Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 4

Physical Units Method, Relative Sales Value Method
Farleigh Petroleum, Inc., is a small company that acquires high-grade crude oil from low-volume production wells owned by individuals and small partnerships. The crude oil is processed in a single refinery into Two Oil, Six Oil, and impure distillates. Farleigh Petroleum does not have the technology or capacity to process these products further and sells most of its output each month to major refineries. There were no beginning finished goods or work-in-process inventories on April 1. The production costs and output of Farleigh Petroleum for April are as follows:

Data on barrels produced and selling price:
Two Oil, 300,000 barrels produced; sales price, $45 per barrel
Six Oil, 170,000 barrels produced; sales price, $25 per barrel
Distillates, 80,000 barrels produced; sales price, $14 per barrel
Required:
1. Calculate the amount of joint production cost that Farleigh Petroleum would allocate to each of the three joint products by using the physical units method. (Carry out the ratio calculation to four decimal places. Round allocated costs to the nearest dollar.)
2. Calculate the amount of joint production cost that Farleigh Petroleum would allocate to each of the three joint products by using the relative sales value method. (Carry out the ratio calculation to four decimal places. Round allocated costs to the nearest dollar.)