Oman Pharmaceutical Industries Co. (OPP) is one of the fastest growing pharmaceutical company in GCC. It...

Oman Pharmaceutical Industries Co. (OPP) is one of the fastest growing pharmaceutical company in GCC. It manufactures four joint products Azithromycin, Clarithromycin, Levofloxacin and Moxifloxacin from a chemical process. After further processing, the company sells Azithromycin, Clarithromycin, Levofloxacin and Moxifloxacin at a price of RO 20, RO 24, RO 16 and RO 12 and estimates a profit of 17.5%, 12.5%, 12.5% and 15% respectively.

The costs incurred till the split- off point are RO 39,000. The output achieved at the end of the process is as under :

Products	Output
Products	(in Units)	(in grams)
Azithromycin	1500	4500
Clarithromycin	2000	4000
Levofloxacin	1600	2400
Moxifloxacin	1400	1100

The company incurs post separation costs of RO 4750, RO 9000, RO 5400 and RO 4280 on Azithromycin, Clarithromycin, Levofloxacin and Moxifloxacin respectively.

As the company just completed its first batch of production, the management of the company wants to identify the best suitable method for distributing the joint costs to the products. The production Manager informs the Management that the company can adopt any one of the five methods for distributing the joint costs viz., Average Cost Method, Physical Unit Method, Survey Method, Sales Value method and Net Realisable Value Method. The Production Manager advises the management to adopt survey method and suggest to apportion the joint costs on technical evaluation based on the proportion of 1:2:2:1 to four products respectively.

Meanwhile, the Management of the company appointed you as a consultant to estimate the total cost of the four products under each method of distributing the joint cost.

Also, advise the management of the company which method is best suitable.

Expert Solution

Cost analysis on various method of cost allocation.

ekkarill92 answered 2 years ago

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