What is Joint product and by-Product costing?
Concept of joint product and by-product
When two or more products are produced from the same process, these products are termed as joint products i.e. main product and by-product. Both the products are important. However, the cost of main produced is generally higher than the by product. Therefore, joint products refer to products that are produced by a single process and identifiable as individual products after some definite point. The following are some of the definitions of joint and by products. The following table presents some joint and by product produced from different industries.
Some of the definitions of joint and by products are given below:
According to character institute of management accounts (Cima), London, "two or more products separated in the course of processing, each having a sufficiently high saleable value to, each recognition as a main product,"
Therefore Lang defines as "two or more products separated in the course of processing operative, usually required further processing. Each product being in such proportion that no single product can be designed as a major product."
From the above definitions it is clear that when two or more products of equal importance are simultaneous produced from the same basis raw materials from a common process, they are known as joint products.
The following are the features of joint products:
• Joint products are produced jointly from the same process and they cannot be produced separately.
• Joint products are produced using identical raw materials and common direct labour.
• These products pass through the same process up to the separate point.
• After the splitting off the joint products, they required further processing.
• All the joint product are of equal economic importance and none of them can be considered as major product.
The relationship and differences between joint product, main product and by product are given below:
a. Value: the goods having higher value is called the main product and the goods having lower value is called the by product, if they are produced from the same process and materials. If the values of both the products are almost same, they are called joint products.
b. Manufacturing objective: the product that is laid the first priority during the production process is main product. On the other hand, by product gets second propriety. If two or more than two products get first proportions, they are called joint product.
c. Production: the joint products are produced continually whereas by products may raw not be produced continuously.
Some of importance terms used in the concepts continuously whereas by products may not be produced continuously.
The extra point in a manufacturing process where two or more products can be distinguished is denoting as the split-off-point. This split-off-point can be either at be stage when the manufacturing process is complete, i.e. when the raw materials have been converted into finished goods or alternatively at some intermediate point in the manufacturing process.
Generally, the products are not identifiable as different individual products until a certain stage or production known as splits-of-point.
Joint cost
All the cost incurred before the split off point is known as joint costs.
Further processing or sub-sequence cost
After the split off point joint products required additional processing cost of every production that is known as further processing cost.
Accounting for joint product
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 subsequence costs begin. If joints costs are not properties and reasonably distributed to different joint products, the cost of the joint products will not be reasonable and their will not show the real valuation of inventory, pricing of product and profit or loss on sale of different products.
Apportionment of joint cost
Following methods are commonly used for apportionment of joint costs that takes place up to the point of separation.
• Average unit cost method
• Physical unit method
• Survey method
• Contributions margin ration method
• Market value method
These methods are discussed below in detail.
Average unit cost method
Under this method averages unit cost is ascertained by divided joint cost by units of joint products. After ascertaining the average units cost. The joint cost of each product is calculated by multiplying thee average units cost and the respective units of the products. This method can be applied where processes are common and in separate for the joint products and where the resultant products can be experienced is same common unit.
Average unit cost = total joint cost/ total output units
Physical unit method
Under this method, joint costs are allocated to joint products on the basis of the relative weight, volume ot other physical measure. This method is not suitable where one product is gas and another product is liquid. This method pre-supposes that each joint product to equally valuable which will be rarely possible in practical loss is borne by the joint products in the ration of their output weight.
Survey method
In this method, joint products are ranked according to their importance. All the major factor such as volume, selling price, technical side, marketing process etc. which affect the cost are ascertained by means of extensive survey. Point value or percentages are given to each product according to their importance. Joint costs are apportioned on the basis of total points. Generally, these points or rations are reversed from time to time depending upon the factors affecting production and sales.
Contribution margin ratio method
In this method, variable cost of the joint cost is apportioned on the basis of quality of each product and fixed cost of the joint cost is apportioned on the basis of contribution margin. Contribution margin Is the different of total sales and total variable cost. This method will be appropriate for the decision making on maximization of profit by re-arrangement of products and sales mix.
Market value method
This method is also known as sales value method and it is the most popular and convenient method. Under this method the joint costs are apportioned to the joint products on the basis of selling price. This method has following two assumptions. (i) All joint products were uniform profit margin (ii) since joint costs are allocated on the basis of selling price if selling price of joint products change, the joint costs should be allocated to the joint products. Sales or market value of each product may mean any of the following:
a. Market value at separation point
In this method, two methods are applied to allocate the joint cost to each product.
h. Sales price basis: under this method, the joint costs are apportioned to the joint products in the ration of selling price per unit of each product.
i. Sales value method: in this, joint costs are apportioned to the products in the ration of total sale value. Total sales value is ascertained by multiplying the sales units of each product with relative selling price.
b. Market value after further processing
Under this method first of all, total sales value of each product after further processing is ascertained and further processing cost is deducted from the total sales value of each product in order to calculate the ratio in which the joint costs are to be apportioned.
c. Net releasable value or reverse cost method
In this method, estimated net profit, selling and distribution expenses and further processing cost are deducted from total sales value of main products and net amount will be ascertained. Total joint costs are apportioned on the basis of ratio of net amount. This method is used; most of the industries such as oil refineries lumber mills etc.
Accounting for by-products
Concept of by-product
In the manufacturing concern, the product what is produced against the objective of the company is called main product and the products that are produced with the main products simultaneously are called by products. For example, in oil refinery crude oil is processed but by-products i.e. sculptures, bitumen, chemical fertilized are obtained with the main product-refined oil. In coke ovens, gas and tar are incidentally produced in addition to the main product coke. Gas and tar are, therefore considered as by-products. By-products may or may not be salable and produced incidentally along with the main products. They have less commercial value and produced in fewer quantities as well. Some of the definitions of by product are given below.
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 further 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 above:
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.
Different between joint products and by-products
Main points of different between joint products and by-products are as under:
Accounting of By-products
There are two types of accounting of by-products, which are given below:
a. Non-cost or sales method
Under this method, the costs of by-products are not considered, rather it is assumed as income. The different ways of maintaining the records of by product are given below.
1. Treating as miscellaneous incomes: in this method the sales value of by-product is considered as negligible and that is show in credit of profit and loss account considering as other incomes or miscellaneous income. By-products, which are not sold, they will not appear in balance sheet as stock, therefore vitiate the valuation of closing stock. 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.
2. Adding with sales of main product: in this method, the total cost of main product and by-products are deducted from total sales of main product and by-product. 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. In this method too, the value of by-product will not appear in the balance sheet.
3. Deducting from the total cost: in this method the sales values of by-product are deducted either form cost of production or from total cost of sales. If the sales value of by-product fluctuates, it affects the cost of main product and may encourage concealing the inefficiencies therein. In this method stock are values either on the basis of total cost or cost of production.
4. Adjusting with selling and distribution costs: in this method, the selling and distribution cost of by-products are deducted from the sales value of by-products and the remaining amount is either credited to process account or deducted from total cost.
5. Adjusting with selling and distribution cost incurred after split off points: under this method, further processing cost required for the by-products and selling and distribution cost are deducted form the total sales value of by-products and the remaining value is credited to the process account. Closing stock is valued at selling price and processing the stock of such by-products. This method will not be appearing ate if sales value of the by-products varies. 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.
6. Reverse cost method: 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.
b. Cost method
There are three methods under this. They are mentioned below
a. Opportunity or replacement cost method: this method is used where by-products are utilized in the same undertaking as materials for some other process. 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. 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 the market, they would be Rs.3 each.
b. Standard cost method: 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. 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.
c. Apportionment on suitable basis: if the total value of by-products is considerable, their actual cost should be as retained by apportioning the joint cost up to the point of physical separate. The apportionment of joint cost is a complicated affair and involves the use of iterate calculating. The method is followed where by-products are process (i) to dispose of waste material more profitable or (ii) to noontide the idle plant. In the first in-case, the case, the by-product after reparation is charged with overhead at full rate whereas in the second case it will included variable cost only.
1. Give the meaning of joint product, main product and by-product.
Where two or more than two products are produced form the same raw materials and process, the product are called joint product. Therefore, joint products referrer to products that are produced by a single process and identifiable as individual products after some definite point the value of such products might after some definite point the value of such products the main product whereas the product having lesser value is called the by product.
2. Difference between main product and by-product.
The different between main product and by product are given below.
a. Value: the product having higher value is called the main product and the product lower is called the by product.
b. Manufacturing objective: main product is laid the first priority during the production process by-product gets second priority during the production process.
c. Production: The main products are produced continuously whereas by-products may not be produced continuously.
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