CA Foundation · Accounting · Inventories
A manufacturer processes a single input and produces two joint products, X and Y, plus a by-product whose value is immaterial. As per AS 2, how should the by-product be treated when determining the cost of the main products?
The by-product is measured at its net realisable value, and that amount is deducted from the joint cost of the main products. AS 2 permits this when by-product value is immaterial, so the main products' carrying amount stays close to their actual cost.
- AThe total joint cost is allocated to the by-product on a weight basis
- BThe by-product is measured at net realisable value and this is deducted from the cost of the main productsCorrect
- CThe by-product is ignored and its sale proceeds are taken as income in a later year
- DThe by-product is valued at its market selling price and shown as a separate asset at cost
Explanation
AS 2 says that where the cost of each product in a joint process is not separately identifiable, cost is allocated on a rational basis. Most by-products, being immaterial, are measured at net realisable value and this value is deducted from the cost of the main product. The carrying amount of the main product is then not materially different from its cost.
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