Joint Supply: Definition, Examples in Economics, Vs Joint Demand

Under this method, estimated profit, selling expenses and further processing cost of the by-product is deducted from the sales value of the by-products to get the joint cost of the by-product. In manufacturing industries the input factors are usually processed at different stages before getting the end product. If the cost accountant suddenly switches to the physical units method in the following year, the financial statements will not be comparable. It will be difficult to analyze trends in the costs of joint and by-products over time.

Using arbitrariness results in inaccurate allocation of joint cost. Another important issue with joint supply products is the allocation of expenses. Since both products are derived from the same source, it is often difficult to figure out how to divide up expenses. All expenditures expended on the primary and secondary items are subtracted from the combined sales of the main product in this manner. Joint products are two or more products that are manufactured from one process.

Allocation based on the gross profit margins

PQR Ltd produces three joint products A, B and C and sells them at Rs.14, Rs.12 and Rs.9 respectively. Number of units produced are 1,500, 1,200 and 1,000 respectively. Processing cost incurred after split-off point are Rs.8,000, Rs.6,500 and Rs.5,000 respectively. Joint cost allocation presents certain challenges, such as choosing the appropriate method for your products or services, avoiding irrelevant costs, and updating cost information. When selecting a method, you need to consider the nature of your products or services, the availability and reliability of data, the purpose and use of cost information, and the impact on behavior and incentives. It is important to remember that joint costs are sunk costs and should not influence pricing or marketing strategies.

The value of the by-product, reduced by its percentage administrative, marketing, and distribution costs, is credited to the Process Account in this manner. Other revenue or miscellaneous receipt in the Profit and Loss Account is used for by-products that have a minor market value relative to the principal items. Some examples of by-products are molasses in the manufacture of sugar and glycerine obtained in the manufacture of soaps.

Examples of Joint Products

This method is consistent with the matching principle and income statement presentation, but it may require more information and estimation than the other methods. In cost accounting, joint and by-product costing requires high accuracy and consistency to ensure that costs are allocated appropriately and that financial statements are reliable. This requires understanding the manufacturing process and the different products produced from a common set of raw materials or resources. This allocation reflects the proportion of physical units produced for each joint product. For example, when crude oil is processed, gasoline, diesel, and heating oil are produced. For external reports such as financial statements and tax returns, the common costs incurred to produce joint products are allocated to the resulting products.

By-products are those products that emerge as a result of processing operations of another product or that are incidentally produced from the scrap or waste materials of a manufacturing process. Thus, a by-product is a subsidiary or secondary product which comes out as a result of the manufacture of the main product. The physical units method is usually applied to the joint products which are similar in state and have a standard unit of measurement. In this method, the apportionment of the joint cost is done through relative quantity or weight of the joint products, at the split-off-point. Along with main products, some manufacturing processes produce one or more products having a relatively small value or no value at all. These products are usually termed as by products or secondary products.

Points of difference between Joint product and By-product

Further, when compared to the main product, the by-product has only a low commercial value. Normally, a process or a manufacturing operation converts input into output by changing the form, shape, size and such other attributes of the input. The output or the end product, also known as a finished product may be a single article or a number of similar articles. In such cases one product cannot be produced without https://turbo-tax.org/cares-act-401k-withdrawal-rules/ the production of other product or products and the management has no control over the ratio in which the different end products come out of the process. Cost accountants who understand joint and by-product costing can help their companies make better decisions and improve their overall financial performance. All of the by-products are valued at a fixed price depending on the product’s technical evaluation.

• One product cannot be produced without the production of other products.
• Joint cost is the cost incurred for all the products produced in the process.
• While producing the main product, there are instances when another product emanates which are of minor importance, as compared to the main product, are the by-product.
• Sales value of by-product less selling expenses credited to process account are deducted from total cost.
• A factory produces three products which originate from a joint process.

Correct collection, compilation and classification of process costs. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

3.1 Joint Product Cost Apportionment using Physical unit Method.

The result obtained under this method is similar to the result obtained under physical unit’s method. The merits and demerits of this method are similar to that of physical unit’s method. In conclusion, joint and by-product costing is a crucial aspect of accounting that cannot be overlooked in any manufacturing process. It ensures that costs are appropriately allocated and that accurate financial statements are produced. By-products are products that are produced alongside the main product in the manufacturing process. Joint products and by-products have their own cost components, and cost accountants must accurately identify them to allocate costs appropriately.

Normally, the by-products are not considered as finished goods because their production is not intended in the first place. They come into existence because their production cannot be avoided because of the nature of production process or the raw materials being used in the production process. The introduction of advanced production and engineering processes, however, has made it possible to control the production of such secondary products to some extent. An example of such processes can be found in petroleum industry. Under this method total joint cost is divided by total number of units of all joint products.

Are joint products the same as co-products?

Allowing manufacturers to determine the cost of each unit produced, joint and by-product costing helps them determine the most profitable products and make informed decisions. In summary, cost accountants must ensure that joint and by-product costing complies with regulatory requirements, including tax regulations and accounting standards. It is not usually feasible to simply split the expenses down the middle in the case of two products because one product usually sells at a premium to the other. An equal split will artificially deflate or inflate profits on one product or the other. Likewise, randomly allocating expenses will produce artificial results. To handle this on the business side, there are usually pricing matrices that work backwards from the end products to establish costing for reporting purposes.