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CA Intermediate · Cost and Management Accounting · Joint Products and By Products

Bharat Spices produces 10,000 kg of Product P from a joint process costing Rs 4,00,000. P can be sold at the split-off point for Rs 50 per kg. Alternatively, it can be processed further at Rs 12 per kg and sold for Rs 60 per kg. Compared with selling at the split-off point, the effect of further processing on profit is:

Profit decreases by Rs 20,000 if the product is processed further. The joint cost is common to both options and is ignored. Further processing adds Rs 10 per kg of revenue but costs Rs 12 per kg, a loss of Rs 2 per kg on 10,000 kg.

  1. ADecrease of Rs 20,000Correct
  2. BIncrease of Rs 20,000
  3. CIncrease of Rs 1,00,000
  4. DIncrease of Rs 2,00,000

Explanation

The joint cost of Rs 4,00,000 is the same under both choices and is irrelevant. The incremental revenue per kg is 60 - 50 = Rs 10, while the incremental cost is Rs 12. The net effect is -Rs 2 per kg, so 10,000 kg gives a decrease of Rs 20,000. Rs 1,00,000 ignores the further processing cost.

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