Process costing and a decision on further processing 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 per cent of the raw materials input is expected. Losses have a realizable value of £5 per litre. 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 litre respectively.

The following information relates to process K for last month:

Raw material input 90000 litres at a total cost of £450000 Actual loss incurred “ 4800 litres Conversion costs incurred £216000 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 litre input. Process L is an existing process with spare capacity. In process L a normal loss of 8 per cent of input is incurred which has no value. Product XP1 could be sold for £30 per litre.

Required:

(b) Based on financial considerations only, determine, with supporting calculations, whether product P1 should be further processed in process L to create product XP1.

(3 marks)

(10 marks)

ACCA Financial Information for Management