SK company purchases crude vegetable oil. Refining this oil results in three products at splitoff point: C, D and E. Product C and D are intermediate products and can individually be further refined into C1 and D1. Product E is a by-product formed after further processed at an additional cost of $2,000 processing cost after the splitoff point. In addition, 30% of revenue is marketing cost on selling of product E. The joint costs of processing the crude vegetable oil were $200,000. The output of product C1, D1 and E are 200,000 gallons, 100,000 gallons and 5,000 gallons respectively. Assume all the products are sold at the end of the year. Additional information related to these products are shown below.

Further processing cost to make C1 and D1 Sales value

Product C1 $50,000 $300,000

Product D1 $70,000 $170,000

Product E $5,000

As a senior accountant, your finance director has suggested two approaches for calculating the cost of these products.

Approach 1: NRV method for allocating the cost of joint products and sales method for by-product

Approach 2: Physical measure method for allocating the cost of joint products and production method for by-product

Required:

Discuss the implications of each approach on the companys financial position.Advise management the approach should be adopted.

(Total: 15marks)