Happy Limited is a Textile Manufacturing Company and engaged in the production of Polyester (P) and Nylon (N). While manufacturing the main…

As per AS 2 'Valuation of Inventories', most by-products as well as scrap or waste materials by their nature, are immaterial. They are often measured at net realizable value and this value is deducted from the cost of the main product. Determination of value of closing inventory of Polyester and Nylon Polyester Nylon Closing inventory in units 1,600 units 400 units Cost per unit 31.14 18.68 Value of closing inventory 49,824 7,472 Working Notes 1. Calculation of net realizable value of by-product, Fiber Selling price of by-product Fiber (3,200 units x 40 per unit) 1,28,000 Less: Separate processing charges of by-product Fiber (10,000) Packing charges (9,000) Net realizable value of by-product Fiber 1,09,000 2. Calculation of cost of conversion for allocation between joint products Polyester and Nylon Raw material 3,50,000 Wages 1,60,000 Fixed overhead 1,20,000 Variable overhead 60,000 6,90,000 Less: NRV of by-product Fiber (W.N. 1) (1,09,000) Sale value of scrap (5,000) (1,14,000) Joint cost to be allocated between Polyester and Nylon 5,76,000 Determination of "basis for allocation" and allocation of joint cost to Polyester and Nylon Polyester Nylon Output in units (a) 12,500 units 10,000 units Sales price per unit (b) 100 60 Sales value (a x b) 12,50,000 6,00,000 Total value (12,50,000 + 6,00,000) = 18,50,000 Joint cost of 5,76,000 allocated in the ratio of 12,50,000 : 6,00,000 3,89,189 1,86,811 Cost per unit [c/a] 31.14 18.68