Question

Georgia Orchards produced a good crop of peaches this year. After preparing the following income statement, the company is concerned about the net loss on its No. 3 peaches

GEORGIA ORCHARDS
INCOME STATEMENT
For Year Ended December 31, 2017
Particular	No 1	No 2	No 3	Combined
Sales (by grade)
No 1.	\(450,000
No 2.		\)300,000
No 3			\(187,500
Total sales				\)937,500
Costs
Tree pruning and care @ \(0.30/lb	90,000	90,000	225,000	405,000
Picking, sorting, and grading	45,000	45,000	112,500	202,500
Delivery Cost	15,000	15,000	37,500	67,500
Total cost	150,000	150,000	375,000	675,000
Net income (Loss)	\)300,000	\(150,000	(\)187,500)	\(262,500

In preparing this statement, the company allocated joint costs among the grades on a physical basis as an equal amount per pound. The company’s delivery cost records show that \)30,000 of the \(67,500 relates to crating the No. 1 and No. 2 peaches and hauling them to the buyer. The remaining \)37,500 of delivery costs is for crating the No. 3 peaches and hauling them to the cannery.

Required

1. Prepare reports showing cost allocations on a sales value basis to the three grades of peaches. Separate the delivery costs into the amounts directly identifiable with each grade. Then allocate any shared delivery costs on the basis of the relative sales value of each grade. (Round percents to the nearest onetenth and dollar amounts to the nearest whole dollar.)

2. Using your answers to part 1, prepare an income statement using the joint costs allocated on a sales value basis.

Analysis Component

3. Do you think delivery costs fit the definition of a joint cost? Explain.

Short answer

Net income of different peaches:

No 1	$140,400
No 2	$93,600
No 3	$28,500

Step-by-step solution

Definition of Joint Cost

The cost incurred for more than one product at a single time and cannot be allocated to them separately is known as joint cost. Such cost is allocated based on various factors such as space occupied, sales, and many more.

Cost allocation

Particular	Combined	No 1	No 2	No 3
Tree pruning and care @ $0.30/lb	$405,000	$194,400	$129,600	$81,000
Picking, sorting and grading	$202,500	$97,200	$64,800	$40,500
Delivery Cost	$67,500	$18,000	$12,000	$37,500
Total cost	$675,000	$309,600	$206,400	$159,000

Working note:

Calculation of percentage share for tree pruning and picking, sorting cost:

Peaches	Sales	/	Total sales	X	100	=	Allocated percentage
1	$450,000	/	$937,500	X	100	=	48%
2	$300,000	/	$937,500	X	100	=	32%
3	$187,500	/	$937,500	X	100	=	20%

Percentage of share for the delivery cost of $30,000:

Peaches	Sales	/	Total sales	X	100	=	Allocated percentage
1	$450,000	/	$750,000	X	100	=	60%
2	$300,000	/	$750,000	X	100	=	40%

Income statement

Particular	Combined	No 1 48%	No 2 32%	No 3 20%
Sales	$450,000	$300,000	$187,500	$937,500
Total cost	($309,600)	($206,400)	($159,000)	($675,000)
Net income	$140,400	$93,600	$28,500	$262,500

Delivery cost as joint cost

Yes, the delivery cost can be considered a joint cost because $30,000 of this cost is incurred for No one and No two peaches jointly for crating and hauling them.