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    Joint and by Product

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    W-304-Bautista,Precious
    Joint and by-products arise when more than one product is produced simultaneously from the same production process. Joint products are of equal importance and value, while by-products are incidental and of lower value. There are different approaches to allocating joint costs between joint products, such as using sales value at split-off point, physical units, or contribution margin. By-product costs can be accounted for through non-cost methods that treat sales as income, or cost methods that allocate costs using opportunity cost or apportionment.

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    Joint and by Product

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    W-304-Bautista,Precious
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    Joint and by-products arise when more than one product is produced simultaneously from the same production process. Joint products are of equal importance and value, while by-products are incidental and of lower value. There are different approaches to allocating joint costs between joint products, such as using sales value at split-off point, physical units, or contribution margin. By-product costs can be accounted for through non-cost methods that treat sales as income, or cost methods that allocate costs using opportunity cost or apportionment.

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    Joint and by-products arise when more than one product is produced simultaneously from the same production process. Joint products are of equal importance and value, while by-products are incidental and of lower value. There are different approaches to allocating joint costs between joint products, such as using sales value at split-off point, physical units, or contribution margin. By-product costs can be accounted for through non-cost methods that treat sales as income, or cost methods that allocate costs using opportunity cost or apportionment.

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    © All Rights Reserved
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    16 views32 pages

    Joint and by Product

    Uploaded by

    W-304-Bautista,Precious
    Joint and by-products arise when more than one product is produced simultaneously from the same production process. Joint products are of equal importance and value, while by-products are incidental and of lower value. There are different approaches to allocating joint costs between joint products, such as using sales value at split-off point, physical units, or contribution margin. By-product costs can be accounted for through non-cost methods that treat sales as income, or cost methods that allocate costs using opportunity cost or apportionment.

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    Joint and By Product

    Accounting: MODULE 4
    Joint Products
    • When two or more products are produced from the same
    basic raw materials and process, these are considered as joint
    products

    • Example: In refining crude oil, both petroleum and diesel are


    obtained.
    By Products
    By products are incidental products resulting from the processing
    of another product

    Example: In sewing clothes, the excess cloth can be made into


    and sold as rags
    Joint Products v By Products

    Joint Products By-Products


    Produced simultaneously with Incidentally produced while
    main products. producing main products.
    High sales value Low sales value
    Equal importance with main Not equal importance with main
    products. products.
    Joint Costing
    When by a process more than one product is produced, the material and conversion cost
    incurred prior to split of stage is know as joint cost.
    Separabale
    Product A
    Cost for A

    JOINT SPLIT OFF


    COSTS POINT

    Separabale
    Product B
    Cost for B

    Split-off point – is the juncture in the process when separate identifiable products emerge
    Separable cost – costs incurred beyond split off point and are assignable to separate
    products
    Joint Process
    Accounting for Joint Costs
    Accounting for joint products includes the distribution of the joint cost to each of
    the joint products. The joint cost is the total cost that is incurred before the split
    off point. After the split off point, the products are separated into two or more
    and subsequent costs begin.

    If joint costs are not properties and reasonably distributed to different joint
    products, the cost of the joint products will not be reasonable and will not show
    the real valuation of inventory, pricing of product, and profit or loss on sale of
    different products.
    Reasons to Allocate Joint Costs
    Inventory costing and COGS computations for external financial statements for
    government reporting

    Inventory costing and COGS computations for internal reporting. Such that are
    used in division profitability analysis

    Cost reimbursement under contracts when only a portion of a business’s


    product of services is sold or delivered to a customer
    Reasons to Allocate Joint Costs
    Customer Profitability Analysis where individual customers purchase varying
    combinations of joint products or by products as well as products of the company

    Insurance settlement computations when damage claims made by business with joint
    products – main or by products – are based on cost information

    Rate regulation when one or more of the jointly produced products or services are
    subject to price regulation
    Approaches to Allocation of Joint Costs
    Sales value at split off point

    Reverse Cost Method

    Net Realizable Value Method

    Physical Unit Method

    Contribution Margin Method


    Sales Value at Split off Method

    If the product would not have been further processed and sold at split off stage
    then the sales value it would have realized would from the basis for the
    apportionment of joint cost
    Reverse Cost Method

    A method of allocating joint costs on basis of estimated profit if there is no


    given value of sale at split off point.

    SALES less PROFIT less ADMINISTRATIVE AND SELLING EXPENSES


    equals to TOTAL FACTORY COST less COST OF SINGLE PRODUCT
    PRODUCED
    Net Realizable Value Method

    Allocates joint costs to joint products on basis of relative NRV of the total
    production of joint products

    NET REALIZABLE VALUE = FINAL SALES VALUE less SEPARABLE COSTS


    Physical Unit Method
    Under this method, joint costs are allocated to joint products on the basis of the
    relative weight, volume, or other physical measure. This method pre-supposes
    that each joint product to be equally valuable which will be rarely possible as
    practical loss is borne by the joint products in the ratio of their output weight.
    Constant Gross Margin Method

    Allocates joint costs to joint products in a way that the overall gross-margin
    percentage is identical for the individual products.

    Joint costs are calculated as residual amounts


    Accounting for by-products

    vIn the manufacturing concern, the product what is produced


    against the objective of the company is called main product.

    vThe products that are produced with the main products


    simultaneously are called products.
    Accounting for by-products
    v In oil refinery crude oil is processed but by-products i.e. sculptures,
    bitumen, chemical fertilized, are obtained with the main product-refined
    oil.

    v In coke ovens, gas and tar are incidentally produced in addition to the
    main product coke.

    v By products may or may not be salable and produced incidentally along


    with main products. They have less commercial value and produced in
    fewer quantities as well.
    According to CIMA

    “A product which is recovered incidentally from the material used


    In the manufacture of recognized main product, such a by-product having either a net
    realized value or a usable value which is relatively low in comparison with the saleable
    value of the main products. By product may be furthered processed to increase their
    realized value.”
    According to Theodore Lang

    “By-product refers to any saleable or usable or usable value


    incidentally produced in addition to the main product.”
    A by-product has the following
    characteristics as mentioned:
    A. By-products are produced incidentally along with main product
    during the process.

    B. By-products have insignificant sales values

    C. By-products may or may not required further processing.

    D. Sometimes by-products are products from the scrap or waste


    materials during a manufacturing process.
    Difference between
    Joint products and By-products
    Based of difference Joint products By-products

    Importance Joint products have high By-products have


    importance. comparatively low
    importance.
    Objectives Producing joint products Production of by product
    is the main objective of is not main objective of
    production. the production process.
    Input The input of all joint The input of products
    products are always raw may be wastage or scrap
    material. of two main products.
    Further processing All joint products The by-product may or
    generally need further may not require further
    processing. processing.
    Accounting of By-products
    There are two types of ACCOUNTING
    accountingFOR
    of BY
    by-products,
    PRODUCTS which are given below.

    Non-cost or sales value method Cost method

    a. Treating as miscellaneous income a. Opportunity or replacement cost


    b. Adding with sale of main product method.
    c. Deducting from the total cost b. Standard cost method
    d. Adjusting with selling and distributing c. Apportionment method.
    cost
    e. Adjusting with selling and distributing
    costs and cost incurred after split off
    point.
    f. Reverse cost method
    Non cost or sales method
    Under this method, the costs of by-products are not considered, rather it is assumed as income.

    1. Treating as miscellaneous income


    v In this method, the sales value of by product is considered negligible and that is shown
    in credit of profit and loss account considering as other incomes or miscellaneous
    income.

    v By-products, which are not sold, they will not appear in the balance sheet as stock,
    therefore vitiate the valuation of closing stock.

    v This method is inaccurate if there is a time lag between sales and production. Under
    this method, there is a possibility that by-product may arise in one period but may be
    accounted in another period and thus distort the profit of two period.
    Non cost or sales method
    Under this method, the costs of by-products are not considered, rather it is assumed as income.

    2. Adding with sales of main product


    v In this method, the total cost of main product and by-products are deducted from total
    sales of main product and by-product.

    v This method is appropriate when the value of by-product is very small or the by-
    products are sold in the market in the state in which they emerge from the main
    product.

    v In this method too, the value of by-product will not appear in the balance sheet.
    Non cost or sales method
    Under this method, the costs of by-products are not considered, rather it is assumed as income.

    3. Deducting from the total cost


    v In this method, the sales values of by-product are deducted either from cost of
    production or from total cost of sales.

    v If the sales value of by-product fluctuates, it affects the cost of main product and may
    encourage concealing the inefficiencies therein.

    v In this method, stock are values either on the basis of total cost or cost of production.
    Non cost or sales method
    Under this method, the costs of by-products are not considered, rather it is assumed as income.

    4. Adjusting with selling and distributing cost


    v In this method, the selling and distribution cost of by-products are deducted from the
    sales value of by-product and the remaining amount is either credited to process
    account or deducted total cost.
    Non cost or sales method
    Under this method, the costs of by-products are not considered, rather it is assumed as income.

    5. Adjusting with selling and distributing costs and cost incurred after split off point.

    v In this method, further processing cost required for the by-products and selling and
    distribution cost are deducted from the total sales value of by-products and the
    remaining value is credited to the process account.

    v Closing stock is valued at selling price and processing the stock of such by-products.

    v This method will not be appearing if sales value of the products varies.

    v The credits to the process account of main product will vary according owing to the fact
    that credit to the main product process account varies; inefficiencies in that process
    may be concealed.
    Non cost or sales method
    Under this method, the costs of by-products are not considered, rather it is assumed as income.

    6. Reverse cost method.


    v In this method, profit of every by-product is given. The profit further processing cost
    and selling and distribution cost are deducted from the market value of by-products and
    the remaining value is credited to the main product.
    Cost method
    1. Opportunity or replacement cost method.
    v This method is used where by-products are utilized in the same undertaking as
    materials for some other process.

    v The opportunity or replacement cost. i.e., cost which could have been incurred had the
    by products being used as materials could have been purchased from the market.

    v The process account is credited with the value of by products so ascertained.

    For example, in the production of a main product a by-product X to another obtained. In a


    certain period, 400 units of by-product X are produced, which are transferred to another
    department where they are consumed. If the by-product were purchased from another
    market, they would be Rs.3 each.
    Cost method
    2. Standard cost method
    v A standard cost may be fixed for each product by averaging the cost figure of the
    previous period and the process account credited with this standard value.

    v During the past five years, records aver been kept for the production costs of product C
    and product D which is a by-product of product C. These records show the following
    data in respect of product D.
    Cost method
    3. Apportionment on suitable basis
    v If the total value of by-products are considerable, their actual cost should be as retained
    by apportioning the join cost up to the point of physical separate.

    v The apportionment of joint cost is a complicated affair and involves the use of iterate
    calculating.

    v The method is followed where by-products are process (i) to dispose of waste material
    more profitable.
    END OF MODULE

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