Petro Ltd. is a petroleum refining company which uses cracking process for producing gasoline, diesel and Heavy fuel oil (HFO). All three final…

CA Intermediate · Cost and Management Accounting · MTP · January 2025
Petro Ltd. is a petroleum refining company which uses cracking process for producing gasoline, diesel and Heavy fuel oil (HFO). All three final products are extracted simultaneously at one common split-off point. Gasoline and diesel are immediately available for sale upon separation, requiring no further processing. In contrast, heavy fuel oil (HFO) undergoes additional processing before it can be sold, as there is no market for it at the split-off point. Throughout the year, the selling prices and total quantities sold for each item were as follows: Product Quantity sold (Gallons) Selling Price per gallon (₹) Gasoline 1,674 400 Diesel 4,743 300 Heavy fuel oil (HFO) 6,624 200 The selling prices listed above are projected to remain unchanged in the upcoming year. The total joint manufacturing costs for the year amounted to 15,00,000, with an additional cost of 7,44,000 incurred for finishing Heavy fuel oil (HFO). There were no opening inventories of gasoline, diesel and Heavy fuel oil (HFO). Though, at the end of the period, the following inventories of complete units were available: 1,620 gallons of gasoline, 540 gallons of diesel, and 225 gallons of Heavy fuel oil (HFO). You are required to COMPUTE the following for gasoline, diesel and Heavy fuel oil (HFO)- (i) joint cost allocated, and (ii) cost of goods sold using Net Realisable Value Method of joint cost allocation.

Suggested Answer and Working Notes:

(i) Statement of Joint Cost allocation of inventories of gasoline, diesel and Heavy fuel oil (HFO) (By using Net Realisable Value Method) Products Gasoline Diesel Heavy fuel oil (HFO) Total Final sales value of total production (Working Note 1) 13,17,600 (3,294 × ₹ 400) 15,84,900 (5,283 × ₹ 300) 13,69,800 (6,849 × ₹ 200) 42,72,300 Less: Additional cost - - (₹ 7,44,000) (₹ 7,44,000) Net realisable value (at split-off point) 13,17,600 15,84,900 6,25,800 35,28,300 Joint cost allocated (Working Note 2) 5,60,156 6,73,795 2,66,049 15,00,000 (ii) Cost of goods sold (By using Net Realisable Value Method) Products Gasoline Diesel Heavy fuel oil (HFO) Total Allocated joint cost (from (i)) 5,60,156 6,73,795 2,66,049 15,00,000 Additional costs - - 7,44,000 7,44,000 Cost of goods available for sale (CGAS) 5,60,156 6,73,795 10,10,049 22,44,000 Less: Cost of ending inventory (Working Note 1) 2,75,485 (CGAS × 49.18%) 68,862 (CGAS × 10.22%) 33,231 (CGAS × 3.29%) 3,77,578 Cost of goods sold 2,84,671 6,04,933 9,76,818 18,66,422 Working Notes 1. Total production of three products for the year Products Quantity sold (in gallon) (1) Quantity of ending inventory (in gallon) (3) Total production (4) = [(2) + (3)} Ending inventory percentage (%) (5) = (3)/ (4) Gasoline 1,674 1,620 3,294 49.18 Diesel 4,743 540 5,283 10.22 Heavy fuel oil (HFO) 6,624 225 6,849 3.29 2. Joint cost apportioned to each product Total Joint cost / Total Net Realisable Value × Net Realisable Value of each product Total cost of Gasoline = 15,00,000 /35,28,300 × ₹ 13,17,600 = 5,60,156 Total cost of Diesel = 15,00,000 /35,28,300 × ₹ 15,84,900 = 6,73,795 Total cost of Heavy fuel oil (HFO) = 15,00,000 /35,28,300 × ₹ 6,25,800 = 2,66,049

Topics: Joint Products and By Products

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