Question

Cost Accounting : (Please write a unique answer, not a copied one).

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

The statement mentioned in the question is apt as the decision to do any further activity should be dependent upon the cost benefit analysis of only such elements which are incurred or would be inurred due to this activity (INCREMENTAL).

Joint cost allocation is just a method of allocation of cost & has no relation with incurrence of cost. If a cost has been incurred, no money will be saved even if it is allocated to two products or hundred products. Hence, even if the new product is processed or not, the costs already incurred continues to incur & so there is no impact on cost incurrence and you continue to pay the same amount.

Decision to process a product further should be dependent upon following things-

• Incremental Costs that will be incurred with further processing of the product in question.
• Incremental Revenue forecasted, so that you can do the cost benefit analysis.
• Qualitative factors which could be varied & different on a case to case basis. It may adversely impact the decision of further processing even if the company is earning incremental reveune when the quality of the processed product is degraded and doesn't meet companies quality standards, as the same may impact the brand image of the company.