Question

In: Accounting

A company manufactures three products using the same production process. The costs incurred up to the...

A company manufactures three products using the same production process. The costs incurred up to the slit-off point are $200,000. These costs are allocated to the products on the basis of their sales value at the slit-off point. The number of units produced, the selling prices per unit of the three products at the split-off point and after further processing, and the additional processing costs are as follows: Product Number of Units Produced Selling Price at Split-Off Selling price after processing additional processing cost D 4,000 $10.00 $15.00 $14,000 E 6,000 11.60 16.20 20,000 F 2,000 19.40 22.60 9,000

Instructions (a) Which information is relevant to the decision on whether or not to process the products further? Explain why this information is relevant. (b) Which product(s) should be processed further and which should be sold at the spli-off point? (c) Would your decision be different is the company was using the quantity of output to allocate joint costs? Explain.

Solutions

Expert Solution

a) The information that is relevant to the decision on whether the products should be further processed are the selling after further processing, selling point at split off point and further processing costs. This information is relevant since joint costs have to be incurred till the split off point and the company can from that point determine if further processing has to be done and will be profitable.

b) Incremental profit / Loss = (Selling price after processing - Selling price at split off point ) * No of units - Additional costs

D: (15-10) * 4000 - 14,000 = 6,000

E: (16.2-11.6) *6,000 - 20,000 = 7600

F: (22.6-19.4) * 2000 - 9000 = -2600

D & E must be processed further and F is to be sold at split off since the there is incremental loss due to F.

c)

D E F
Sales
[No of units *Selling price after processing]		 60000 97200 45200
Less: Additional proccesing costs 14,000 20,000 9,000
Less: Allocation of joint costs 66666.67 100000 33333.33
Profits -20,666.67 -22,800 2,866.67

In this case D & E must not be processed further and F is to be sold after processing further.

Working:

Allocation of Joint costs:

D : 200000*(4000/12000) = 66,666.67

E:  200000*(6000/12000) = 100,000

F:  200000*(2000/12000) = 33,333.33

ekkarill92 answered 5 months ago
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