Question

Bethany Lutrell’s uncle has asked her to take over the family poultry processing plant. Provide Lutrell, who graduated in engineering, answers to the following issues:

a. What are the important questions to be answered about joint processes in a poultry processing plant? Also indicate the points in a joint process at which these questions should be answered.

b. How should joint costs be used in managerial decision making? When and why might a joint cost be used inappropriately in decision making?

c. How are joint process outputs similar and dissimilar?

Answer 1

a. In a poultry processing plant, the joint input would be chickens and/or   turkeys. The   primary   financial   questions   to   be asked follow. (1) What specific poultry will be used; what customers will be   served; and   what   is   the   estimated   profitability   of   the business? The answer   to these questions will   determine what inputs will be purchased and, to some extent, what production processes will be performed. It also will help determine whether the process should be undertaken at all. (2) What specific cuts of poultry should be selected from the poultry inputs? The answer to this question will determine how the inputs are cut into salable parts. (3) How will the joint process output will be classified: joint product, by-product, scrap, or   waste? The   answer   to   this question determines which output is allocated part of the joint cost. (4) How much processing should be done to the individual cuts? The answer to this question will determine what specific processes will be necessary beyond the split-off point and what types of equipment the poultry processing plant must have to execute   the   required   conversion   operations. To   answer   this question, the incremental costs and benefits must be compared before undertaking any additional processing’s.

b. In a poultry processing plant, the way joint cost is allocated   can   affect   many   decisions. For   example, allocating joint cost to by-product and scrap would cause them tube seen as “money losers” and, as such, they might simply be disposed of as waste. The allocation of joint costs can also be important   in   meeting   reporting   requirements, e.g.,   income determination and inventory valuation for purposes of reporting to   the   Internal   Revenue   Service. Joint   product   cost   is   also relevant   in   determining   whether   one   is   going   to   engage   in production. However, once the split-off point is reached in the production operation, the joint cost is irrelevant in determining whether additional conversion operations should be performed.

c. Four potential categories of output may be obtained from joint production. Joint products are the main products obtained and are   distinguished   from   the   other   outputs   by   their   greater sales value. At the opposite end of the continuum, waste is an incidental output of a joint production process and has no value. By-products and scrap are distinguished by the fact that they both have some value, but the value is below that   of   joint   products. By-products   have   a   greater market value than scrap.

a. The incremental costs and benefits must be compared before undertaking any additional processing’s.

b. The joint cost is irrelevant in determining whether additional conversion operations should be performed.

c. Four potential categories of output may be obtained from joint production.