An equal split will artificially deflate or inflate profits on one product or the other. Likewise, randomly allocating expenses will produce artificial results. To handle this on the business side, there are usually pricing matrices that work backwards from the end products to establish costing for reporting purposes.
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. An example of such processes can be found in petroleum industry. The joint cost should not be confused with the common cost because they are significantly different from each other.
Consequential costs are the indirect overhead costs that arise from a joint production activity in which a variety of products result from one process. For example, in the case of assembly line manufacturing, many machines and work stations are used to complete multiple products produced on a single assembly line. Joint product costing constitutes the cost that arises from the common processing or manufacturing of products produced from a common raw material.
Definition and explanation of joint cost
Generally, a same raw material is used to manufacture two or more products from the single process. Therefore, an increase in the output of one product will bring an increase in the output of other products from the same process or vice versa but not in direct proportion. 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 short, we can say, when two or more products of equal importance are simultaneously produced, then they are known as joint products. The total production cost of multiple products involves both the joint cost and individual product costs. 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.
Correct collection, compilation and classification of process costs. On the other hand, the by-product is nothing but the subsidiary product which emerges out, in the course of manufacturing of the main product. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year.
Split-off point and cost allocation
Where joint supply exists, the supply and demand for each product is linked to the others originating from the same source. For example, if demand increases for wool and sheep farmers, therefore, raise more animals for wool, there will be a related increase in sheep meat production. This increased production will lead to greater meat supply and potentially lower prices. Sometimes, the joint products may require further processing. The main objective of manufacturing operation is to produce joint products.
- Joint products refer to two or more products that are created together.
- Sometimes, the output of a process may get its value after further processing.
- After this split-off point, costs are allocated to individual products.
- Joint production activities are those that involve processing different products together with costly processes, rather than using independent methods to process each product.
A true joint cost is always indivisible whereas a common cost is divisible. In case of common cost, the products or services can be obtained separately and any shared or common cost incurred to obtain the products and services can be allocated among them on the basis of relative usage of shared facilities. 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.
Joint Supply: Definition, Examples in Economics, Vs. Joint Demand
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. This definition emphasizes the point that the manufacturing process creates products in a definite quantitative relationship. Joint products refer to two or more products that are created together. This article offers an explanation, examples, and accounting techniques for costing such products.
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- (i) Joint products are of equal importance while by-products are of not equal importance as compared to that of the main products.
- In this context, joint products and by-products are often studied.
- In a manufacturing process, a raw material may be converted into finished product.
- This article offers an explanation, examples, and accounting techniques for costing such products.
Co-products can be produced in different quantities without affecting the production of other co-products. Co-products are a type of product produced in different varieties. Co-products may require a different type of raw material and may be processed in different ways, but they’ll use the same facilities. Rather, joint demand happens when demand for two goods is interdependent. Similarly, ink cartridges are of no use without a printer. Another example could be razors and razor blades, or gasoline and motor oil.
Do joint products have to be similar?
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. 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. (ii) Joint products are produced simultaneously while by-products are produced incidentally. The joint product cost results from the creation of two or more different products from a single cost factor.
Examples of by-products
In some cases, the proportions of the joint products are nearly fixed, such as with cotton and cottonseed. For example, through cross-breeding, it is possible to breed sheep either for wool or for meat. So the quantity of one can be increased at the expense of the other to a degree. Analysts keep a close eye on products in joint supply because investments in one can be significantly impacted by what happens with the other.
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. Joint products are two or more products that are generated within a single production process. They can’t be produced separately and will incur undifferentiated joint costs. The costs incurred in the production of joint products are undifferentiated until the specific split-off point. After this split-off point, costs are allocated to individual products.
