Intermediate: Joint cost apportionment and decision on further processing A company manufactures four products from an input of a raw material to process 1 Following this process, product A is processed in process 2, product 8 in process 3, product C in progress 4 and product D in process 5.

The normal loss in process 1 is 1 0% of input, and there are no expected losses in the other processes. Scrap value in Process 1 is

£0.50 per litre. The costs incurred in Process 1 are apportioned to each product according to the volume of output of each product.

Production overhead is absorbed as a percentage of direct wages.

Data in respect of the month of October

You are required to:

(a) calculate the profit or loss for each product for the month, assuming all output is sold at the normal selling price;
(4 marks)

(b) suggest and evaluate alternative production strategy which would optimize profit for the month. It should not be assumed that the output of process 1 can be changed;
(12 marks)

(c) suggest to what management should devote its attention, if it is to achieve the potential benefit indicated in (b)

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Process 1 2 3 4 5 Total Direct materials at (2000) (2000) (000) (000) (2000) (2000) 1.25 per litre 100 Direct wages 48 12 8 4 4 16 16 88 Production overhead 100 88 66 Product A B C D Output (litres) 22000 20000 10000 18000 Selling price () 4.00 3.00 2.00 5.00 Estimated sales value at end of Process 1 () 2.50 2.80 1.20 3.00