2. Joint Products:
Two or more types of outputs generated simultaneously,
by a single manufacturing process using common
input, and being substantially equal in value. Joint
products are separately unidentifiable and incur
undifferentiated joint costs, until they reach the split-
off point.
Few examples of joint products:
To obtain gasoline. i.e., diesel, petrol, kerosene oil,
and lubricants from processing of crude oil
To obtain butter, cheese and cream from processing of
milk
Different grades of wood obtained from a same kind
of tree.
3. By-Product:
A by-product is a secondary/minor product derived from a
manufacturing process or chemical reaction. It is the secondary
product (i.e., small market value) produced simultaneously (all
together) during the manufacturing of main product(s). The
product of greater total sales value is called main product(s). In
the context of production, a by-product can be defined as the
'output from a joint production process that is minor in
quantity and/or net realizable value (NVR) when compared
to the main products. Because they are deemed to have no
significant influence on reported financial results, therefore, by-
products do not receive allocations of joint costs. By-products
also by convention are not inventoried, but the NRV from by-
products is typically recognized as 'other income' or as a
reduction of joint production processing costs when the by-
product is produced. A by-product can be useful and marketable
or it can be considered waste. See next page
4. Few examples of By- products :
Sawdust is a By-product of the
lumber/timber industry
Feathers are a By-product of
poultry processing
……..
5. Methods of allocating joint costs to joint
products:
The following methods are commonly used to
allocate total joint costs incurred up to the
split-off point (or separation point).
1. Physical units’ methods.
2. Weighted average method
3. Market value method.
4. Hypothetical market value method
6. 1. Physical units’ methods:
Under this method the total joint
costs are allocated to the joint
products in proportion to the
physical output of the joint
products respectively.
7. 2. Weighted average method:
Under this system total joint costs
are allocated to the joint products
in proportion to the physical
Weight the of the joint products.
i.e., physical weight = Number of
units × Weight factor
8. 3. Market value method:
Under this method the total joint
costs are allocated to the joint
products in proportion to the
market value of the joint
products. This method can only
be used, if joint products can be
sold at split off point.
9. 4. Hypothetical market value method:
Under this method joint costs are allocated to the
joint products on the basis of hypothetical sales
values i.e., sale value less any additional expenses
to be incurred before sale, because there may not be
a ready market for the product at the split-off point.
This method is particularly useful when one or more
products cannot be sold at the split-off point but
must be processed further.
►Hypothetical sales value = Market value (i.e.,
Production Units X Sales price) – Further
processing costs after split-off point
10. Accounting for By-Products
By-products can be accounted for by
using the following methods:
1. Other income
2. By-product revenue deducted
from main product cost
3. Replacement cost method
11. 1.Other income:
The net sales of by-products for the
current period is recognized as “Other
Income” or “Miscellaneous Income”
and is reported in the income statement.
The market value of by-product inventory,
if material, should be reported in a
footnote to the balance sheet.
12. 2. By-product revenue deducted from
main product cost:
The net sales of by-products will
be treated as a deduction from the
cost of the main product.
13. 3. Replacement cost method
Replacement cost method ordinarily is
applied by firms, whose by-products are used
within the plant, thereby avoiding the necessity
of purchasing materials and supplies from
outside suppliers. The production cost of the
main product is credited for such materials, and
the offsetting debit is to the department that
uses the by product. The cost assigned to the by
product is the purchase or replacement cost
existing in the market. This method is
commonly used in the steel industry.
Continued on next page
14. Few examples are:
Scrap steel when remelted is credited to
the cost of finished steel at market cost
of equivalent grades purchased.
Waste heat from furnaces used to
generate steam is credited to the steel
ingot cost at a computed value based on
the cost of coal yielding equivalent heat
units.
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