Question

In making decisions about whether to sell or further process joint products or by-products, allocation of common or joint costs is:

-The only way to get the true total product cost.
-Essential.
-Useful.
-Irrelevant and should be ignored.
-Useful depending on the method chosen

Answer 1

Aligning with productive efficiency, firms should prioritize incremental analysis, focusing on marginal costs and benefits over sunk costs, which are irrelevant for future business decisions.

Step-by-step explanation:

In making decisions about whether to sell or further process joint products or by-products, the allocation of common or joint costs is often considered irrelevant and should be ignored. When deciding on whether to continue processing a product, incremental analysis is more applicable. This analysis considers the additional revenues and additional costs of further processing but disregards any allocated joint costs because they are sunk costs and cannot be recovered.

Such cost/benefit analysis weighs marginal costs against marginal benefits. In the context of business choices and productive efficiency, it is more informative for firms to look at variable costs that can be altered in the present, representing potential cost savings or increases based on production decisions.