Cornerstone Exercise 7.7 (Algorithmic)

Allocating Joint Costs Using the Physical Units Method

Orchard Fresh, Inc., purchases apples from local orchards and sorts them into four categories. Grade A are large blemish-free apples that can be sold to gourmet fruit sellers. Grade B apples are smaller and may be slightly out of proportion. These are packed in boxes and sold to grocery stores. Apples for slices are even smaller than Grade B apples and have blemishes. Apples for applesauce are of lower grade than apples for slices, yet still suitable for canning. Information on a recent purchase of 25,000 pounds of apples is as follows:

Grades Pounds

Grade A 2,250

Grade B 6,250

Slices 10,000

Applesauce 6,500

Total 25,000

Total joint cost is $18,750.

Required:

1. Allocate the joint cost to the four grades of apples using the physical units method.

Joint Cost

Grades Allocation

Grade A $

84

Grade B

3

Slices

2

Applesauce

2.8

Total $

2. Allocate the joint cost to the four grades of apples by finding the average joint cost per pound and multiplying it by the number of pounds in the grade. Round the average cost answer to the nearest cent.

Average cost = $

per pound.

Joint Cost

Grades Allocation

Grade A $

84

Grade B $

3

Slices $

2

Applesauce $

2.8

3. What if there were 2,750 pounds of Grade A apples and 5,750 pounds of Grade B? How would that affect the allocation of cost to these two grades? How would it affect the allocation of cost to the remaining common grades?

Joint Cost

Grades Allocation

Grade A $

84

Grade B $

3

Slices $

2

Applesauce $

2.8