By Products and Joint Products:
After studying this chapter you should be able to:
Many industrial concerns are confronted with the difficult and often rather complicated problem of assigning costs to their by-products and joint products. Chemical companies, coke manufacturers, refineries, flour mills, coal mines, lumber mills, gas companies, dairies, canners, meat packers, and many others produce in their manufacturing or conversion processes a multitude of products to which some cost must be assigned. Assignment of costs of these various products enhances equitable inventory costing for income determination and financial statement purposes. An even more important aspect of by product and joint product costing is that it furnishes management with data for use in planning maximum profit potentials and evaluating actual profit performance.
Methods of Costing By-Products:
The accepted methods for costing by-products fall into two categories:
A joint production cost is not allocated to the by product. Any revenue resulting from sales of the by product is credited either to income or to cost of the main product. In some cases, costs subsequent to split-off point may be offset against the by-product revenue. For inventory costing, any independent value may be assigned to the by product. The methods most commonly used in industry are:
Some portion of the joint production cost is allocated to the by product. Inventory costs are based on this allocated cost plus any subsequent processing cost. In this category, the following method is used:
Methods of Allocating the Joint Production Cost:
The allocation of joint product cost incurred up to the split-off point can be made by:
- The market or sales value method, based on the relative market values of the individual products.
- The quantitative or physical unit method, based on some physical measurement unit such as weight, linear measure, or volume.
- The average unit cost method.
- The weighted average method, based on a predetermined standard or index of production.
Joint Product Cost Analysis For Managerial Decisions and Profitability Analysis