Cost Accounting: Buttermilk and Butter Production

Production Process

• ‘Buttery Butter’ produces Buttermilk, Butter, and Ghee by purchasing processed cream and churning it until it separates into Buttermilk and Butter.

January Production and Sales

• 50 Kilolitre of processed cream was purchased at ` 100 per 1000 ml in January.
• Conversion cost of ` 1,00,000 was incurred up to the split-off point, producing two saleable products: Buttermilk and Butter.
• Production and sales information for January:
  • Buttermilk: 28 Kilolitre produced, 28 Kilolitre sold, selling price ` 30 per Litre
  • Butter: 20 tonne produced, 0 tonne sold
  • Ghee: 16 Kilolitre produced, 16 Kilolitre sold, selling price ` 480 per KG

Ghee Production

• 20 tonne of Butter was further processed at an incremental cost of ` 1,20,000 to yield 16 Kilolitre of Ghee.

Inventory

• There was no opening or closing inventory of Buttermilk, Butter, or Ghee in January.

Joint Cost Apportionment

• Joint cost would be apportioned between Buttermilk and Butter under the Estimated Net Realisable Value method.

Offer from Healthy Bones

• ‘Healthy Bones’ offers to purchase 20 tonne of Butter in February at ` 360 per kg.
• If accepted, no Ghee would be produced in February.
• Suggest whether ‘Buttery Butter’ should accept the offer, affecting its operating income, or further process Butter to make Ghee itself.