Problem:
Apportionment of joint costs
The marketing director of your company has expressed concern about product X, which for some time has shown a loss, and has stated that some action will have to be taken. Product X is produced from material A which is one of two raw materials jointly produced by passing chemicals through a process.
Representative data for the process is as follows:
|
Output (kg):
|
|
|
Material A
|
10 000
|
|
Material B
|
30 000
|
|
Process B (£):
|
|
|
Raw material
|
83 600
|
|
Conversion costs
|
58 000
|
Joint costs are apportioned to the two raw materials according to the weight of output. Production costs incurred in converting material A into product X are £1.80 per kg of material A used. A yield of 90% is achieved. Product X is sold for £5.60 per kg. Material B is sold without further processing for £6.00 per kg.
Required:
(a) Calculate the profit/loss per kg of product X and material B, respectively.
(b) Comment upon the marketing director's concern, advising him whether you consider any action should be taken.
(c) Demonstrate an alternative joint cost apportionment for product X an comment briefly upon this alternative method of apportionment.