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.
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.
Process K Equivalent Units Calculation
|Particulars||Total Units||Equivalent Units|
|Units of P1 Produced||56,800||56,800|
|Units of P2 Produced||28,400||28,400|
|Normal Loss (4% of 90,000)||3600||0|
|Abnormal Loss (4,800-3,600)||1,200||1,200|
Cost of Process K
|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 Name||Sales Value Tk||%||Cost Allocation|
Process K account
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|
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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