By Products and Joint Products:
After studying this chapter you should
be able to:
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.
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:
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:
Methods of Allocating the Joint Production Cost:
The allocation of
joint product cost incurred up
to the
split-off point can be made by:
-
The
market or sales value method, based on the relative market values of the
individual products.
-
The quantitative or physical unit method,
based on some physical measurement unit such as weight, linear measure, or
volume.
-
The average unit cost method.
-
The weighted average method, based on a
predetermined standard or index of production.
Joint Product Cost Analysis For Managerial
Decisions and Profitability Analysis
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