Concept Of Sell Or Process Further Decision

Joint products have common process and joint cost of production up to a split-point. At split-off point they become distinguishable. That is, after completing common process, the joint products will be separated. Often joint products are sold at the separation/split-off point. But sometimes, it is more profitable to process a joint product further beyond the split-off point, prior to selling it.Such additional processing adds value to a product and increases its selling rice above the amount, for which it can be sold at split-off. Manager has to decide whether a product is sold at split-off point or sold after further processing. That is, determining whether to sell or process further is an important decision that a manager must take.

Further processing not only increase the total revenues but also incurred additional costs. Therefore, the process further decision depends on whether the increase in total revenue exceeds the additional cost incurred for processing beyond split-off point. That is, incremental analysis provide the solution to sell or process further decision. Joint cost incurred prior to split-off point have no effect on the decision. The cost incurred before split-off point are past costs, sunk cost or irrelevant cost for sell or process further decision. Only future incremental revenue and differential cost should be considered. And incremental revenue is to be compared with incremental costs. The alternative which gives more benefit(incremental revenue- incremental cost) must be adopted.

No comments:

Post a Comment