QUESTION 40 (26 MARKS) November 2015 Rounding Allocation of costs and Unit values - 2 decimals First Foods buys apples from selected farmers, processes the fruit into baby products: namely, puree and apple juice. In the first department the apples are sorted and washed, the peel and core are removed, and ingredients are added to preserve the liquidised apples. The skin, peel and core are treated as a by-product and sold back to local farms as animal feed. Costs involved in the first department for the processing of 22 200 kg of apples are as follows: Ingredients/materials Labour Overheads Apples purchased at R5.40 per kg R24 500 50% of the labour cost The basic mixture (excluding the by-product) from the first department can be sold at R8.50 per kg or it can be transferred and processed further in the Puree Department or the Juice Department. First Foods uses the approach of deducting the net market value of the by- product from the production costs. Additional information: Output as % of kg produced Ending inventory Market value after further processing Factor Further costs (per kg) after separation (kg) (per kg) Puree 60% 2 680 R12.50 per kg 3 R3.20 Juice 32% 360 R11.80 per kg 7 R1.90 Animal feed 8% 5 R1.00 per kg R0.50 REQUIRED: Answer the following unrelated questions: 28 40.1 Use the weighted factor method to assign the joint costs to the products. Calculate the value of the closing inventory on hand (8) 40.2 Due to new legislation in the baby food industry, the animal feed will not be considered as a by-product anymore and no costs can be allocated to it. The allocated kilograms will be disposed of at a cost of R500 that will be considered as part of the joint cost. Labour cost will also be reduced with R2 000 and other materials will increase with R3 000. Use the constant gross profit method to assign the costs to all the products. (5%) 40.3 Use the net market value method to allocate joint costs to the products. The animal feed must be treated as stated in the original information. Calculate the profit or loss for the Puree if they process it further. (5%) 40.4 A customer has offered to buy % of the production of the puree if First Foods is willing to process it further and add some extra ingredients to the mixture to produce a new product for the non-baby market, Apple pudding. The customer is willing to pay R18.50 per kilogram for this new product and the additional ingredients will cost R6.50 per kg in total and the conversion costs will be R6 500. This new product will however increase the market price of the remaining puree. The price will for that will now be R16.00 per kg. Prepare an analysis on the effect of such an offer and advise the company as to whether it should accept the offer or not. (5) 40.5 Evaluate the juice and give advice whether it will be more profitable to sell it at the split off point or after further processing. (2)