Chapter 5, Problem 1TIF

Joint cost allocation and performance evaluation

Gigabody, Inc., a nutritional supplement manufacturer, produces five lines of protein supplements. Each product line is managed separately by a senior-level product engineer who is evaluated, in part, based on his or her ability to keep costs low. The five product lines are produced in a joint production process. After splitting off from the joint production process, all five lines are processed further before resale.

Traditionally, joint product costs have been allocated to the five product lines using the physical units method. Recently, however, one of the line managers has complained that the supplement she oversees, the Turbo Capsule, is subsidizing the production of the Power Shake. As she puts it, “The powder for the Power Shake requires a higher temperature in the early refining process than the powder in my capsules, so it should carry more of the joint costs!” However, the line manager does not point out that in terms of the powder used, the Power Shakes sell for a fraction of the Turbo Capsules, such that Turbo Capsules have much higher margins than Power Shakes. This provides a reasonable argument for Turbo Capsules to carry even more of the joint costs than they currently carry.

1. a. Did the line manager behave ethically by not disclosing the facts that go against her argument?
2. b. What factors should be considered when determining the allocation of joint costs?