A business which enters into a contract to purchase a product (or products)and will compensate the manufacturer under a cost reimbursement formula, should take an active part in the determination of how joint costs are allocated because:
A)the manufacturer will attempt to allocate as large a portion of its costs to these products
B)if the manufacturer successfully allocates a large portion of its costs to these products then it will be able to sell its other nonreimbursed products at lower prices
C)the FASB requires the business to participate in the cost allocation process
D)Both A and B are correct.

Question

Quizplus · Accepted Answer

The manufacturer will naturally want to allocate as much of its costs to the products being reimbursed in order to maximize profits. If successful, it may be able to sell other products at lower prices, which would put the contracting business at a disadvantage. Therefore, the business should take an active part in the cost allocation process to ensure fair and accurate allocation of joint costs.

A Business Which Enters into a Contract to Purchase a Product