11340
00
22320
0
18000
0
20520
0
17424
00
Joint cost
allocated
on basis
of sales
value
Joint
cost
per
ton
Separa
ble
Cost
per ton
Total
Cost
per
ton
Profi
t
Total
per
profi
ton
t
1083626
2007
78
2085
15
8254
213285
2370
84
2454
26
2355
172004
1911
34
1945
55
4936
196085
1089
16
1105
35
6235
2178
0
1665000
Table II
MAC-II
84
34
16
306
0
288
0
10918
80
21564
0
17694
0
20232
0
16867
80
10777
81
21285
6
17465
5
19970
8
16650
00
1996
78
2365
84
1941
34
1109
16
Separable Cost
421
20
756
0
18000
0
20520
0
17424
00
Separable Cost
per ton
Sales Value
200
0
114
0
78
207
4
244
9
197
5
112
5
Total profit
90
18
0
90
0
11340
00
22320
0
90
210
0
248
0
Bran
54
0
Suji
Whole
meal
Flour
While
Flour
Production in tons
Product
26
1409
9
31
2784
25
2285
15
2612
2178
0
Table III
Table III gives the allocation of the joint costs based on this
method, and also the profitability of the different products
when this method is followed
MAC-II
Table IV
Sale
s
Producti price
on
in per
tons
ton
Product
While
Flour
540
2100
Suji
90
2480
Wholeme
al Flour
90
2000
Bran
180
1140
900
Table: IV
Sales
Value
11340
00
22320
0
18000
0
20520
0
17424
00
Joint cost
allocated
on basis
of
assuming
3
byproducts
1070100
215640
176940
202320
Join
t
cost
per
ton
198
2
239
6
196
6
112
4
Separa
ble
Cost
per ton
78
84
34
16
Tota
l
Cost
per
ton
206
0
248
0
200
0
114
0
Profit
per
ton
40
Total
profit
2178
0
0
2178
0
1665000
The tabe IV gives the cost allocation and the profitability for
the different products when this method is used
Hence, we allocate the joint costs to Bran such that the total
cost of Bran equals its selling price.
Sale
s
Producti price
on
in per
tons
ton
Product
While
Flour
MAC-II
540
2100
Suji
90
2480
Wholeme
al Flour
90
2000
Bran
180
1140
900
Sales
Value
11340
00
22320
0
18000
0
20520
0
17424
00
Joint
cost
allocate
d
on
basis of
bran as
a
by
product
107902
6
212380
171274
202320
166500
0
Join
t
cost
per
ton
199
8
236
0
190
3
112
4
Separa
ble
Cost
per ton
78
84
34
16
Tota
l
Cost
per
ton
207
6
244
4
193
7
114
0
Profit
per
ton
24
Total
profit
1285
4
36
3260
63
5666
6
0
2178
0
Table: V
6. Constant Gross margin NRV method:
Sales
Value
Method
Net
Realization
Value
assuming 3
by-products
Assuming
Bran
as
byproduct
MAC-II
Tota
l
Cost
Produc
t
While
Flour
Suji
Whole
meal
Flour
Bran
Sale
s
pric
e
per
ton
210
0
248
0
Total
Cost
( Inve
ntory
Value
)
Gross
per Margi
ton
n
1928
8.20%
1934
22%
200
0
1884
114
0
1866
5.80%
63.70
%
Total
Cost
( Inve
ntory
Value Gross
) per Margi
ton
n
0.70
2085
%
1.10
2454
%
Total
Cost
( Inve
ntory
Value) Gros
s
per
Marg
ton
in
1.20
2074
%
1.20
2449
%
2480
0%
( Inv
ento
ry
Valu
e)
per
ton
207
6
244
4
Total
Cost
( Inven
tory
Gross
Value) Margi
per ton n
1.90
2060
%
Gross
Margi
n
1.10
%
1.50
%
1945
2.70
%
1975
1.30
%
2000
0%
193
7
3.10
%
1105
3%
1125
1.30
%
1140
0%
114
0
0%
Table VI
2. Sales value method:
This method is better than Physical Quantity method as we do not
observe any loss on any of the products. But if we adopt this
method, we will have gross margin of only 0.7% for the white flour,
which is our main product. This might cause a concern especially for
the senior management.
3. Net Realization Value(NRV) method:
By this method we are getting a good and even profit margin among
all the products. Also we are getting a decent 1.2% gross margin
(which is very close to our overall margin) on our main product
white flour.
4. Assuming all the three products other than white flour as
by-products:
In this method, as according to our assumption, we can see that we
are getting a profit margin of 0% on our main product, white flour.
Also, we are observing a gross margin of 1.9% on white flour.
We have to be careful when we use this method, because we should
note that we are allocating the extra joint costs of by-products to
white flour. In case the market prices of the three by-products fall,
MAC-II
Best solution:
From the above analysis, we can arrive at two final methods which we can
adopt:
1. Net Realization Value method
2. Treating only Bran as By-Product
If we have to choose one method from these two, we can go for the Net
Realization Value method. The reason being, in the long term, it might
happen that the selling price of Bran changes and it leads to a change in
the Inventory costs of other products too. So, to avoid volatility in our
values, we can go for the former method.
Lessons from the case:
From the case analysis, we can identify the following points as learnings:
a) When multiple products are produced using the same processes
simultaneously, the costs involved in the process (Joint costs) should
be allocated after choosing an allocation basis to arrive at the right
costs for each product.
b) Physical distribution method though easy to implement, it can be
used only when the products produced from the process are of
comparable value.
c) We should be careful when treating some of the products as byproducts. Since we will be allocating part of their joint costs to the
main products, this increases the inventory costs of our main
product, which reflects on the balance sheet. So, we should make
sure that there is no significant impact because of this.
MAC-II
d) Finally, we should keep in mind that the cost allocation of joint costs
should not cause any change in the economic decisions of the firm.
So, which ever method we adopt should not have any impact on the
managerial decisions made. These methods should be viewed only
from accounting perspective.