You work for Deloitte Consulting as a graduate accountant. You areworking in their Smart Manufacturing team whose main work involves helping Queensland manufacturers to improve their cost structures to be more competitive in international markets. One of your clients is a large agricultural chemical business called FarmCrops, who have developed a new chemical fertilizer for corn farmers aimed at reducing impact of pesticides on the environment.
This can be used as two products. The first, is a mainly phosphorous-based fertilizer, but it can be processed further into a more complex product with the added chemical nitrogen. Your supervisor has asked you to do some analysis for FarmCrops on which product is more value-adding for the company. You are given the following information:
In one joint process, 10 000 kg of phosphorous are processed into 7 000 kg of a product called Phosolite and 3 000 kg of a product called Bonide. The cost of the joint process, including the phosphorous is $40 000. FarmCrops allocates $28 000 of the joint cost to the Phosolite and $12 000 of the cost to the Bonide.
The 3 000 kg of Bonide can be sold at the split-off point for $5 000, or it can be processed further adding nitrogen into a product called Nutricide. The sales value of 3 000 kg Nutricide is $20 000, and the additional processing cost is $16 200.
REQUIRED:
a) Use appropriate written communication to make a recommendation as to whether the Bonide should be sold at the split-off point or processed further. (5 marks - professional communication)
b) Provide an analysis of the costs that show your decision making and recommendation.
c) Are the concepts underlying relevant cost analysis still valid in an advanced manufacturing environment? Are these concepts valid when activity-based costing is used? Explain.