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CT Horngreen
The Cook Company operates a simple chemical process to convert a single material into three separate
items, referred to here as X, Y, and Z. All three end products are separated simultaneously at a single split
off point. Products X and Y are ready for sale immediately upon split off without further processing or
any other additional costs. Product Z, however, is processed further before being sold. There is no
available market price for Z at the split off point. The selling prices quoted here are expected to remain
the same in the coming year. During 2014, the selling prices of the items and the total amounts sold were
as follows:
The total joint manufacturing costs for the year were $580,000. Cook spent an additional $200,000 to
finish product Z.
There were no beginning inventories of X, Y, or Z. At the end of the year, the following inventories of
completed units were on hand: X, 132 tons; Y, 120 tons; Z, 28 tons. There was no beginning or ending
work in process.
Required:
1) Compute the cost of inventories of X, Y, and Z for balance sheet purposes and the cost of goods sold
for income statement purposes as of December 31, 2014 using the following joint cost allocation
methods:
a) NRV method
b) Constant gross-margin percentage NRV method
2) Compare the gross-margin percentages for X, Y, and Z using the two methods given in requirement 1.