CA Intermediate · Cost and Management Accounting · Joint Products and By Products
A chemical firm apportions its joint processing cost among its joint products using the physical units method. Which of the following is a recognised limitation of this method?
The physical units method ignores the relative market values of the joint products. Because joint cost is divided only by quantity, a low-priced product with large volume may absorb a cost greater than its selling price, which makes the resulting product profitability misleading.
- AIt requires the further processing cost of every product to be estimated before apportionment
- BIt ignores differences in the market values of the products, so a low-value product may be charged a cost higher than its selling priceCorrect
- CIt can be used only when all joint products are sold at the split-off point
- DIt gives every product the same percentage of gross profit
Explanation
The physical units method divides joint cost in proportion to quantity and takes no account of what each product can fetch in the market. A cheap product with large volume can therefore absorb more cost than it can recover. The first option describes the net realisable value method, and the last describes the constant gross profit method.
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