Chapter 22
Managerial Accounting
Process Further
Decisions
Prepared by Diane Tanner
University of North Florida
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Further Processing Decisions
 A company must often decide if it should sell a
product ‘as is’ or process it further. May involve
 Units of inventory that are obsolete
 Units of inventory that are partially complete
 Decision should be based on profitability
 The goal is to maximize profit
The decision: Should the product be sold ‘as
is’ or processed further?
Process Further Amounts
Incremental Revenue
• The additional revenues
generated from
processing the product
further (enhancing its
sales value)
Incremental Costs
• The additional costs
incurred to process the
product further
Not relevant
 Most fixed costs
 Any costs incurred up to the split-off point—the point at
which the decision is being made
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How to Make Process Further Decisions
If incremental revenues < incremental costs
Sell as-is, unless qualitative
characteristics impact the decision
If incremental revenues > incremental costs
Process further, unless qualitative
characteristics impact the decision
If incremental revenues = incremental costs
Use qualitative characteristics to assess
Process Further Example
A company manufactures two models of door locks using the same
production process. The costs incurred up to the split-off point are
allocated $100,000 to each model. Additional data follows:
Product
X
Z
Number of
Selling Price at Selling Price after Additional
Units Produced
Split-off
Processing
Processing Costs
5,000
$10.00
$15.00
$14,000
4,000
19.40
21.60
12,000
Prepare an incremental analysis for product X.
Incremental revenue (5,000 x ($15 - $10))
Incremental costs
Incremental increase in profit if processed further
Process further because profit is
expected to increase by $11,000.
$25,000
(14,000)
$11,000
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The End
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