Scenario:
The sample company is an integrated oil company. It extracts oil from its many wells throughout the world and then refines the oil into gasoline and diesel fuel. The total (full) cost of extracting 500,000 barrels of oil from the ground is $5,000,000. Once refined, the oil yields 5,000,000 gallons of gasoline that can be sold for $2.00 per gallon and 1,000,000 gallons of diesel fuel that can be sold for $2.25 per gallon.
Questions:
1. Using the net realizable value method of allocating joint production costs, how much of the $5,000,000 cost of the oil will be allocated to the gasoline refined?
2. Using the physical quantities method of allocating joint production costs, how much of the $5,000,000 cost of the oil will be allocated to the diesel refined?