JOINT-PRODUCT & BY-PRODUCT COSTING

JOINT-PRODUCT
 When a group of individual products is simultaneously produced and each
product has a significant sales value.
 Joint-products are products manufactured simultaneously from the same
material.
 None of the product can be treated as main product.

 Example:

Industry Raw Material Joint Product

Dairy product Milk Cream, Butter, Cheese

Oil Refining Crude oil Gasoline, Kerosene

 A distinguishing feature of the production of joint-products is that the product are

not identifiable as different individual products until it reaches a specific point in
the production process, known as split-off-point.
 Thus, before the split-off-point, costs cannot be traced to particular products.

JOINT-COSTS
 The joint-products are identifiable as separate products at the split-off point.
 All costs incurred up to this point are called “joint-costs” or “common cost”.
 Costs incurred on the products after the split-off point are known as
“subsequent costs” or “additional processing costs”. This cost can be
identified to the specific products (e.g. Product X,Y & Z).

 For product costing purposes, the major problem in joint-product costing is in

apportioning the joint costs incurred up to the split-off point.
 The subsequent costs do not impose any problem because they are readily
identifiable with a specific product and can be charged accordingly.
 What is the importance of apportioning the joint costs?
a) Stock valuation
b) Setting selling price
c) Checking existing selling price to determine whether profitable to sell
product at split-off point or after further process.
APPORTIONMENT OF JOINT COSTS

Method 1: Physical measures method

 The cost allocation is a simple allocation of joint costs in proportion to volume

or physical weight.
 Each product is assumed to receive similar benefits from the joint costs, thus it is
charged with its proportionate share of the total cost.

 Example:

Total joint costs are RM150,000 to be apportioned to the 3 joint-products i.e.

Product X, Y & Z.

Joint-Product Units Produced

X 40,000
Y 20,000
Z 60,000

Calculate the CPU for each product.

Answer:

Joint- Units Joint costs allocated CPU (RM)

Product produced

X 40,000 40000/120000 x RM150,000= RM50,000 1.25

Y 20,000 20000/120000 x RM150,000= 25,000 1.25
Z 60,000 75,000 1.25
120,000 150,000

 This method assumes that the CPU is same for each of the products.
 Alternatively, CPU can be calculated by:

CPU = Total cost / Total number of units produced

= RM150,000/120,000
= RM1.25
Method 2: Sales value

 Joint costs are allocated to joint products in proportion to the estimated sales
value of production on the assumption that higher selling price indicate higher
costs.
 This method requires the calculation of the sales value of the output produced
(i.e. Quantity x Selling Price)

 Example:
Total joint costs are RM150,000 to be apportioned to the 3 joint-products i.e.
Product X, Y & Z.

 The sales value of each product:

Joint-Product Units Produced Sales Value (RM)

X 40,000 500,000
Y 20,000 200,000
Z 60,000 300,000
120,000 1,0000,000

Calculate the CPU for each product:

Answer:
Joint- Units Sales Joint costs allocated CPU
Product produced Value (RM)
(RM)

RM500000 x RM150,000 = 75,000

X 40,000 500,000 RM1000000 1.875

Y 20,000 200,000 30,000 1.50

Z 60,000 300,000 45,000 0.75
120,000 1,000,000 150,000
Method 3: Net Realizable Value Method

 In practice, normally the joint-product will be processed individually beyond the

split-off point. Thus, market value / sales value may not exist at the split-off point.
 Sales value at split-off point = Estimated sales value at point of sales – additional
processing costs.

 Example:
The following are the sales value at point of sales and additional processing
costs for each product.

Joint-Product Units Produced Sales value at Additional

point of sales processing costs
(RM) (RM)
X 40,000 150,000 40,000
Y 20,000 250,000 50,000
Z 60,000 100,000 10,000
120,000

The total joint costs are RM150,000. Calculate the CPU for each product.

Answer:
Joint- Units Sales Additional Estimated
Product produce value at processing NRV at split-
d point of costs off point
sales (RM)
X 40,000 150,000 40,000 110,000
Y 20,000 250,000 50,000 200,000
Z 60,000 100,000 10,000 90,000
120,000 400,000

Joint- Joint costs allocated (RM) CPU (RM)

Product
X RM110000 x RM150,000 = 41,250 1.03
RM400000
Y 75,000 3.75
Z 33,750 0.56
150,000
BY-PRODUCT
 Arise incidentally in the production of the main product.
Example: Meat (by-product: bones, fat). Timber trade (by-product: sawdust,
small off-cuts), Gas (by-product: coke, fat, ammonia).
 Usually subject to further processing after separation from the main product.
 It has a minor sales value
 Since the major objective of the business is to produce the main product, it can
be justifiable that joint costs (that incurred before split-off point) should NOT be
allocated to the by-product.
 Thus, before apportioning the joint costs to the joint product, the by-product
revenues (or net revenues) should be deducted from the total joint costs.
Total Joint Costs RM xxx
Less: Normal Loss (xxx)
Less: By-product revenues (xxx)

Joint costs to be apportioned to XXX

the joint products

 Sales value of the by-product:

The possible values are:

a) Market value at separation point
The final sales value of the by-product deducts its further processing costs
after split-off point.

b) Comparative value
In some situation, the by-product may be usable elsewhere in the factory.
The realistic value to put on the by-product would be its bought-in price or
the price of an alternative.

c) Standard price
In order to save time, a company may decide to value the by-product at a
standard price. The standard price could be set after the consideration of
historical record. Any difference between the actual price and the standard
price would be written off to the P&L.

d) Miscellaneous revenue
If the company considers that the value of the by-product is relatively
insignificant, it may decide that all of the previous methods are too detail.
Thus, all of the common costs will be borne by the main product and any
revenue received from the disposal of the by-product will be credited to the
P&L and merely shown as miscellaneous revenue.