Earl’s Hurricane Lamp Oil Company produces both A-1 Fancy and B Grade Oil. There are approximately $9,000 in joint costs that Earl may allocate using the relative sales value at splitoff or the net realizable value approach. Before splitoff, A-1 sells for $20,000 while B grade sells for $40,000. After an additional investment of $10,000 after splitoff, $3,000 for B grade and $7,000 for A-1, both the products sell for $50,000. What is the difference in allocated costs for the A-1 product assuming applications of the net realizable value and the net realizable value at splitoff approach? 1. A-1 Fancy has $1,300 more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. 2. A-1 Fancy has $1,300 less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. 3. A-1 Fancy has $1,500 more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. 4. A-1 Fancy has $1,500 less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Earl’s Hurricane Lamp Oil Company produces both A-1 Fancy and B Grade Oil. There are approximately $9,000 in joint costs that Earl may allocate using the relative sales value at splitoff or the net realizable value approach. Before splitoff, A-1 sells for $20,000 while B grade sells for $40,000. After an additional investment of $10,000 after splitoff, $3,000 for B grade and $7,000 for A-1, both the products sell for $50,000. What is the difference in allocated costs for the A-1 product assuming applications of the net realizable value and the net realizable value at splitoff approach?
1. A-1 Fancy has $1,300 more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.
2. A-1 Fancy has $1,300 less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.
3. A-1 Fancy has $1,500 more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.
4. A-1 Fancy has $1,500 less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.
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