This information can be used to decide which products to produce and sell and determine each product’s profitability. Co-products can be produced in different quantities without affecting the production of other co-products. In short, we can say, when two or more products of equal importance are simultaneously produced, then they are known as joint products. So, the main difference between joint product and by-product lies in the fact that whether the company produced the product on purposely, or it emerged additionally, as a result of ongoing production. Joint costs are incurred at the outset, even if each product possesses some value when it emerges from the process.
For example, oil refineries use joint costing to allocate the costs of crude oil to various products such as gasoline, diesel, jet fuel, and asphalt. The joint costs are the costs that are incurred before the split-off point, which is the stage where the products become separately identifiable. Joint costing requires a basis for apportioning the joint costs among the products, such as physical units, sales value, net realizable value, or relative sales value. Cost accountants must choose an allocation method that accurately reflects the resources used and the value of the products produced. The chosen method must also be consistent with accounting principles and regulatory requirements. This allocation reflects the proportion of physical units produced for each joint product.
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Any cost incurred on a particular product after the split-off point is not included in joint cost but is regarded as further processing cost of that individual product. Mostly, a quantitative relationship exists among the production of joint products; that is, if the production of one product is increased, the production of other joint products will also increase and vice versa. However, the proportion in which the output of one product impacts the output of other products may not be the same throughout the production process. Allocating joint costs does not help management, since the resulting information is based on essentially arbitrary allocations. Consequently, the best allocation method does not have to be especially accurate, but it should be easy to calculate, and be readily defensible if it is reviewed by an auditor. Suppose the company’s object is to produce two products Product A and Product B side by side, as the initial process and input requirements of the two products are common, then these two will be called as joint products.
- In that case, the cost accountant might choose the sales value at the split-off method to allocate joint costs based on the relative sales value of each product.
- The physical units method allocates the joint costs in proportion to the physical measure of each product, such as weight, volume, or units.
- By-product costing is a method of accounting for products that are of minor value and quantity compared to the main products from a joint process.
This can be done by determining the market price of the beef bones or the value of the beef bones when sold as a by-product. joint products can’t be separated until a specific ‘split-off point’ or ‘separation point’. By Product can be understood as the subsidiary or secondary product which is incidentally produced, along with the main product, and has saleable or usable value.
Joint and By-Product Costing- Conclusion
The classic example of joint products is found in the meatpacking industry, where various cuts of meat and by-products are processed from one original carcass with one lump sum cost. Joint products are produced simultaneously by a common process or series of processes, with each product possessing more than nominal value in its produced form. Allowing manufacturers to determine the cost of each unit produced, joint and by-product costing helps them determine the most profitable products and make informed decisions. In summary, understanding joint and by-product costing is important in manufacturing for accurate costing, profitability analysis, tax compliance, financial reporting, and resource management. Co-products are such products which are produced simultaneously with the main product but not necessarily from the same raw material. One type of cost savings is the ability to share fixed costs across the product and service lines so that the total fixed costs are less than if the operations were organized separately.
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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, https://business-accounting.net/ however, has made it possible to control the production of such secondary products to some extent. Along with main products, some manufacturing processes produce one or more products having a relatively small value or no value at all. The main products are produced in larger quantities whereas by-products are produced in relatively small quantities.
Examples and applications
While producing the main product, there are instances when another product emanates which are of minor importance, as compared to the main product, are the by-product. To the point of split-off or the point where these products emerge as individual units, the cost of the products forms a homogeneous whole. (i) Joint products are of equal importance while by-products are of not equal importance as compared to that of the main products.
What is the difference between joint and by-product costing?
To complicate things further, both products, because they are produced jointly, share a common marginal cost curve. Their production could be linked in the sense that they are bi-products (referred to as complements in production) or in the sense that they can be produced by the same inputs (referred to as substitutes in production). Further, production of the joint product could be in fixed proportions or in variable proportions. In oil industry kerosene, gasoline, fuel oil, lubricants etc. are all produced from the same product, crude petroleum. There are some industries where two or more products come out of a single raw material which is equally important. As with economies of scale, the opportunities for economies of scope generally dissipate after exploiting the obvious combinations of goods and services.
What is a joint cost?
Let’s say the physical volume of the products at the split-off point is 40% gasoline, 40% diesel, and 20% lubricants. Financial management relies on cash flow forecasting to predict an organization’s cash flow. In a dynamic company environment where financial stability is crucial, cash movement prediction is essential.
If the two products have considerably different market values, the more valuable product is considered the main product, and the secondary product is known as a by-product. (ii) Joint products are produced simultaneously while by-products are produced incidentally. Let’s consider a petroleum refinery which processes crude oil to yield several products like gasoline, diesel, and lubricants. This definition emphasizes the point that the manufacturing process creates products in a definite quantitative relationship. This article offers an explanation, examples, and accounting techniques for costing such products. The cost accountant must determine the value of the by-product, in this case, the beef bones.
Failure to comply with regulatory requirements can result in fines, penalties, and legal issues. Cost accountants must allocate these joint costs to each joint product in a way that reflects the proportion of resources used in their production. On the other hand, by-product costing is used when a secondary product is produced due to the main production process. Both methods require careful attention to detail, as accurate cost allocation is essential for proper decision-making. An important characteristic of joint products is that they cannot be produced independently of each other. They are the result of a common production process up to a certain point, known as the split-off point.