Question

Discuss the process we use to determine if we should sell a product at the split off point or process it further?

Discuss the process we use to determine whether we should Keep or drop a segment

How do we determine if we should accept or reject a special order?

Answer 1

1.

In case of process costing, while manufacturing a product, several joint and by products may get manufactured simultaneously. Split off point is the point at which products are separated from each other. At the split off point, it is decided whether further processing is to be done or to sell the product as they are. If the increase in sales revenue after further processing is more than further processing cost, then products should be further processed. If the further processing costs are more than increase in revenue from further processing, then products should be sold at the split off point.

2.

While deciding about whether to keep a segment or drop it, segment margin should be considered. If segment margin is positive, then segment should be kept and if segment margin is negative, segment should be dropped.

Segment margin is calculated as under:

Segment margin = Sales revenue - Variable costs of the segment - Traceable fixed costs of the segment

3.

If the revenue provided by the special order is more than costs to be incurred to fulfill the special order, then special order must be accepted since in that case special order will add to the total profits of the firm. On the other hand, if the revenues provided by the special order are less than the costs to be incurred in the special order, then special order must be rejected.

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