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Joint and By-Product Slides

Joint and by-products arise from joint production processes where multiple outputs emerge simultaneously. Joint products have significant sales values while by-products have relatively small values. Joint costs that cannot be traced to specific products must be allocated according to methods like physical units or sales value. By-product income is deducted from production costs or listed separately. When deciding whether to further process joint products, only relevant incremental revenues and costs are considered to maximize net income.

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32 views18 pages

Joint and By-Product Slides

Joint and by-products arise from joint production processes where multiple outputs emerge simultaneously. Joint products have significant sales values while by-products have relatively small values. Joint costs that cannot be traced to specific products must be allocated according to methods like physical units or sales value. By-product income is deducted from production costs or listed separately. When deciding whether to further process joint products, only relevant incremental revenues and costs are considered to maximize net income.

Uploaded by

Merveille Sady
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 13:

Joint and by-products


SPECIFIC OUTCOME
After studying this chapter, the learner should be able to achieve the
following specific outcome:
• Demonstrate competency in the operation of process costing
systems with joint and by-products being the output of such
systems.
ASSESSMENT CRITERIA
Learners will demonstrate that they have achieved the specific
outcome when they can do the following:
• Distinguish between joint and by-products.
• Allocate joint costs according to accepted methods.
• Account for the by-product(s) according to an accepted method.
• Calculate net income of joint and by-products.
13.1 INTRODUCTION
Examples of industries where joint and by-products arise are as
follows:

Joint product By-product


Timber Various grades and Sawdust, bark and offcuts
industry sizes of wood
Meat industry Various grades of meat Offal, bones
Oil refining Petrol, diesel, paraffin Sulphur
13.2 DISTINCTION BETWEEN
JOINT AND BY-
PRODUCTS
• Joint and by-products are the output of a joint production process
from which these products emerge simultaneously.
• Joint products: two or more products each having a significant
sales value in relation to other products emerging from the process.
• By-products: emerge incidentally from the joint production
process and have a relatively small sales value in relation to the
sales value of the joint products.
DISTINCTION BETWEEN JOINT AND BY-
PRODUCTS

Split-off point
• Split-off point is the point where joint and by-products emerge
from the same production process. These products are only
separately identifiable after the split-off point.
• After split-off point some products may be processed further.
DISTINCTION BETWEEN JOINT AND BY-
PRODUCTS

Joint costs
• Costs incurred in respect of the joint process.
• Joint costs cannot be directly traced to each individual product
emerging from the process.
• Joint costs need to be apportioned(split) between joint products.
(Only joint products get a portion of the joint cost, NOT by-
products)

Joint costs must be apportioned to products to:


– value inventory
– assist in pricing decisions
– determine the profit for each joint product.
DISTINCTION BETWEEN JOINT AND BY-
PRODUCTS
Joint costs

Figure 13.1 Joint production process


13.3 METHODS OF
ALLOCATING JOINT
COSTS
The commonly used methods for joint costs allocations are the:
• Physical units (measurement) method
• Sales value at split-off method/Market value method
• Net realisable value method/Hypothetical market value
• constant gross profit method (this method is not part of our
syllabus)
METHODS OF ALLOCATING JOINT COSTS

Physical units method


• Costs are allocated in proportion to volume.
• Each cost is allocated a proportional share of the total joint cost.
• Cost per unit is the same for each of the products.
• No correlation between joint costs allocated to each product and
the corresponding sales revenue.
• Difficult to implement where products have different units of
measurement e.g. liquids and gases.
• Advantage – Simplicity
• Disadvantage – Can distort profit reporting and inventory
valuation
See Example 13.1 (Textbook page 326)
METHODS OF ALLOCATING JOINT COSTS

Sales value at split-off method


• Costs are allocated in proportion to the estimated sales value of
production at split-off point.
• A larger portion of the joint costs is allocated to products with
higher selling prices.
• Formulas:
– Joint cost: [(Units produced x sales price/u) || Total sales
revenue] x Total joint cost.
– Cost of sales: Sales revenue – (opening inv. + production cost –
closing inv.)
See Example 13.2 (Textbook page 327)
METHODS OF ALLOCATING JOINT COSTS

Net realisable value method


• Estimated market value = Units produced x selling price (after
further processing) per unit.
• Net realisable value = Estimated market value – further processing
costs.
Joint cost allocation:
• Net realisable value of product || Total net realisable value × Total
joint cost
• Production cost per unit = (Joint costs allocated + further
processing costs) / Units produced
METHODS OF ALLOCATING JOINT COSTS
Joint cost allocation

• Closing inventory value = Units in closing inventory x production


cost per unit
• Advantage – Joint cost allocation takes further processing costs
into account
• Disadvantage – May encounter problems if process is complex or
if there are many split-off points
See Example 13.3 (Textbook page 328)
13.4 METHODS TO ACCOUNT
FOR BY-PRODUCTS
• Basic approach:
– Joint costs are not allocated to by-products
METHODS TO ACCOUNT FOR BY-PRODUCTS

Methods to account for by-product income:


• Revenue or net revenue from the sale of by-products is listed on
the income statement as one of the following:
• Additional sales revenue
• Other income
• A deduction from the production cost of the joint product(s)
• A deduction from the cost of sales of the joint product(s).
OR
• Deducted from joint cost before splitting it between joint
product(s).

See Example 13.5 (Textbook page 331)


13.5 JOINT COST
ALLOCATIONS FOR
DECISION-MAKING
• When a decision must be made whether to sell a joint product at
split-off point or to process it further, the joint cost is not relevant.
The relevant costs are the further processing costs.
• The option that maximises the net income will be the best
alternative.
• Only relevant costs and revenues are taken into consideration.
JOINT COST ALLOCATIONS FOR DECISION-MAKING

• A cost (revenue) is relevant if the cost (revenue) is different


between the two options.
• To determine the additional profit (loss) the following method is
used:
– Additional profit (loss) = Incremental revenue – Incremental
costs.

• The general rule is to accept an alternative where an additional


profit is made. Where a loss is made the alternative will not be
accepted.
See Example 13.6 (Textbook page 333)
13.6 SUMMARY

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