By-product costing and joint product costing

Joint product costing constitutes the cost that arises from the common processing or manufacturing of products produced from a common raw material. The joint cost should not be confused with the common cost because what is a perpetual inventory system definition and advantages they are significantly different from each other. For example, the costs related to power and fuel may be allocated among products on the basis of metered usage or production volume of each individual product.

Which of these is most important for your financial advisor to have?

If there is any loss of the resources consumed by the process, the losses are called spoilage/wastage.

China Intellectual Property: Debunking Common Myths

The main products are produced in larger quantities whereas by-products are produced in relatively small quantities. Consider a business carrying out the process requiring the joint cost amounting to USD 10,000. Here, the cost is determined through the production style and methodology used, which helps to calculate the profit and loss of the entire manufacturing process. In addition, the output level determines how the production cost will be influenced. However, all such products generate simultaneously and usually need separate processing later for commercial purposes.

Market Value Method

In general, the manufacturing will convert raw materials to finished products and waste that does not have any economic value. The wastage is the minority output that is lost during the production process. The company usually ignores the wastage and excludes it from the consideration. If a company decides to allocate a higher proportion of joint costs to one product, it may need to increase its price to maintain profitability, affecting consumer demand and market dynamics. Conversely, if a byproduct becomes more profitable, a company may choose to allocate more costs to it, potentially lowering the price of the main product to consumers. The costs incurred in the production of joint products are undifferentiated until the specific split-off point.

If it’s not possible to determine the sale price of each product at the split-off point, the gross margin method may be the only option. If the secondary product has no saleable value, it’s considered spoilage, waste or scrap. Accurate cost information is necessary to make informed decisions about pricing, product mix, and resource allocation. You can change your settings at any time, including withdrawing your consent, by using the toggles on the Cookie Policy, or by clicking on the manage consent button at the bottom of the screen. We need to have a preset standard cost for each product type, and then the cost will absorb based on that rate.

Joint and By-Product Costing- Explained With Examples

• One of the main challenges in joint product pricing is accurately determining the split-off point and related costs, especially when production processes are complex.
• Another method for allocating joint costs is the sales value at the split-off method.
• In addition to tax regulations, cost accountants must also ensure compliance with accounting standards, such as the Generally Accepted Accounting Principles (GAAP) in the United States.
• Use the split-off point to work out the proportion of joint costs that each product should carry.
• For example, in refining crude oil to produce gasoline to fuel cars and trucks, the refining process will create lubricants, fertilizers, petrochemicals, and other kinds of fuels.

For example, suppose we have a company that expands from selling one product to two similar products. It will be simple but only apply to the product with similar features and price, and the output can separate in common units. The production of butter, cheese, and cream from milk is also another example of a joint product. The business does not have to consider the production of the bed to fulfill the order for the chair, as the two products are not dependent on each other. On the contrary, the production of one joint product is dependent on the production of another joint product.

In addition to tax regulations, cost accountants must also ensure compliance with accounting standards, such as the Generally Accepted Accounting Principles (GAAP) in the United States. GAAP requires companies to disclose the allocation method used for joint and by-product costs in their financial statements. Regardless of the method used, the cost accountant needs to allocate joint costs in a way that accurately reflects the proportion of resources used in the production of each joint product. This information can be used to determine each joint product’s profitability and make decisions about which products to produce and sell. Cost accountants can make informed decisions about resource allocation and production by understanding the manufacturing process and the different products produced from a common set of raw materials or resources.

To determine the cost of each joint product, the units produced of each joint product is multiplied with the average unit cost. Cost accountants must use an allocation method that accurately reflects the resources used in the production of each product and must use the same allocation method consistently over time. Accurate and consistent cost information is essential for decision-making and maintaining financial statement credibility. Once the costs have been allocated appropriately, the cost accountant can determine the profitability of each joint product and the by-product.

A joint cost is incurred before the point at which separately identifiable products emerge from the same process. The following steps help to allocate the joint cost based on the gross margins of the product. Lumber, the joint product of the wood processing industry, is facing a fall in demand in the US due to decreased housing demand, directly linked to the continuous rise in market interest rate. Since every such product is equally valuable, they have a significant sale value.

Normally, the by-products are not considered as finished goods because their production is not intended in the first place. They come into existence because their production cannot be avoided because of the nature of production process or the raw materials being used in the production process. The introduction of advanced production and engineering processes, however, has made it possible to control the production of such secondary products to some extent.

Categorised in: Bookkeeping

This post was written by SPORTSERVE ADMIN