The important features distinguishing joint products and by – products are:
- Joint products are the products of equal economic importance, while by – products are of lesser economic importance.
- Joint products are produced from same input and process whereas by – products are produced from wastage, scrap or discarded material of the main process.
- Joint products are not produced incidentally but by – product emerge incidentally also.
- Joint products have significant impact on total cost at the point of separation, whereas by – products have little impact on total cost.
The distinction of joint products and by – products is important, because the relative significance will have impact on the method of accounting followed.
Bba cost Accounting Study Material to Joint Products and By Products Short Notes of Objectives For Allocation of Joint Costs
Objectives for Allocation of Joint Costs
Joint costs create the following problems in Accounting:
- If joint costs are shared between more than one product. On what basis should they be shared out (apportioned)? And why do they have to be shared out?
- How should joint costs be kept under control?
- How should management accountants handle joint cost when they present information for decision making? For example information about break – even point or for deciding whether to produce extra units of a product?
The main objectives for allocation of joint costs are given below:
- In a system of absorption costing, production cost must be charged to product costs. When more than one product share some common production costs, a basis for sharing out these costs must be devised.
- Another reason for sharing out joint costs is so that management can judge the profitability of a product. This is something that a ‘pure’ marginal costing system cannot properly do.
- For cost control and decision making.
- For valuation cost stock of finished goods and work – in – progress.
- To meet cost audit regulations.
- For correct determination of costs and cost justification in case of price control. To fix selling prices.
- For determining the impact of change of product mix and output variations.
- For bidding cost plus contracts.
Sharing out joint costs, therefore, has both advantages and disadvantages for profit measurement.
- The advantages are in providing more information to assess the profitability of individual products.
- The disadvantages are that individual product profitability will vary according to the basis chosen for apportioning the joint costs.
Bba cost Accounting Study Material to Joint Products and By Products Short Notes
- When two or more products arise simultaneously is the course of processing and each has a significant sales value in relation to each other they are called ‘joint products’.
- When a particular type of product is manufactured in different varieties and grades, they are called ‘co – products’.
- When a product which arises incidentally in the production of the main products and has a relatively small sale value in comparison to the main product is called ‘by – product’
- Scrap is an incidental residue from the materials used in the manufacturing operations which is recoverable and measurable without further processing.
- Waste is a residue arising from the process which can be disposed off at a very low value and sometimes the concern may have to incur costs of disposing.
- The point at which the joint products are identifiable separation, called ‘separation point’ or ‘split – off point’.
- The cost incurred in common process, before separation point, called ‘joint costs’.
- The costs that are incurred after separation point and traceable to individual joint profits and by – products, those costs are called as ‘further processing costs’.
- The joint costs are apportioned to joint products by using method like physical unit’s method, market value method, standard cost method, contribution method etc.
- When by – products are of considerable to total value, then joint cost proration method is appropriate.
- When the by – products are of small to total value, miscellaneous or other income method or by – products sales are deducted from process cost of main products is appropriate.