JOINT AND BY – PRODUCT COSTING

JOINT PRODUCTS

Commonly used input factors• Same materials• Same process• Output consists of multiple products

INDUSTRIES

• Agriculture• Extractive• Chemical• Dairy farming• Petroleum • Flour milling• Saw mill

• Problem is allocation of costs up to point of separation.

• Correct determination of product costs and managerial decision making

• Leads to incorrect inventory valuation• Wrong income measurements which is

disastrous for managerial analysis and control

PRODUCT A

M=>P1=>P2=>S PRODUCT B

PRODUCT C

BY PRODUCTS• Secondary product which incidentally results

from the main product• By products are secondary result of operation• Joint product usually has greater commercial

importance• Relationship between by product and main

product changes with changes in economic or industrial conditions(soap and glycerin)

• What is by product of one industry may become main product of another(coke and gas)

• Dairy farming: butter milk is by product• Manufacture of soap• Methanol is a gas ;a by product in the

manufacture of acetone

COMMON COSTSCost of facilities or services employed in the

output of two or more simultaneous produced operations ,commodities , services.

Cost of indirect material, indirect labour and indirect expenses enjoyed by different products in a factory during course of production.

JOINT COSTS ARE DIFFERENT FROM COMMON COSTS

• ACCOUNTING FOR JOINT PRODUCTS

AVERAGE UNIT METHOD• Convenient in tobacco industry, timber industry, flour milling,

glue making industry• Advantages are:1. Simple and easy to use2. All joint products have uniform costs3. Logical to use• Disadvantages:1. Cannot be used till end products are expressed in same unit2. Cannot be used to set prices in highly competitive markets3. Not all joint products are equally costly. Adequate

weightage is not given4. This method is not useful for decision making as operator

has to rely on experience and rule of thumb for determining types and grades of products to be produced.

• Example:• Total production- 25,00,000 ft• Total cost (upto split off point)- Rs.53,000• Average cost per 1,000 ft Rs.21.20Grade Qty produced(ft)

1 2,50,0002 12,50,0003 5,00,0004 5,00,000

PHYSICAL UNIT COST METHODA physical base like raw material in physical output

quantity is taken as basis for apportioning costsAdvantages:1. Easy to use and simple2. Technically soundDisadvantages:3. When output has different types of units like

liquids and solids4. Assigns same costs to low and high quality joint

products

• ExampleThe following data have been extracted from the books of

Bharat Coke Co. Ltd.Yield per tonne of coal

Coke 665Tar 57Benzol 19Sulphate of ammonia 19Gas 190Water(waste) 50The price of coal is Rs.200 per ton. Direct labour and overhead

costs to the point of split-off are Rs.300 and Rs.400 resp. per ton of coal. Calculate material, labour and overhead and total cost of each product on the basis of weight.

SURVEY METHOD• Joint products are multiplied by their weight factors prior to

allocation of joint costs to individual joint products• When it is possible to assign weight to joint products this

method maybe used• Advantages:1. Accurate allocation2. More equitable than other methods3. Effort is made to allocate costs according to the benefits of

each of the joint productDisadvantages:4. Weights are assigned arbitrarily. Maybe baseed on intuitive

judgement5. Weights used maybe inappropriate

• EXAMPLEIn a company , following pre-separation costs are

incurred:Material: Rs.20,000Wages: Rs. 10,000Production overhead: Rs.10,000 Output and weights of 3 products:Product Output WeightA 200 units 8B 1200 units 5C 800 units 3

• CONTRIBUTORY MARGIN METHODJoint costs are divided into 2 categories: fixed and variable.The variable costs are applied on the basis of

units produced or other physical quantities and fixed costs on the basis of contribution made by the various products.

• Example• A firm produces 3 grades A,B and C of pickles

at a total cost of Rs. 2,095 of which fixed costs are Rs.975. The quantity produced and sold are 50kgs, 30 kgs. and 60 kgs. and selling prices are resp. Rs. 18, Rs. 16 and Rs. 15 per kg. Apportion the joint costs.

• MARKET VALUE METHOD• Under this method joint cost are allocated on the basis of

sales value.i.e. product with higher sales bears more of the joint cost.

• Following variants of this method are more commonly used:• Market value at point of separation• Market value after further processing • Net value methodUnder this method the value of individual joint product is

reduced by the following :a. Estimated profit marginb. Estimated selling & distribution expenses, if anyc. Cost of processing after the split-off point

• X Ltd manufactures 3 products A,Band C. The actual joint costs for the period were Rs.16,000.It was estimated that the profit on each product as percentage of sales would be 30%,25% and 15% resp. Subsequent expenses were as follows:

A B C• Materials Rs. 200 Rs.150 Rs. 50• Direct wages 400 250 100• Overheads 300 250 150TOTAL 900 650 300Sales 12000 8000 5000Prepare a statement showing apportionment of joint costs

of manufacture over the different products.

ACCOUNTING FOR BY- PRODUCTS

• Sales of by-products credited to costing profit&loss account as misc. income. In this case the entire cost is debited to the main product

• Sales income credited to process account• Reverse cost method:• This process is used mostly in cottonseed processing industry.• Under this method sale value of by-product is first reduced by :• Estimated profit margin• Selling& distribution costs• Post split-off costsand cost of main product is thus reduced by this net figure

• Example:In manufacturing the main product A, a company

processes the resulting waste material into two by-products B1and B2. Using the method of working backward from sales value to an estimated cost ,prepare comparative profit & loss statement of the 3 products from the following data:

Total cost upto separation point: Rs.60,000A B1 B2

Sales(Rs.) 100,000 10,000 20,000Cost after separation(Rs.) 3,000 6,000Estimated net profit as a% to sales value 20% 30%Estimated selling expenses as % to sales value 20% 20% 20%