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Hello
really need your help with this number.
A company located on the Gulf of Mexico is a producer of soap products. Its six main soap product lines are produced from common inputs. Joint product costs up to the slit-off point constitute thee bulk of the production costs for all six product lines. These joint costs are allocated to the six product lines on the basis of the relative sales value of each line at the slit-off point.
The company has a waste product that results from the production of the six main product lines. Until a few years ago, the company loaded the waste onto barges and dumped it into the gulf of Mexico, since the waste was thought to have no commercial value. The dumping was stopped, however, when the company’s research division discovered that with some further processing the waste would be made commercially saleable as a fertilizer ingredient. The further processing was initiated at cost of $175,000 per year. The waste was then sold to fertilizer manufacturers at a total price of $300,000 per year. The accountants responsible for allocating manufacturing cost included the sales value of the waste product along with the sales value of the six main product lines in their allocation of the joint product costs at the slit-off point. This allocation resulted in the waste product being allocated $150,000 in joint product cost. This $150,000 allocation, when added to the further processing of $175,000 for the waste, caused the waste product to show the net loss as shown below’Sales value of the waste product after further processing $300,000
Less: cost assignable to the product (150,000+175,000) $325,000
(25,000)
The company decided that further processing of the waste was not desirable after all. The company went back to dumping the waste in the Gulf.Required.
Advise management, especially with regard to the allocation of joint costs, Hint; Determine whether there is any contribution margin generated by processing further the waste.Hi there – as mentioned on previous posts (and in response to your messages on ACCA FMA boards) – this forum can not be used for you to post lengthy (homework?) questions on.
Presumably you will have a textbook answer with this question. If there is an aspect of the answer you have found which you dont follow then please add this details and your query below.
This question is also not a CIMA P1 question – you will not find any questions which are this long on the CIMA P1 objective test exam.
Sorry I cant help further
Thanks@kyanda Accoding to the new syllabus we can treat the revenue from by products in two ways.
1) The proceeds from the sale of by-product may be treated as pure profit OR
2) The proceeds from sales, less any handling and selling expenses, may be used to reduce the cost of the main products.While as your case suggest if by-product needs further processing such cost should be deducted in arriving the net revenue. So to solve your problem they suggest us to check if there is contribution margin generated by the JP.
Solution:
The contribution/Net revenue form Jp is
300k-175k=125k
Here we can see that the By product has 125k contribution towards the Fixed cost and profit. Hence the production of such product should be continued.
If we stop producing such product we will lose 125k contribution toward the FC and profits.Further to the answer:
The absorption of overheads doesn’t help to decide if we process such product or not. The amount of overheads to be absorbed by the particular cost unit (By-product) might alter as result of companies policy of allocation; However this is merely the result of company’ s cost accounting procedures for overheads. This overhead cost will be incurred even if we do not process such by product further. Hence we can conclude that the absorbed cost of 150k is non relevant cost and should not be used for the decision to further process the by product.
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