Harvard Products Company produces three products, X, Y, and Z, from a single joint process. The company uses the average unit cost method for allocating the joint production cost. Some spoilage normally occurs in the joint process, but the company also has been experiencing some unexpected spoilage in the separable process to Product Y. In costing the three products for sale, all spoilage costs, together with joint and separable process costs, are included in product cost.
Over the past year, the company has been losing money on Product Z. Sentiments are mixed as to whether to drop Z or make modifications. The controller is convinced that the entire costing system needs to be revised and she has hired a consultant to present a proposal for a cost study.
Required:
As the consultant, prepare a brief proposal for the company's management, outlining the aspects of its product costing that need to be reviewed. Explain why the areas cited need to be studied.