Kapaci Bhd\'s marketing president has recently paid attention to a loss-making p
ID: 2771274 • Letter: K
Question
Kapaci Bhd's marketing president has recently paid attention to a loss-making product H, and mentioned that some actions need to be taken.
Product H is produced from the mixture of material X and material Y. Processing data of product H is as follows:
Joint costs are allocated to both raw materials based on the weight of output.
Production costs incurred in converting material X into product H are RM1.80 per kg of material X used. The successful rate of producing product H is 90%. Product H selling price is RM5.60 per kg. Material Y is sold without any processing for RM6 per kg.
Required:
a) Compute the profit/ loss per kg of product H and material Y, respectively. [11 marks]
b) Comment on the president's concern and suggest to him any action should be taken. [5 marks]
c) Choose a recommended joint cost apportionment method and demonstrate its calculation of the apportionment for product H. Then comment on this method of apportionment. [8 marks]
Material X Material Y Output (kg) 16,000 48,000Explanation / Answer
Given
Output
Material X = 16,000
Material Y = 48,000
Joint costs
Process Cost = 133,760
Conversion Cost = 92,400
Production Cost = RM 1.80 per Kg for Material X
Success Rate of Product H = 90%
Output of Product H = 90% * (Material X + Material Y)
Output of Product H = 90% * (16,000 + 48000) = 57,600 kg
Answer (a)
Per Kg Costs associated with production of Product H
Process Cost of Raw Material P = Total cost / (Material X + Material Y)
= 133760/(16000+48000) = 133760/64000
= RM 2.09
Conversion Cost of Raw Material C = Total cost / (Material X + Material Y)
= 92,800/(16000+48000) = 92800/64000
= RM 1.45
Production cost of Material X Px = RM 1.80
Per Kg Profit / Loss of product H can be calculated using the formula
Profit / Loss = Sale Price – Process Cost – Conversion Cost – Production cost of Material X
= RM 5.60 – RM 2.09 – RM 1.45 – RM 1.80 = RM 0.26 / kg
Calculation of Per Kg profit / loss of Material Y
Process cost of Raw Material P = (133760 * (48000/(16000+48000))/48000
P = (133760 * 0.75)/48000 = RM 2.09
Conversion Cost of Raw Material C = (92800 * 48000/64000)/48000 = RM 1.45
Profit / Loss on Material Y = RM 6 – RM 2.09 – RM 1.45 = RM 2.46 / kg
Answer (b)
The profit of Product H is RM 0.26 vis a vis that of Material Y which is RM 2.46 Kg. This at per Kg level of the product. In addition there is a 10% loss in material at the time of production of Product H while the costs are to be calculated on the actual weight of the material to be used. However, one cannot completely discontinue the process involved in production of Product H. The reason being the raw material needs to be proceeds till the stage both Material X and Material Y can be identified. Only Material X needs further production cost of RM 1.80 / kg to produce Product H. If the production of Product H is discountinued the costs associated with Material X till the stage where both the materials can be identified will end up as loss. It is better to look for increasing the sale price or improve realization of product H to improve its profitability.
Answer (C)
Calculation of Joint costs associated with Material X and Material Y is based on the output of the respective products.
Output (kgs)
Material X = 16000
Material Y = 48000
Total output= 64,000
Proportion of Material X in Joint Costs = 16000 / 64000 = 0.25
Proprotion of Material Y in Joint Costs = 48000/ 64000 = 0.75
Apportioning of Production Joint cost between Material X and Material Y
Total Cost = RM 133,760
Material X = RM 133,760 * 0.25 = RM 33,440
Material Y = RM 133,760 * 0.75 = RM 100,320
Average unit cost = RM 2.09
Apportioning of Conversion Joint cost between Material X and Material Y
Total Cost = RM 92,800
Material X = RM 92,800 * 0.25 = RM 23,200
Material Y = RM 92,800 * 0.75 = RM 69,600
Average Unit cost = RM 1.45
The method used for apportionement of joint costs can be termed as average unit cost method where the output of individual products can be expressed in some common units. Each unit of output shares a proportionate amount of joint cost. This is a simple method where joint cost is separated into an average joint cost per unit.
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