Question

Describe a situation in which the sales value at splitoff method cannot be used but the NRV method can be used for joint-cost allocation.

A. This situation can occur when a production process allocates joint costs to joint products produced during the accounting period on the basis of a comparable physical measure, such as the relative weight, quantity, or volume at the splitoff point. The result is that selling prices at the splitoff point are not available. Examples include a gold mine that extracts ore containing gold, silver, and lead. Use of a common physical measure (tons) would result in almost all costs being allocated to lead, the product that weighs the most but has the lower revenue-generating power.

B. This situation can occur when a production process yields separable outputs at the splitoff point where each product has a selling price. The company will then determine the NRV based on the selling price. An example is a dairy purchases raw milk from individual farms and processes it until the splitoff point, when two products, cream and liquid smirk emerge.

C. This situation can occur when a production process yields separable outputs at the splitoff point that do not have selling prices available until further processing. The result is that selling prices are not available at the splitoff point to use the sales value at splitoff method. Examples include processing in integrated pulp and paper companies and in petro-chemical operations.

D. None of the above are correct.

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