This lesson examines decisions about whether to sell a product at the split-off point or process it further before sale. It covers the application of relevant costing to joint products and by-products, distinguishing between joint costs and additional processing costs.

Detailed Notes:

• Definition and Purpose: During the manufacturing process, some raw materials need to be separated or refined to produce a final product. A single raw material input that can be separated into one or more materials is known as a joint product. The point at which the original raw material input is separated is known as the split-off point. Differential decision-making can be used to analyse whether to sell products at the split-off point or process them further.

• Joint Products and By-Products:

  • Joint Products: Two or more products produced simultaneously by a single process, each with significant sales value (e.g., crude oil refining produces gasoline, diesel, and kerosene).

  • By-Products: Products produced incidentally to the main product, with relatively low sales value (e.g., sawdust from timber production).

• The Relevant Cost Analysis:

  • Joint Costs: Costs incurred to process the raw material input to the split-off point. Joint costs are not relevant to the decision to process further because they have already been incurred (sunk costs).

  • Additional Processing Costs: Costs incurred to process the products after the split-off point. These are relevant to the decision because they will be incurred only if the product is processed further.

  • The Decision Rule: A product should be processed further if the incremental revenue from further processing exceeds the incremental costs of further processing. The analysis is: Incremental Revenue (Final Sales Value – Sales Value at Split-Off) – Incremental Processing Costs = Incremental Profit. If the result is positive, it is profitable to process further.

• Example: A cheese manufacturer produces a secondary product (whey) at the split-off point. If the whey can be sold for $1,000 or processed further into a gourmet product for an additional $500 and sold for $2,000, the incremental profit is $500 ($2,000 – $1,000 – $500), so it should be processed further.