Question

When making sell or process further decisions managers should:
a) ignore joint cost
b) allocate joint cost to all products based on their estimated sale revenues
c) ignore cost incurred after the split off point
d) allocate drink cost to some but not all products, depending on their relative sale values

Answer 1

When making sell or process further decisions, managers should consider relevant costs and revenues. In the context of joint costs (costs incurred before the split-off point when multiple products are produced from a common input), the best approach is to:

c) Ignore cost incurred after the split-off point

This is because joint costs are sunk costs, and decisions should be based on the incremental costs and revenues that arise after the split-off point. Allocating joint costs based on estimated sale revenues (option b) or other arbitrary methods may lead to suboptimal decisions, as it doesn't consider the actual cost and revenue dynamics of each product after the split-off point.