Wharf Fisheries processes many of its seafood items to the demands of its largest customers, most of which are large retail distributors. To keep the accounting system simple, it has always assigned cost by the weight of the finished product. However, with increased competition, it has had to watch its prices closely and, in recent years, several items have incurred zero profit margins. After several weeks of investigation, your consulting firm has found that, while weight is important in processing of seafood, numerous items have very distinct processing steps and some items are processed through more steps than others.
Required:
Based on the findings of your consulting firm, what changes might you recommend to the company in the way of cost allocation among its products
Answer:
Recommendations might include, among others, some of the following:
- Categorize the fishing expeditions as joint costs, especially if multiple items are caught.
- Categorize all processing activities where multiple items are processed as joint costs.
- For those processes that are unique to only one product or a set of products, use separable cost categories.
- Choose something other than weight for allocating joint costs. Select one of the value methods of assigning the costs.
- Carefully separate main products from byproducts in the costing system.
- Do not allocate the joint costs for internal decisions.
