joint products examples

The chosen method depends on the nature of the products and the information available to the company. Allocating joint costs is an important aspect of cost accounting for companies that produce joint products. Joint costs are the costs incurred in the production of joint products, such as the cost of raw materials and direct labor. Cost accountants must choose an allocation method that accurately reflects the resources used and the value of the products produced. The chosen method must also be consistent with accounting principles and regulatory requirements. The physical units method allocates joint costs based on the number of physical units produced for each joint product.

Content: Joint Cost

Allocating joint costs does not help management, since the resulting information is based on essentially arbitrary allocations. Consequently, the best allocation method does not have to be especially accurate, but it should be easy to calculate, and be readily defensible if it is reviewed by an auditor. A cashew nuts processing unit produces two varieties of cashew nuts, premium and regular, at a joint cost of ₹75000, out of which ₹25000 is the fixed cost. The quantity produced is 100Kg and 150Kg; and sold at ₹750 and ₹600 per Kg, respectively. Additionally, by-product costing helps companies generate additional revenue from the waste produced during manufacturing.

joint products examples

Physical units method 🔗

This means it is likely something I have said above will prove incorrect or will change soon. The contention is that if one product sells for more than another, it is because it cost more to produce. Basically, joint capital budgeting: what it is and how it works demand is when you need two goods because they work together to provide a benefit for the consumer. If two goods are in joint demand, they will have a high and negative cross elasticity of demand.

Get Any Financial Question Answered

They all use some measure of production to do this, for example number or volume. The costs allocated to joint products and by-products should have no bearing on the pricing of these products, since the costs have no relationship to the value of the items sold. Prior to the split-off point, all costs incurred are sunk costs, and as such have no bearing on any future decisions – such as the price of a product. The estimation of the individual cost (usually direct cost) involved in the manufacturing or extraction of joint products is a complicated task. Since the expense over raw material, labour and processing of such products are incurred as a collective cost. In summary, joint and by-product costing requires high accuracy and consistency to ensure that costs are allocated appropriately and that financial statements are reliable.

What is a joint cost?

The mill also produces a by-product, wood chips, which are generated during the milling process. In manufacturing, joint products are two or more products that are produced from a common set of raw materials or resources. In markets where multiple companies produce similar joint products, pricing strategies can be a vital competitive tool. Companies that optimize their joint product pricing can competitively price their products, potentially capturing a larger market share. Effective cost allocation and pricing can also insulate a company from market volatility by ensuring it can maintain profitability even when the market prices of one or more joint products fluctuate. Joint products are multiple products that result from a single process and the same materials.

Sales Value Method

The point at which these products emerge in their separately identifiable form is known as point of separation or split-off point. At this point, some of the joint products have an economic value and can be sold to customers while others require a further processing before they can be placed in the salable condition. Joint products are multiple products generated by a single production process at the same time. These products incur undifferentiated joint costs until a split-off point, after which each product incurs separate processing.

This can be done by determining the market price of the beef bones or the value of the beef bones when sold as a by-product. Cost accountants who understand joint and by-product costing can help their companies make better decisions and improve their overall financial performance. This method will take a look at all aspects in the production process which impact the cost of each product. From the material use, worker wage, how the machine performs, and the level of work difficulties, then we will decide the cost of each product base on our professional judgment. First, we need to separate the variable cost from the total cost; the remaining will be the fixed cost.

Co-products can be produced in different quantities without affecting the production of other co-products. Co-products may require a different type of raw material and may be processed in different ways, but they’ll use the same facilities. To be considered a joint product, each product must be of roughly equal economic importance. If the two products have considerably different market values, the more valuable product is considered the main product, and the secondary product is known as a by-product.

  • This method allocates joint costs based on the number of physical units produced for each joint product.
  • The following steps help to allocate the joint cost based on the gross margins of the product.
  • In sectors like agriculture, petrochemicals, and food processing, where joint production is common, mastering joint product pricing can be a significant competitive advantage.
  • Usually, all the costs incurred on a joint production process are allocated to the joint products whereas no costs are typically allocated to any by-products.

Joint products are the multiple outputs that have similar value to the company. The next step is to calculate the percentage of each product contribution margin. The way of calculation is also simple; we can measure it one time and use it forever unless there is something change within the production process. 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. This article offers an explanation, examples, and accounting techniques for costing such products.

In other words, a fall in the price of ink may prompt an increase in demand for printers. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Physical relationships that necessitate simultaneous production serve as a link between numerous products. For instance, the furniture business may produce different types of furniture that include beds, chairs, tables, sofas, and many other items manufactured from the process. If the resources consumed in the process are of food quality, the output is expected to be of better quality.