Joint cost allocation, process further. Sinclair Oil & Gas, a large energy conglomerate, jointly processes purchased hydrocarbons to generate three nonsaleable intermediate products: ICR8, ING4, and XGE3. These intermediate products are further processed separately to produce Crude Oil, Natural Gas Liquids (NGL), and Natural Gas (measured in liquid equivalents). An overview of the process and results for August 2009 is shown here (Note: The numbers are small to keep the focus on key concepts):

A federal law has recently been passed that taxes crude oil at 30% of operating income.
No new tax is to be paid on natural gas liquid or natural gas. Starting August 2009, Sinclair Oil & Gas must report a separate product-line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the joint cost of producing the three separate saleable outputs. Assume no beginning or ending inventory.
REQUIRED 1. Allocate the August 2009 joint cost among the three products using

a. Physical-measure method

b. NRV method 2. Show the operating income for each product using the methods in requirement 1.
3. Which, if any, method would you use for product emphasis? Explain.
4. Draft a letter to the taxation authorities on behalf of Sinclair Oil & Gas that justifies the joint cost allocation method you recommend Sinclair use.LO1

Transcribed Image Text:

Joint Costs $1,800 Separable Costs ICR8 Processing $175 Crude Oil 150 barrels @ $18 per barrel Hydrocarbons Processing ING4 Processing $105 XGE3 Processing $210 NGL 50 barrels @ $15 per barrel Natural Gas 800 eqvt. barrels @ $1.30 per eqvt. barrel