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BBA cost Accounting Study Material to Joint Products and By Products Short Notes

Average Unit Cost Method

Under this method total joint costs up-to the point of separation are divided by the total units produced to get average cost per unit of production. This method is advocated where processes are common and inseparable for the joint products and where the resultant products can be expressed in terms of common unit.

Survey Method

Under this method, technical survey of the production process and the costs involved is made and point values will be assigned to the products according to their relative importance and joint products are multiplied by their assigned points to arrive at the weights for allocation of joint costs to individual products. This method is more scientific as compared to other methods.

Standard Cost Method

Where the standard costing system is in vogue, the joint costs of the product will be apportioned on the basis of standard costs set for the respective joint products. This method is supported for the following reasons:

• It is a convenient method for determining the maximum price that can be paid for raw materials in the manufacture of joint products.
• It provides basis for measuring efficiency of the process in producing joint products.
• It provides for comparison of actual material and conversion costs are with standards set, which provides basis for fixing up purchase prices.

Standard Cost Method

This method is applied where joint costs are identifiable or capable of being technically estimated to be allocable to each of the joint products.

By – Products

CIMA defines by – product as “output of some value produced incidentally in manufacturing something else (main Product)”.

A by – product is a secondary product which incidentally results from the manufacture of main product and also from the same process. A by – product is a product which arises incidentally in the production of the main products and which has a relatively small sales value compared with the main products. The; distinguishing features of by – product is its relatively low sales value in comparison to the main product. Like joint products, a by – product may need further processing after the point of separation before it is sale-able.

The example of process industries and their by – products are given below.

Scrap and By – Product

The distinction between scrap and by – product is a matter of degree determined in terms of value as well as manufacturing objective. Scrap is the incidental residue from the materials used in manufacturing operations which is recoverable and measurable without further processing. The recoverable value of a by –product is relatively more than that of scrap. By – product may be subject to further processing and market strategy before sale, whereas scrap is sold without further treatment.

Waste

Waste is term used to describe material that has no value or even negative value if it has to be disposed off at some cost. Examples include gases, saw – dust, smoke and other unsalable residues from the manufacturing process. Waste presents no accounting problems because it has no sales value, and therefore it is not included in the valuation stock.

Accounting for By – Products

The methods of accounting for by – products are categorised into two:

1. Cost methods and
2. Non – cost or sales value methods.

1. COST METHODS

Opportunity or replacement cost method.  This method is used when by – products are consumed in the same factory as raw material in place of existing material is in use. The cost of material replaced is considered as replacement or opportunity cost of the by – product and is credited to cost of production of main products. The opportunity cost or replacement cost which otherwise would have been incurred if the by – products were to be purchased from outside suppliers, then such product will be valued at market value of like material.

Standard Cost Method. The by – products are valued at a predetermined standard rate for each product which may be based on technical assessment. Standard cost of by – product is credited to the process account due to operational difficulties in computation of value of by – product.

Joint Cost Pr-oration Method. Where the by – products are having considerable commercial value or importance or where adoption of normal methods for by – product accounting may not be fair or reasonable to the main product or to the by – product, then the by –products will be treated as equal footing with the main products both for valuation and accounting of costs. The joint costs may be divided over joint products and by – products by using physical unit method (at the split – off point) or ultimate selling price (if sold).

2. NON – COST OR SALES VALUE METHOD

Miscellaneous or Other Income Method – when the market value of by – product is very small or negligible as compared to the main products, the sale value of by – product is shown as other income or miscellaneous receipt in the profit and loss account. This method of valuation is criticised for the following reasons:

• Valuation of stock of main products is inflated and no value is assigned to the by – product inventories.
• All cost and expenses charged to the main products is not scientific.
• No attempt is made to control the inventory of by – products and losses due to frauds are possible.
• By – products will be accounted only at the time of sale but not at the time of production. If sale of by – product is not effected within the period it is produced, profits vary between one period and other. This accounting treatment is highly objectionable.

Credit of By – Product Net Sale Value to Process Account. In this method, the sale value of the by – products will be credited to process account after deducting direct selling and distribution costs and other process costs incurred after point of separation and any special costs incurred on account of by – products. The main drawback in this method is any change in market value of by – product will show deviation from standards set or previous costs incurred.

By –product Sales deducted from Total Cost. In this method the sale value of by – product is deducted from the total cost. It may be deducted either from cost of production or cost of sales.

Credit of by – product Value less Administration, Selling and Distribution Costs. In this method, the sales value of the by – product, reduced by its portion administration, selling and distribution expenses incurred for its disposal, is credited to process account.

By – product Sales added to the Main Product Sales. In this method, all costs incurred on main and by – product are deducted from the combined sales of the main product.

Reverse Cost Method. In this method, the estimated profit from the sales of by – product, selling and distribution expenses and further processing costs after the split – off point are deducted from sales value of by – products and the net amount is credited to the main product.

Selection of Appropriated Method

• When the by – products are of small total value, miscellaneous or other income method or by – product sales deducted from process cost of main products method are appropriate.
• When the by – product are of considerable total value, then joint cost proration method is suitable.
• When the by – products require further processing, then if the net realisable value of by – product at the split – off point may be arrived at by subtracting the further processing costs from the realisable value of by – products. If the total sales value of by – products at split – off point is small, it may be treated as per the methods mentioned in point (a) above.  If the amount realised from the sale of by – products is considerable, it may be treated as mentioned in point (b) above.

Joint Products and By – Products: Distinction

The determination of the two or more products arising from common process, one or more as major products and other product(s) as by – product(s) depend on relative commercial objective. The jointly produced products are termed as joint products. As by – products are merely incidental to the production of main products. After the point of separation both joint products and by – products may need further processing before they are sale able. The point of distinction of joint products and by – products is a question of commercial importance, business objectives, profit pattern, certainty of market, necessity of further process etc.

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