Question

(c) Identify the revenue or expense amounts necessary to make a sell-or-process-further decision and the reasons behind them. [5 marks) (d) Identify the four methods of allocating joint costs to individual products and the most preferred method among accountants. (5 marks]

Answer 1

C.

In cost accounting, a sell or process further decision asks whether to sell a product “as is” at the splitoff point, or to process further. The splitoff point is the point when the costs of two or more products can be separately identified. There are two criteria you use to justify further processing (and more costs):

• If the product has a sales value at splitoff, maybe it’s better to sell it.

• If the incremental revenue from further processing is greater than the incremental cost of further processing, maybe it’s better to continue processing.

Some products simply don’t have a sales value at splitoff. The product’s production isn’t far enough along for it to be sold yet. No customers (or not enough customers) would consider buying the product at splitoff. Think about selling blue jeans without zippers or belt loops; it’s probably not a good idea.

If you can’t calculate a sales value at splitoff, there’s no “sell or process further” decision to make. To have a viable product to sell, you need to keep processing.

But wait! There are times when a partially completed product at splitoff has value to someone. Say you make cabinets. You’ve run production on two types of products, and you’re now at splitoff. Neither type of cabinet is ready to be sold to a customer because you have to complete the sanding and finishing on the wood. You also have to install metal handles.

The product is clearly not ready for a regular customer (likely a retail store that sells to the public). However, another business may ask you for a price quote for the partially completed goods. Maybe another cabinetmaker is having trouble filling a large order. It might be willing to buy your partially finished cabinets. In that scenario, you essentially become an industry supplier.

Joint costs are irrelevant for your “sell or process further” decision. Those costs are the same, whether you sell the product at splitoff or process further. In this case, joint costs are sunk or past costs. In other words, they’ve already been paid.

Incremental revenue is the additional revenue you get from selling one more unit that has been processed further. Incremental cost is the additional cost. If you spend $5 more per unit, and earn $7 more from selling that unit, your incremental revenue is $2 higher than the incremental cost. Incremental, in this case, refers to the production from splitoff to a completed product.

D.

The four joint cost allocation methods are:

1. Market or sales value method:

The market or sales value method allocates a joint production cost on the basis of relative market or sales values of individual joint products.

2. Quantitative or physical unit method:

This method uses some physical measurement units (such as volume, weight etc.) to allocate joint production cost.

3. Average unit cost method:

The average unit cost method, as the name implies, uses average unit cost to allocate the cost before split-off point.

4. Weighted average method:

This method assigns predetermined weight factors to joint products based on various factors such as price, production complexity and unit size of the product.

The splitoff method in cost accounting

After splitoff, each product incurs separable (or independent) costs. Allocating joint costs using sales value at splitoff may be the most effective method for planning and budgeting for joint costs.