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Processing a batch further produces revenue of $60,500 and causes a 4% loss of product through evaporation. What evaporation cost is charged to the processing option?
A$1,940
B$2,240
C$2,420
D$3,020
Answer & Solution
Correct answer: C. $2,420
1. The evaporation loss is measured against the revenue of the processed product.
2. Processed revenue is 5,000 pounds times $12.10, which is $60,500.
3. 4% of $60,500 gives $2,420.
4. That $2,420 is charged as a cost of the processing option only.
5. Applying the 4% to the unprocessed revenue of $48,500 would wrongly give $1,940.
6. The loss arises from the further processing, so it belongs with the processed selling value.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.5 Sell a Product or Process Further_
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