Management Accounting

IM6.6 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 B in process 3, product C in process 4 and product D in process 5. The normal loss in process 1 is 10 per cent 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: Process 1 2 3 4 5 Total (000) (000) (000) (000) (000) (000) Direct materials at 1.25 per litre Direct wages Production overhead 100 48 12 8 4 16 100 88 66 Product . B 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 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 an 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). (4 marks) CIMA P1 Cost Accounting 2