UNIT 3

JOINT AND BY-PRODUCT

JOINT PRODUCTS
When two or more products are simultaneously produced from common set of inputs
by a single process which are distinguishable from each other up to the point of separation are
called joint products.
Joint products represent two or more products separated in the course of same processing
operations.

Definition:
CIMA defines joint product as “two products separated in processing each having a
sufficient high value to merit the recognition as a main product”.
Example:
a) In oil refining process the products formed like petrol, diesel, LPG, kerosene etc are
indicated as joint products.
b) Coke, tar, benzyl so on formed from coal gas are termed as joint products.

BY-PRODUCTS
A by-product is a secondary product, which incidentally results from the
manufacture of main product. A by-product has a relatively small sales value as compared to the
main products.

Definition:
CIMA defines by-products as, “output of some value produced incidentally in
manufacturing something else”. The feature of by-product is its relatively low sales value in
comparison to the main product.
Example:
a) During the process of sugar manufacturing, the molasses so obtained is identified as by-
product.
b) Saw dust, small off-cuts, barks etc obtained during the process of manufacturing timber is
termed as by-products of timber.
CO-PRODUCT
When a particular type of products is produced in different varieties, they are called
as co-products.
Example:
a) Furniture manufacturing company manufactures tables, chairs, cots, almirah etc.
b) Automobile manufacturing company manufactures heavy vehicle, light vehicles, buses
etc.

Distinction between joint products and by-products

Points Joint products By-products
Meaning Two or more products A by-product is a secondary
separated in processing each product, which incidentally
having a sufficiently high results from the manufacture
sales value to merit of main product and also
recognition as a main from the same process.
product.
Economic importance Joint products are the product By-products are of lesser
of equal economic economic importance
importance
Production Joint products are produced By-products are produced
from same input and process from wastage, scrap or
discarded material of the
amin process.
Incidental production Joint products are not By-products emerge
produced incidentally incidentally also.
Impact on total cost Joint products have By products have little impact
significant impact on the total on the total cost.
cost at the price of separation

Distinguish between scrap and by-product

Scrap is the incidental residue from the material used in manufacturing operation, which is
recoverable and measurable without further processing.
The recoverable value of by-product is relatively more than that of scrap. By-products may be
subjected to further processing and market strategy before sale, whereas scrap is sold without
further processing.
Method of accounting for joint products
1) Physical Unit Method:
A physical base like raw materials weights or volume of products like kg, tonnes,
litres, gallons etc. is taken as basis for apportioning the joint cost to products under this
method.
The joint cost is borne by the joint product in the ratio of their output weight.
2) Market Value Method:
In this method joint cost will be apportioned to the product in the ratio of
selling price of respective individual products.
a) Market value at separation point:
The market value of individual joint product at the point of separation i.e. at
the split off point, is ascertained and the joint cost will be apportioned in the ratio of
market value ascertained as above.
b) Market value at finished stage:
In this method, the common cost and joint cost are apportioned to the joint
cost in the ratio of final selling price of individual products and the cost incurred for
further processing will be added to the respective joint products for determination of
product cost.
c) Net realizable value method:
The joint cost is distributed in NRV ratio which is calculated as follows:

Particulars A B C Total

Sales value after further processing

XXX XXX XXX XXX
Less: estimated profit
Less: selling expenses (XXX) (XXX) (XXX) (XXX)
Less: further processing cost (XXX) (XXX) (XXX) (XXX)
(XXX) (XXX) (XXX) (XXX)
Net realizable value (NRV)
XXX XXX XXX XXX

3) Average Unit Cost Method:

Under this method total joint cost up to the point of separation are divided
by the total units produced to get average cost per unit of production.
4) Survey Cost Method:
Under this method, technical survey of the production process and the
costs involved is made and joint values will be assigned to the products according to their
relative importance and the joint products are multiplied by their assigned points to arrive
 at the weight for allocation of joint costs to individual joint products. This method is
more scientific as compared to other methods.
5) Standard cost method:
Where the standard costing system is in vogue, the joint cost of the
product will be apportioned on the basis of standard cost set for the respective joint
product.
6) Constant gross margin percentage method:
Under this method the joint costs are allocated in the following manner:
gross margin
Gross margin % = sales value after further processing X 100

7) Direct allocation method:

This method is applied where joint costs are identifiable or capable of being
technically estimated to be allocable to each of the joint products.

Various methods of accounting for by-products

The methods of accounting for the by-products are as follows:
COST METHODS:
a) Opportunity/replace cost method:
This method is used when by-products are consumed in the same
factory as raw material in place of existing material in use. The cost of material
replaced is considered as replacement or opportunity cost of the by-product and is
credited to the cost of production of the main product.
b) Standard cost method:
The by-products are valued at a pre-determined standard rate for
each product, which may be based on technical assessment. Standard cost of by-
product is credited to the process amount of the main product.
c) Joint cost production method:
Where the by-products are having considerable commercial value
then the by-product will be treated as equal footing with the main product both for
valuation and accounting of cost. The joint cost may be divided over the joint
products and the by-products by using physical unit method or ultimate selling
price.

NON-COST METHODS / SALES VALUE METHOD

a) Miscellaneous or other income method:
When the market value of by-product is very small or
negligible as compared to the main product, the sale value of by-product is
shown as other income or miscellaneous receipt in the profit and loss
account.
b) Credit of the by-product net sale value to process account:
In this method, the sale value of the by-product will be
credited to process account after deducting direct selling distribution cost and
other process costs incurred after the point of separation and any special cost
incurred on account of by-products.
c) By-product sales dedusted from total costs:
In this method, the sale value of by-product is deducted
from total cost. It may be deducted either from cost of production or cost of
sales.
d) Credit of by-product value less administration, selling and
distribution costs:
In this method, the sales value of the by-product, reduced
by its portion administration, selling and distribution expenses incurred for
its disposal, is credited to process account.
e) By-product sale added to the main product sales:
In this method all costs incurred to the main and the by-
product are deducted from the combined sales of the main product.
f) Reserve cost method:
In this method the estimated profit from the sale of by-
product, selling and distribution expenses and further processing costs after
the split off point are deducted from the sale value of the by-product and the
net amount is credited to the main product