Summary
Highlights
The video introduces the final part of a series on joint and by-product costing, shifting focus from allocating joint costs to individual products to their relevance in decision-making, specifically further processing decisions. It outlines a revision of joint and by-product costing basics and explores how relevant information criteria apply to joint costs in further processing.
A joint process combines raw materials, labor, and overheads to simultaneously produce multiple products. Costs cannot be traced to individual products until the split-off point, necessitating allocation methods. After this point, products can be further processed, incurring additional costs traceable to individual items. Joint costs occur before the split-off point and are outside the scope of further processing decisions.
Joint costs are allocated for inventory valuation, not for decision-making purposes, as allocation bases are arbitrary and lack a cause-and-effect relationship. Relevant information for decisions must differ across alternatives, relate to the future, be timely, and can be qualitative or quantitative. Information not meeting these criteria is irrelevant.
An example is presented where a company produces two products, A and B, from a joint process with total joint costs of 400,000 rand. Product A yields 10,000 units at 25 rand/unit. Product B yields 15,000 units at 20 rand/unit at the split-off point, with an option to further process into Product X at 5 rand/unit, selling for 30 rand/unit. The viewer is prompted to decide whether to sell Product B as is or convert it to Product X.
In the 'sell as is' scenario, Product A sales are 250,000 rand (10,000 units x 25 rand), and Product B sales are 300,000 rand (15,000 units x 20 rand), totaling 550,000 rand. After subtracting 400,000 rand in joint costs (not allocated, treated as a total), and with no further processing costs, the profit is 150,000 rand.
If Product B is converted to Product X, Product A sales remain 250,000 rand. Product X sales are 450,000 rand (15,000 units x 30 rand), totaling 700,000 rand. Joint costs remain 400,000 rand, but further processing costs of 75,000 rand (15,000 units x 5 rand) are incurred. This results in a profit of 225,000 rand, making further processing the better quantitative decision.
The analysis demonstrates that joint costs are irrelevant for the further processing decision because they do not change between the 'sell as is' and 'further process' alternatives. Only the incremental revenues and costs for Product B/X are relevant. This confirms that joint costs are not relevant to further processing decisions as they are common to both alternatives.
The video concludes by prompting viewers to consider what types of decisions would cause joint costs to change, thereby making them relevant. This encourages deeper thought into the applicability of relevant costing principles.