Question

SELL AT SPLIT – OFF POINT OR PROCESS FURTHER & JOINT COST ALLOCATION

Lauricella Inc. produces three products from a common set of inputs for $95,000. Other sales and cost data follow:

                                                                                Unit Sales Price ____          Costs After      

                                                                          At                     After further            Split-off

               Product             Quantity            Split-off                Processing               Point__

               Regular               8,000                  $ 8                            $ 10                  $ 10,000

               Special                5,000                      5                                  8                     15,000

               Premium             4,000                      6                                10                     20,000

REQUIRED:

1. Which products should be sold at the split-off point?

2. Which products should be processed further?

3. What are Joint Costs?

4. For the purposes of making this decision, should joint costs be allocated? Why or why not?

5. Are there any OTHER reasons why we might want to allocate these costs?

Answer 1

At Split Off Product 1 Quantity 2Sales Price @Split off 3 Sales Value(1*2) 4 Physical Units Method( Total Quantity(8000+5000+4000) 5 Proportion(1/4) 6 Common Cost [95000 *(5)] Regular Special Premium Sno 8000 5000 4000 5 6 64000 24000 25000 17000 17000 17000 0,47 0.29 0.24 27550 44650 22800 7 Profit(3-6) -2550 19350 1200 After Further Process Product 1Quantity 2 Sales Price 3 Sales Value(1*2) 4 Physical Units Method( Total Quantity(8000+5000+4000) 5 Proportion(1/4) 6 Common Cost [95000 *(5)] 7 Profit before process cost(3-6) Regular Special Premium Sno 5000 8000 4000 10 10 80000 40000 40000 17000 17000 17000 0.47 0.29 0.24 44650 27550 22800 35350 12450 17200 8 Process cost 20000 10000 15000 9 Profit(3-6-8) 25350 -2550 -2800

Conclusion Which products should be sold at the split-off point? Products Special and Premium sold at spilt off Since further process results less profit Which products should be processed further? Product regular should sold after further process since profit after further process more What are Joint Costs? Joint costs are costs that are incurred from buying or producing two products at the same time. In cost accounting terms, joint costs have the same cost object.

For the purposes of making this decision, should joint costs be allocated? Why or why not? Without allocation of joint cost Product 1 Sales at split off Regular Special Premium Sno 25000 64000 24000 2 further process cost 3 Sales after process 4 Net Sales after process(3-2) 5 sales Increase/(Decrease) after process (4-1) 10000 15000 20000 40000 80000 40000 20000 70000 25000 6000 0 -4000 sold after process as Sold Before Process as no Sold Before Process as 6 Decision sales Increase change in sales Sales decrease Thus, With or Without Allocation of joint cost it results same decision