Definitions and comments:

1. Joint products: When more than one product results from a manufacturing process, the products are called joint products. For example, soy bean oil and soybean meal are joint products that result from the processing of soybeans. Manufacturing of joint products always has a split-off point at which separate products emerge, to be sold or processed further. Costs incurred after the split-off point do not generally cause allocation problems because they can be identified with specific products.

2. Common costs: These are costs incurred to produce products simultaneously, but each of the products could have been produced separately. Thus, common costs are divisible and can be traced to each product produced. For example, the cost of lumber for a furniture manufacturer is a common cost that can be directly traced to the various products produced.

3. Joint costs: Often confused with “common costs”, joint costs are costs are indivisible and not specifically identifiable with any of the products being simultaneously produced. For example, the cost of trees for a sawmill is a joint cost because all the various types of products that trees yield cannot be varied. In this problem, we are given the common costs ($40,000), but there is no way to determine the joint costs. Therefore, we have calculated the per unit and total common costs (not joint costs) to be allocated to each product.

4. Relative sales basis: Under this method, any estimated additional processing costs are deducted from the final sales value in an attempt to approximate a hypothetical market value at the split-off point. In this example, we do not have any information on additional processing costs, so we will use the final sales value as a proxy.

Sales of each product:

HR2: 150,000 x $.40 = $60,000

MX1: 50,000 x $.80 = $40,000

Common cost = $40,000

Allocation of total common cost

HR2: $40,000 x .60 = $24,000

MX1: $40,000 x .40 = $16,000

Per Unit Common Cost

HR2: $24,000/150,000 = $0.16

MX1: $16,000/50,000 = $0.32