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Hi John
The Kaplan revision kit has question on relevant costing and I just can’t make sense of the solution.
The question broadly says: ‘…the production mix could be changed to 7:8:5, should this change be implemented?’
This question is given in a process costing production environment with, where products P, Q and R are produced. There’s no wastage specified and the products can be split off and sold after initial processing or be processed further.
I understand that the change in the production mix would leave the overall joint processing TOTAL output (prior to split off) unchanged prior to the split-off point and so joint process costs will not change, meaning that the only relevant costs are the further processing costs.
Kaplan’s solution calculates the incremental costs of the proposed change to the production mix (understood), but nets this off against the total total revenue, rather than the incremental revenue, after the split-off point.
Confused!!!
Why wouldn’t we calculate the incremental revenue (after split-off point) and then deduct the incremental costs incurred (as a direct consequence pf the change in the production mix) from this?
Is their solution right?
What you are suggesting sounds sensible.
However I do not have the Kaplan kit – only the BPP kit – and so without seeing the whole question I cannot say whether or not their answer is correct.
If it is a past exam question, then tell me which exam and I should be able to find it (and then obviously I will be in a better position to help you).
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