Joint Products: Definition and Accounting

This method is useful where all the products produced are uniform with each other in all the respects. This method will not be useful if the production units are not similar with each other. To record conversion costs in the production process during July; examples include energy, manufacturing supplies, all manufacturing labor, and plant depreciation. A joint product is manufactured consciously and simultaneously along with the main product, whereas the by-product is simply an incidental result of the manufacturing of the main product. Overhead allocation is important because overhead directly impacts your small business’s balance sheet and income statement.

When a particular type of product is produced in different varieties, they are called ‘co-products’. For example Furniture manufacturing company manufactures tables, chairs, cots, interior decorating furniture etc. Automobile manufacturing company manufactures heavy commer­cial vehicles, light commercial vehicles, buses, utility vehicles etc. The direct method makes no cost allocations between or among service departments. Each cost calculation is followed by a cost update process in SAP. The update process assures that the latest cost gets updated in the respective material masters.

ACCOUNTING TREATMENT

That means, Joint Products are obtained in some fixed proportion and this proportion is normally an uncontrollable one from the point of view of management. This feature distinguishes the Joint Products from the Co- products. Emergence of multiple products is common in the case of industries such as agricultural joint products are outputs from common inputs and a common production process. products, extractive, chemical and dairy products. For instance, let’s consider a poultry plant. The plant takes live chickens and turns them into chicken parts used for food. The chickens yield chicken breasts, drumsticks, livers, gizzards, and other parts of the chicken that are used for human consumption.

Rice and sugarcane, which are co-products, produced on different portions of the same land, and by different processes of cultivation, may be altered with regard to quantities produced. In the context of joint products, it is necessary to distinguish between joint products and co-products. Ordinarily, both are considered to be the same. The terms ‘joint products’ and ‘co-products’ have also become interchangeable.

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A similar conflict can also arise with respect to production of joint products. Suppose Farmers’ Dairy has the option of selling raw milk at a profit of $20,000. The manager of the liquid-skim line will prefer, from his or her performance – evaluation standpoint, to not produce liquid skim but rather to sell the raw milk. Because the physical-measure method allocates joint costs on the basis of the number of gallons, cost per gallon is the same for both products.

Processing of crude oil to obtain gasoline, diesel, asphalt, jet fuel and lubricants etc.

Why are joint cost allocated to individual products or services?

Summarize the result of outsourcing production using the format presented in Figure 7.3 “Summary of Differential Analysis for Best Boards, Inc.”. Assume making the rims internally is Alternative 1, and buying the rims from an outside manufacturer is Alternative 2. $\bullet$ The third chip is currently incorporated into a solid-state device under the AT name. Galaxy Electronics has approached Arnold with an offer to purchase this chip at the splitoff point for $\$ 2.40$ per unit. Assume no beginning or ending inventories.

That means, the By­product may be sold for some price to outsiders in the market. Of course, the Co-products also use, to a greater extent, the same input factors.

Difference between Joint Products and By Products

In the case of dairying, milk, butter, cream, cheese, etc., are together produced. Production of coal gas results in the emergence of products such as coke, tar, benzol, sulphate of ammonia, etc.

It gives average cost per unit of all joint products. The result obtained under this method is similar to the result obtained under physical unit’s method. The merits and demerits of this method are similar to that of physical unit’s method. Selling prices of some joint products are fairly stable while others fluctuate and it makes allocation of joint costs difficult. A joint product is the term used when two or more products arise simultaneously in the course of processing, each of which has a significant sales value in relation to each other. Common costs are not only common to products, but they may be common to processes, functions, responsibilities, customers, sales territories, periods of time and similar costing units.

Joint Product and By Product Costing – Definitions

Allocating common costs among other products or segments of the company can result in what appears to be a loss https://business-accounting.net/ on a product. The situation is quite different for any costs incurred from the split-off point onward.

The NRV method is typically used in preference to the sales value at splitoff method only when selling prices for one or more products at splitoff do not exist. Using this method for Example 2, Exhibit 8 – 6, Panel A, shows how joint costs are allocated to individual products to calculate cost per gallon of butter cream and condensed milk. The sales value at splitoff method allocates joint costs to joint products produced during the accounting period on the basis of the relative total sales value at the splitoff point. Using this method for Example 1, Exhibit 8 – 3, Panel A, shows how joint costs are allocated to individual products to calculate cost per gallon of cream and liquid skim for valuing ending inventory. This method uses the sales value of the entire production of the accounting period , not just the quantity sold . The reason this method does not rely solely on the quantity sold is that the joint costs were incurred on all units produced, not just the portion sold during the current period.

Prior to the split-off point, all costs incurred are sunk costs, and as such have no bearing on any future decisions – such as the price of a product. Compute unit costs per pound for products $A, B,$ and $C,$ treating all three as joint products and allocating joint costs by the NRV method. Sometimes joint products at split-off point may not have market. So it is difficult to ascertain the market value of joint products at split-off point. In such cases, the other alternative available to apportion the joint cost is using the market value of products after further processing. But this method is not logical because the expenses incurred in further processing may be in different proportions for different products. Under this method total joint cost is divided by total number of units of all joint products.

• Conversely, apportionment of the cost is needed when the cost cannot be allocated to a particular cost center.
• In a sense, joint costs are sunk costs with respect to this decision, and will not influence future processing decisions.
• Thus elimination of Grade B lumber sales would result in a decrease in overall profit of $60,000.
• There are three variants of this method.
• Therefore, if there is any change in the selling price of individual joint products, that will be a reallocation of total costs between joint products.
• The process costs an additional $\$ 100$ per batch of 2,000 pounds of boulders used.
• Assume keeping all product lines is Alternative 1, and keeping only the soda product line is Alternative 2.

The process costs an additional $\$ 100$ per batch of 2,000 pounds of boulders used. The finished Red Rock product is sold for \$15 per pound. SRC can produce 25 table covers, 75 chair covers, and 5 pounds of package filler from 100 pounds of bottles. In June, SRC had no beginning inventory. The Seattle Recycling Company purchases old water and soda bottles and recycles them to produce plastic covers for outdoor furniture.

What are the features of joint products?

These products may be classified as joint products, co-products and by-products. Co-products are distinguished from joint products. The co-products can be produced in quantities and the production of one co-product will not affect the production of other co-product. But the joint products will arise from the common process and common input and can be identified only at split-off stage and linear relation exists between them as to the quantities of production. The processing of crude oil can result in the joint products naphtha, gasoline, jet fuel, kerosene, diesel, heavy fuel oil and asphalt, as well as other petrochemical derivatives. The refinery process has variable proportions depending on the distilling temperatures and cracking intensity.