- 12 Marks
Question
Pinto Company Limited processes materials into finished products. After process one, two main products PEF and CEF are turned out. The production processes allow for 10% normal loss at process one and 5% for each product if it is to be processed further. The scrap at process one can be sold for GH¢6.60 per unit. The standard prices of the products are as follows: PEF to be sold at split-off point for GH¢17 per unit but can be sold for GH¢28 per unit after further processing. A unit of CEF can also be sold for GH¢16 at split-off point or GH¢25 after further processing. Further processing costs are: PEF; direct materials GH¢4 per unit and conversion GH¢3.50 per unit. The materials and conversion costs per unit for CEF are GH¢5 and GH¢4 respectively.
In the month of August 2016, 6,000 units were processed through process one at the following costs: direct materials GH¢40,000, conversion GH¢32,000. The output at the end of process one was 3,000 units for PEF and 2,000 units for CEF.
Required:
Advise management on which of the products should be processed further and which should be sold at split-off point if volume is used to share common cost. (12 marks)
Answer
Accounting for Units Processed:
- Units started: 6,000
- Less normal loss (10%): 600
- Expected units: 5,400
Output:
- PEF: 3,000 units
- CEF: 2,000 units
- Abnormal loss: 400 units
Cost per Unit:
| Description | Material Cost (GH¢) | Conversion Cost (GH¢) | Total Cost (GH¢) |
|---|---|---|---|
| Total Cost: | 40,000 – 3,960 | 32,000 | 68,040 |
| Cost per Unit: | GH¢12.60 |
Income Statement at Split-Off Point:
| Description | PEF (GH¢) | CEF (GH¢) |
|---|---|---|
| Revenue: | 51,000 (3,000 x 17) | 32,000 (2,000 x 16) |
| Cost of Sales: | 37,800 (3,000 x 12.6) | 25,200 (2,000 x 12.6) |
| Profit: | 13,200 | 6,800 |
Income Statement After Further Processing:
| Description | PEF (GH¢) | CEF (GH¢) |
|---|---|---|
| Revenue: | 79,800 (2,850 x 28) | 47,500 (1,900 x 25) |
| Cost of Sales: | 37,800 | 25,200 |
| Further Processing Cost: | 22,500 | 18,000 |
| Profit: | 19,500 | 4,300 |
Decision: Process PEF further and sell CEF at the split-off point.
(Total: 12 marks)
- Topic: Decision making techniques
- Series: NOV 2016
- Uploader: Dotse
