Question

Q 4      Making a decision to process a product further is not influenced by joint cost allocation. However, it should be based on incremental costs and qualitative factors. Discuss this statement.

Answer 1

Yes, this statement is true that Making a decision to process a product further is not influenced by joint cost allocation. However, it should be based on incremental costs and qualitative factors.

As we know that joint costs are common costs and once these costs are allocated then these costs are known as sunk cost or past cost hence decision to process a product further is not influenced by these sunk costs. But such decision is influenced by the incremental revenues and associated incremental costs. If incremental revenues are sufficient to cover incremental costs or excess to these incremental costs then product will be processed further or vice versa. Thus it is true that a decision to process a product further should be based on incremental costs and qualitative factors not by the joint cost allocation because sunk costs do not have any impact of such decision and if decisions are taken on the basis of these sunk & past costs then such decisions will be irrelevant.