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Management Accounting · Applications of Marginal Costing in Short Term Decision Making

Sell or Process Further and Plant Utilisation Decisions

Updated 10 October 2026 · Fact-checked

A sell or process further decision compares the extra revenue from further processing with the extra (incremental) cost of doing it. Joint costs already incurred are sunk and ignored. Process further only if incremental revenue exceeds incremental cost. For plant utilisation and alternative methods, compare relevant contribution or relevant cost.

Understand Other Decisions: Sell or Process Further, Plant Utilisation

Some products come out of a common process together. These are joint products. Up to the split-off point, their costs cannot be traced to each product. That cost is the joint cost.

At the split-off point you can sell the product as it is. Or you can process it further and sell it at a higher price. The question is: does the extra processing add profit?

The joint cost is a sunk cost. It has already been incurred and will be the same whichever option you pick. So it is not relevant. A relevant cost is a future cost that differs between alternatives. Only the further-processing costs and the extra sales value matter.

Plant utilisation and choice of method decisions work the same way. If capacity is idle, any order that gives positive contribution adds to profit. If capacity is limited, compare options on contribution per unit of the scarce resource. When choosing between methods (for example manual or machine), compare the total relevant cost at the expected volume. Fixed costs that do not change are ignored. Fixed costs that change with the method are relevant.

Always use the marginal costing view: ask what changes in cash and contribution, not what the full cost sheet shows.

Key rules to remember

Further processing rule
Process further if (Sales value after processing − Sales value at split-off) > Further processing cost
Use incremental figures only. Joint cost is excluded.
Incremental profit
Incremental profit = Incremental revenue − Incremental cost
Positive means process further. Negative means sell at split-off.
Contribution
Contribution = Sales − Variable cost
Used for plant utilisation and method comparison.
Contribution per unit of scarce resource
Contribution per hour = Contribution per unit ÷ Hours per unit
Use when plant hours are limited and several products compete.
Indifference point between two methods
Volume = Difference in fixed costs ÷ Difference in variable cost per unit
Gives the volume where total cost of both methods is equal. The method with higher fixed cost wins above this volume if its variable cost per unit is lower.

How to solve Other Decisions: Sell or Process Further, Plant Utilisation questions

Use this order for any question on further processing, alternative methods or plant utilisation.

  1. 1Identify the decision and the alternatives. Write them as columns.
  2. 2List the joint cost, allocated overheads and past spend. Mark them as sunk or non-relevant and leave them out.
  3. 3For each alternative, find the relevant revenue per unit or per batch.
  4. 4Find the relevant costs: further-processing cost, variable cost, and fixed costs only if they change or are avoidable.
  5. 5Compute incremental revenue, incremental cost and incremental profit. For limited capacity, compute contribution per scarce hour.
  6. 6Pick the alternative with the higher incremental profit or contribution.
  7. 7State the decision in one line and add any non-financial points, such as quality, market risk or idle capacity.

Quickest way: Incremental check in two lines

When to use it: Use for further-processing questions with several products and a stated joint cost.

  1. For each product, write: Final sales value − Split-off sales value − Further processing cost.
  2. Process further if the result is positive. Ignore the joint cost and any allocation of it completely.
  3. Add up only the gains from products you process further to get the total benefit.

Common mistakes in Other Decisions: Sell or Process Further, Plant Utilisation

  • Deducting the apportioned joint cost while deciding whether to process further.

    The cost sheet shows a full cost per product, so it looks like it belongs in the decision.

    Fix: Joint cost is sunk at the split-off point. Compare only incremental revenue and incremental cost.

  • Comparing final selling price with further processing cost only.

    Students forget the product could have been sold at split-off.

    Fix: Use the increase in revenue: final price minus split-off price.

  • Including fixed costs that do not change between alternatives.

    Habit of using total cost rather than relevant cost.

    Fix: Include a fixed cost only if it differs between options or can be avoided.

  • Ranking products by contribution per unit when plant hours are limited.

    Per unit figures are easy to see.

    Fix: Rank by contribution per hour of the scarce resource.

  • Treating sunk cost and relevant cost as the same thing, or counting depreciation of existing plant as relevant.

    Both terms relate to past and present spending.

    Fix: Sunk cost is already incurred and cannot be changed. Relevant cost is a future cost that differs between alternatives.

Worked examples

Example 1

A process yields two joint products, P and Q, at a joint cost of ₹6,00,000. P can be sold at the split-off point for ₹4,00,000 or processed further at an extra cost of ₹1,20,000 and sold for ₹5,50,000. Q can be sold at split-off for ₹3,00,000 or processed further at an extra cost of ₹1,00,000 and sold for ₹3,80,000. Advise which products to process further.

Show the solution
  1. Joint cost of ₹6,00,000 is sunk. Ignore it.
  2. Product P: incremental revenue = ₹5,50,000 − ₹4,00,000 = ₹1,50,000.
  3. Product P: incremental cost = ₹1,20,000. Incremental profit = ₹1,50,000 − ₹1,20,000 = ₹30,000.
  4. Product Q: incremental revenue = ₹3,80,000 − ₹3,00,000 = ₹80,000.
  5. Product Q: incremental cost = ₹1,00,000. Incremental profit = ₹80,000 − ₹1,00,000 = −₹20,000.

Answer: Process P further, which adds ₹30,000 to profit. Sell Q at the split-off point, because further processing would reduce profit by ₹20,000.

Example 2

Aarav Industries can make a component by Method A (manual) or Method B (machine). Method A: variable cost ₹50 per unit, fixed cost ₹2,00,000. Method B: variable cost ₹30 per unit, fixed cost ₹4,00,000. Find the volume at which both methods cost the same and advise for an expected demand of 12,000 units.

Show the solution
  1. Difference in fixed cost = ₹4,00,000 − ₹2,00,000 = ₹2,00,000.
  2. Difference in variable cost per unit = ₹50 − ₹30 = ₹20.
  3. Indifference volume = ₹2,00,000 ÷ ₹20 = 10,000 units.
  4. Check at 12,000 units. Method A = ₹2,00,000 + 12,000 × ₹50 = ₹2,00,000 + ₹6,00,000 = ₹8,00,000.
  5. Method B = ₹4,00,000 + 12,000 × ₹30 = ₹4,00,000 + ₹3,60,000 = ₹7,60,000.

Answer: Both methods cost the same at 10,000 units. At 12,000 units Method B is cheaper by ₹40,000, so choose Method B.

Exam tips

  • Write the words 'joint cost is sunk and not relevant' in the answer. Examiners look for this line.
  • Lay out columns: sell at split-off, process further, and difference. This earns step marks even if one figure is wrong.
  • In plant utilisation questions, check first whether capacity is idle or limited. The method changes.
  • End every answer with a clear decision sentence and one non-financial factor if there is space.
  • In the MCQ section, a distractor often includes the joint cost. Cross out any option built on it.

Practice questions from Applications of Marginal Costing in Short Term Decision Making

Other Decisions: Sell or Process Further, Plant Utilisation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Other Decisions: Sell or Process Further, Plant Utilisation: frequently asked questions

What is the difference between sunk cost and relevant cost?

A sunk cost has already been incurred and cannot be changed by any decision, such as joint cost at the split-off point. A relevant cost is a future cost that differs between the alternatives. Only relevant costs are used in decision making.

Is joint cost ever relevant in a further processing decision?

No. Joint cost is the same whether you sell at split-off or process further. It matters only for product costing and stock valuation, not for this decision.

How do I decide between alternative methods of production?

Compare the total relevant cost of each method at the expected volume. You can also find the indifference point from the difference in fixed and variable costs. Choose the cheaper method at your expected volume.

How is plant utilisation decided when capacity is limited?

Find contribution per unit of the scarce resource, such as machine hours, and rank products on it. Allot capacity to the highest ranked product first, within market demand limits.