From a particular joint process, Watkins Company produces three products, X, Y, and Z. Each product may be sold at split-off or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. In 2016, all three products were processed beyond split-off. Joint production costs for the year was P60,000. Sales value and costs for 2019 are as follows: 6,000 P25,000 4,000 P41,000 2,000 P24,000 Units produced Sales values at split-off If processed further Final sales value 42,000 9,000 45,000 7,000 32,000 8,000 Separable costs Joint costs are allocated to the products in proportion to the relative physical volume of output. 7. The relevant unit cost for a decision to sell Product Z or process further is P 5.00 P 12.00 P 4.00 d. а. b. P 9.00 8. See item 7. To maximize operating income, Watkins should subject the following products to additional processing: X only b. X, Y, and Z Y and Z only d. Z only / a. с.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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