Question: Joint-cost allocation, process further or sell. Mountainair Construction Company (MCC) crushes boulders to obtain decorative rock, which they sell through various outlets. The process produces three grades of rock, which are viewed as joint products: Red Rock, a high-end decorative rock; White Rock, commonly used for landscaping purposes; and Gravel, used for driveway filler. For each 2,000 pounds of boulder, MCC produces 400 pounds of Red Rock, 600 pounds of White Rock, and 1,000 pounds of Gravel. Data for August are provided below:
Red Rock White Rock Gravel
Production (pounds) 8,000 12,000 20,000
Selling price per pound at split off $10.00 $7.00 $3.50
Joint costs are $190,000; there was no beginning or ending inventory. Because the Red Rock is sold at a premium, it is processed further to ensure uniformity of the rocks. The process costs an additional $100 per batch of 2,000 pounds of boulders used. The finished Red Rock product is sold for $15 per pound.
1. Allocate joint costs under each of the four methods. For the physical measure, use pounds of production.
2. Mr. Green, the president of MCC, wants to understand which method is best to use. Explain to Mr. Green the basis for each method and its effect on the financial statements. Also provide your recommendation for MCC and a rationale for that recommendation.