Welcome to Accounting For Management

Home »  By Products and Joint Products Costing



By Products and Joint Products Costing:

Learning Objectives:

  1. What are by products and joint products?
  2. What are the methods of costing by products?
  3. How joint cost is allocated between products.

Introduction to By Products and Joint Products:

Many industrial concerns are confronted with the difficult and often rather complicated problem of assigning costs to their by-products and joint products. Chemical companies, coke manufacturers, refineries, flour mills, coal mines, lumber mills, gas companies, dairies, canners, meat packers, and many others produce in their manufacturing or conversion processes a multitude of products to which some cost must be assigned. Assignment of costs of these various products enhances equitable inventory costing for income determination and financial statement purposes. An even more important aspect of by product and joint product costing is that it furnishes management with data for use in planning maximum profit potentials and evaluating actual profit performance.

Difficulties in costing by products and joint products:

By products and joint products are difficult to cost because a true joint cost is indivisible. For example, an ore might contain both lead and Zink. In the raw state, these minerals are joint products, and until they are separated by reduction of the ore, the cost of finding mining, and processing is a joint cost; neither lead nor Zink can be produced without the other prior to the split-off point. Click here to read full article.

Joint Products and Joint Product Costs:

Joint products are produced simultaneously by a common process or series of processes, with each product processing more than a nominal value in the form in which it is produced. Click here to read full article.

By Products:

The term "by product" is generally used to denote one or more products of relatively small total value that are produced simultaneously with a product of greater total value. Click here to read full article.

Methods of Costing By-Products:

The accepted methods for costing by-products fall into two categories:

Category 1:

A joint production cost is not allocated to the by product. Any revenue resulting from sales of the by product is credited either to income or to cost of the main product. In some cases, costs subsequent to split-off point may be offset against the by-product revenue. For inventory costing, any independent value may be assigned to the by product. The methods most commonly used in industry are:

Method 1: Recognition of Gross Revenue:
Revenue from sales of the by product is listed on the income statement as:

  • Other income.
  • Additional sales revenue.
  • A deduction from the cost of goods sold of the main product.
  • A deduction from the total manufacturing cost of the main product. Click here to read full article.

Method 2: Recognition of Net Revenue:
Revenue from sales of the by product less the costs of placing the by product on the market (marketing and administrative expenses) and less any additional processing cost of the by-product is shown on the income statement in a manner similar to that indicated in method 1. Click here to read full article.

Method 3: Replacement cost method:
Replacement cost method ordinarily is applied by firms whose by-products are used within the plant, thereby avoiding the necessity of purchasing materials and supplies from outside suppliers. Click here to read full article.

Category 2:

Some portion of the joint production cost is allocated to the by product. Inventory costs are based on this allocated cost plus any subsequent processing cost. In this category, the following method is used:

Method 4: Market value method or reversal cost method:
The market value method or reversal cost method is similar to the last technique (By Product Revenue deducted from Production Cost) illustrated at recognition of gross revenue method page. However it reduces the manufacturing cost of the main product , not by the actual revenue received, but by an estimate of the by products value at the time of recovery. This estimate must be made prior to split-off from the main product. Click here to read full article.

Characteristics of Joint Products and Cost:

Many products or services are linked together by physical relationships which necessitate simultaneous production. Click here to read full article.

Methods of Allocating the Joint Production Cost:

The allocation of joint product cost incurred up to the split-off point can be made by:

  1. The market or sales value method, based on the relative market values of the individual products.
  2. The quantitative or physical unit method, based on some physical measurement unit such as weight, linear measure, or volume.
  3. The average unit cost method.
  4. The weighted average method, based on a predetermined standard or index of production.

Joint Product Cost Analysis For Managerial Decisions and Profitability Analysis:

Get information about how managerial decisions are affected by joint production costs and methods used to allocate joint costs. Click her to read full article.

 

Our Request

Dear visitor! Do you like this article? If you like, then please bookmark this page and also share with your friends. Thank you for your support.

 [Report Errors and Omissions]

 

Back to Home Page


Bookmark and Share
 


Our Message

We love our visitors and want to work for them.


Our Request

Knowledge is free for all. Please tell others about this site. Share this site at yahoo, Facebook, Google and other social sits and forums.
In this way you will encourage
accountingformanagement.com to continue writing high quality accounting articles for you.  Thank you for your support.


Managerial Accounting Articles
 
Business and Quality Improvement Programs
Cost Terms, Concepts and Classification
Job Order Costing system
Process Costing System
Process Costing System - Addition of Materials and Beginning Inventory
Controlling and Costing Materials
Materials and Inventory Cost Control
By Products and Joint Products Costing
Cost-Volume-Profit-Relationship
Variable Costing System
Activity Based Costing System
Budgeting and Planning
Standard Costing and Variance Analysis
Gross Profit Analysis
Linear Programming Technique
Segment Reporting and Transfer Pricing
Capital Budgeting Decisions
Service Department Costing
Preparing Cash Flow statement
Financial statement Analysis
Pricing Products and Services
Managerial Accounting Terms and Definitions
Managerial / Cost Accounting Formulas

Financial Accounting Articles
Bookkeeping and Bookkeeping Terms
Accounting Principles and Accounting Equation
Journal
Ledger
Accounting For Bills of Exchange
Subdivision of Journal
Final Accounts
Capital and Revenue Items
Single Entry System/Accounting From Incomplete Records
Accounting For Non-Trading Concerns
Accounting for Consignment / Consignment Accounts
Accounting for Joint Ventures
Accounting for Depreciation

Articles By International Authors

Accounting Articles

Advertisements

Indianapolis Real Estate
MSI Credit Solutions
MSI Credit Solutions
MSI Credit
MSI Credit
MSI Credit
MSI Credit
MSI Credit
MSI Credit
MSI Credit
Health Insurance Texas

 
 

 
Home | Advertise With Us | Privacy Policy | Disclaimer & Terms of Use | Site map | Links | Link to us About Us | Contact Us

No text of this website can be republished without permission of the owner of this site and the authors of these managerial, management, and cost accounting articles. Otherwise sever civil and criminal penalties shall be imposed. All rights reserved.
Copy right © 2009