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Joint Products Costing Problem and Solution

Joint Products Costing Problem and Solution


Luiz Ltd operates several manufacturing processes in which stocks of work-in-progress are never held. In process K, joint products (P1 and P2) are created in the ratio 2:1 by volume from the raw materials input. In this process a normal loss of 4% of the raw materials input is expected. Losses have a realizable value of £5 per liter. The joint costs of the process are apportioned to the joint products using the sales value basis. At the end of process K, P1 and P2 can be sold for £25 and £40 per liter respectively. The following information relates to process K for last month: Raw materials input 90,000 liters at a total cost of £450,000 Actual loss incurred 4,800 interconversion costs incurred £216,000.

From ACCA F2 Management Accountant Question

Required:(a) Prepare the process K account for last month in which both the output volumes and values for each joint product are shown separately.

(7 marks)

The company could further process product P1 in process L to create product XP1 at an incremental cost of £3 per liter input. Process L is an existing process with spare capacity. In process L a normal loss of8% of input is incurred which has no value. Product XP1 could be sold for £30 per liter.

Required:(b) Based on financial considerations only, determine, with supporting calculations, whether product P1should be further processed in process L to create product XP1.

Requirement: a

Process K Equivalent Units Calculation

ParticularsTotal UnitsEquivalent Units
Units of P1 Produced56,80056,800
Units of P2 Produced28,40028,400
Normal Loss (4% of 90,000)36000
Abnormal Loss (4,800-3,600)1,2001,200

Cost of Process K

Direct Material4,50,000
Conversion Costs2,16,000
Less: Scrap Value of Normal Loss (€ 5 *3,600)18,000
Cost per equivalent unit (6,48,000/86,400)Tk 7.50
Cost of good output (56,800+28,400) =85,200 units @ € 7.50= 6,39,000

Sales Value Calculation

Product NameSales Value Tk%Cost Allocation

Process K account

Requirement: b

Process L Gain/ Calculation

Unit Input for Process L                 56,800
Less: Normal Loss @ 8%                   4,544
Good Quality Products for Sales                 52,256
Incremental Cost (56,800 Ltr @ €3)               170,400
Incremental Sales Value (52,256 Ltr @ €5)               261,280
Process Gain                 90,880

Based on incremental Cost and Sales analysis, product P1 should go process L to produce product XP1 as incremental process gain is €90,880 .

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