Discussion

You are the new cost accountant of Pride Company and on your way to a meeting you overheard the business consultant said to one of the managers that “evaluating profitability when there are joint products should be based on the fact that joint costs do not change the degree of profitability for individual joint products.” Do you agree with this statement? Justify your answer. Provide some examples. (300 words).

and two replies with 200 words each

Reply1:

Evaluation of profitability when there are joint products as it does not align to the joint products individually

The joint costs are not going to alter the profitability and you need to be making choice on the realizable value of any product. It is the product sales revenue after deduction of the processing costs. A point to consider is that the joint costs have no role to play in altering the profit of an individual product. The onus is on the managers to ensure maximum profitability where they go on to choose among the best set of joint products that is available. In fact correct decisions have to be made so that it becomes easy to process the future decisions. The problems of joint costs might relate to pricing (Keirstead, 2019).

The joint costs tend to be part of the product costs and it could be one of the reasons why you assign them to products. Even joint allocation might be necessary for a lot of reasons. They tend to be inventory costs and might go on to be a major component of the goods sold. A major chunk of the joint costs has to flow through the accounting system as it reflects expenses through sales. The allocation of joint costs tends to emerge in response to the regulatory requirements In addition the estimation of the casualty costs makes sure that allocation of joint costs would be important. Even the task of performance evaluation might take into consideration certain type of joint costs. But you need to exercise caution when allocated costs tend to be part of the evaluation process. A suggestion is not to be using such costs for profitability decisions when it relates to the individual joint products. Assessment of joint costs would be critical for urban development (Senyel & Guldmann, 2018).

The onus is on the manager to decide which of the joint costing methods they have to use. On gross margins you should not be making any type of product decisions that includes cost allocation. Though this is till that point of time when a product complies with a regulatory requirement. In the contractual agreement the joint allocation cost is to be clearly specified between the product provider and the customer.

The production activities might lead to waste and the scrap or the waste might be disposed of in the form of a cost. The revenues generated from them contribute to joint costs.

References

Keirstead, B. (2019). XIII. Some Further Problems in Price Determination, Joint Costs, Multiple Equilibrium, Price Discrimination. In Essentials of Price Theory (pp. 136-143). University of Toronto Press.

Senyel, M. A., & Guldmann, J. M. (2018). Joint Costs in Electricity and Natural Gas Distribution Infrastructures: The Role of Urban Factors. Urban Science, 2(2), 35.

Reply2:

Joint costs are essential for manufacturing costs, which is the primary justification relegating them to products. Joint cost allotment is vital for stock expenses, and therefore become part of the expense of merchandise sold. A part of the joint costs should course through the bookkeeping framework to mirror the recuperation of the cost through sales. They are apportioned considering administrative necessities that required allocation of such expenses as a reason for value setting (Hilton and Platt, 2020, p. 772). Therefore, as the business consultant rightly stated; joint costs should not be used to make profitability decisions for individual joint products. Evaluating profitability when there are joint products should be based on the fact that joint costs do not change the degree of profitability of individual profits. The management should take a gander at expanding by and large productivity by picking the most ideal arrangement of joint products. Right choices should be settled on by considering further decisions.

Productivity measurement includes the choice to sell intermediary items or process them further. The right decision depends on estimating an item's net feasible worth. At the point when an item is prepared further it turns out to be more important than an item that isn't handled further. Consequently, the cost of such items should increment. The choice to handle further depends on a correlation of the extra income created by selling the item at a more exorbitant cost, to the extra expense of preparing the item further. On the off chance that the steady incomes are more noteworthy than the gradual expenses, the item ought to be prepared further (Hilton and Platt, 2020, p. 773).

For example, all products retrieved from an oil company are joint products – oils retrieved need to be refined further to distinguish them into petroleum, diesel, and so on.  Subsequently, generous divisible costs will be caused in preparing the joint items notwithstanding the joint costs brought about in the oil field activities (Hilton and Platt, 2020, p. 774). The expenses of finding the oil field, constructing the boring stages, and the drilling itself are for the most part joint expenses. Oil companies typically use the net realizable value of the products manufactured as the basis for allocating the joint production costs. The full expenses of the organization's different items at that point become the reason for estimating prices (Hilton and Platt, 2020, p. 774).

References:

Hilton, R. W. & Platt, D. E. (2020). Managerial accounting: Creating value in a dynamic business environment. Boston: McGraw-Hill Education.