When deciding whether to sell a product as-is or process it further, a manufacturer should consider only relevant costs—those that will change based on the decision.
Why Option A (Incremental processing costs, incremental revenue, and variable manufacturing expenses) is Correct:
Incremental processing costs: These are additional costs required to process the material further, making them directly relevant.
Incremental revenue: The additional revenue that would be generated if the product is processed further is a key factor in decision-making.
Variable manufacturing expenses: These costs change with production levels, making them important in the decision-making process.
Why Other Options Are Incorrect:
Option B (Joint costs, incremental processing costs, and variable manufacturing expenses):
Incorrect because joint costs (costs incurred before the split-off point) are sunk costs and are not relevant in the decision.
Option C (Incremental revenue, joint costs, and incremental processing costs):
Incorrect because, again, joint costs are not relevant to the decision.
Option D (Variable manufacturing expenses, incremental revenue, and joint costs):
Incorrect because joint costs should be ignored in a sell-or-process-further decision.
IIA GTAG – "Auditing Cost Accounting Decisions": Discusses relevant costs in decision-making.
IFRS & GAAP Cost Accounting Standards: Explain cost classification and decision-making.
COSO Internal Control – Integrated Framework: Recommends proper cost allocation methods for financial decisions.
IIA References:
