When a manufacturing company carries out an operation in which two or more joint products are produced from a common process, then a number of problems can arise. These are:
1. If the joint products can be sold at the existing conditions at the split-off point or after further separate processing then a decision should be made on whether to process further.
2. If there is extra demand for one joint product and not the other, then it will be necessary to know whether it is worth to make more output of the joint product in order to make a profit on one and dispose off the other.
3. It may be possible to change the production in order to change the product mix. The product mix decision will then have to be made, taking into account the cost of changing the mix and the incremental sales revenue from selling the new mix.
1. Joint product further processing decision
The relevant costs are the additional costs of further processing which should be compared with the incremental revenue of further processing. Joint costs (cost before the split-off point) are irrelevant.
Illustration:
ABC Ltd produces product A and B from the same process and incurs a joint processing costs of Ksh 150,000 upto the split off point where 100,000 units of A and 50,000 units of B are produced. The selling prices at split off points are as follows:
Titany answered the question on
October 12, 2021 at 06:14