Problem - Create a manual/handwritten solution AND a spreadsheet to solve the following joint cost problem. You may choose to scan or use your cell phone to copy and paste the manual solution.
The Dubbo Rubbo Liniment Company manufactures liniment. Three processes are involved.
Process 1 in which all chemicals etc. are added incurs costs of $124 000 for an output of 17 600 kg. Of this, 1600 kg is a sludge which is generally sold to road builders. The remaining 16 000 kg receives further processing. Of this 16 000 kg, 9000 kg goes on to Process 2 to become 9000 kg of A-grade liniment for an extra cost of $72 000. The A-grade liniment sells for $28 per kg. The other 7000 kg goes to Process 3 to become 7000 kg of B-grade liniment for an extra cost of $48 000. B-grade sells at $24 per kg. Sludge sells at $3.50 per kg, but costs $1 per kg to package safely.
Required:
(a) Assuming no opening or closing inventory is held, calculate the gross profit for the major products, using
(i) the physical units approach to allocate joint costs.
(ii) the net realisable value approach to allocate joint costs.
(b) Explain the reasons for your treatment of the by-product revenue. Describe one other way in which the by-product could have been dealt with and how this would have affected your answers to (a).