Joint production processes result in the output of two or more products produced simultaneously.

In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation.

Joint Product and Joint Cost

Joint product: Two or more outputs generated simultaneously, by a single manufacturing process using common input, and being substantially equal in value. Joint products (such as butter. cheese, and cream from milk, and fuel oil, gasoline, and kerosene from crude oil) are separately unidentifiable and incur undifferentiated joint costs until they reach the split-off point. A joint product is the term used when two or more products arise simultaneously in the course of processing, each of which has a significant sales value in relation to each other. Example: The processing of crude oil can result into the joint products kerosene, gasoline, jet fuel, and asphalt, as well as other petrochemical derivatives.

Joint cost: Two or more outputs generated simultaneously, by a single manufacturing process using common input, and being substantially equal in value. Joint products (such as butter, cheese, and cream from milk, and fuel oil, gasoline, and kerosene from crude oil) are separately unidentifiable and incur undifferentiated joint costs until they reach the split-off point. In accounting, a joint cost is a cost incurred in a joint process. Joint costs may include direct material, direct labor, and overhead costs incurred during a joint production process. Example: Let’s consider an oil refinery. The refinery takes crude oil and refines it into a substance that may be used for auto gasoline, motor oil, heating oil, or kerosene. All of these various outputs come from a single input – crude oil. In both of these examples, a single input yields multiple outputs.

In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance. A standard costing system involves estimating the required costs of a production process. Joint products may be defined as two or more products produced simultaneously in a process, each having a sufficiently high saleable value to merit recognition as a main product. The processing of a particular material may result in the production of two or more products. Examples of joint products include the production of liquid oxygen and nitrogen from air, beef and hides from steers, and gasoline and fuel oil from crude oil.

Jack has a philosophy of every product line paying for itself and is determined to cut his losses on rattles. A-1 Fancy has $\$ 1,500$ less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. A-1 Fancy has $\$ 1,500$ more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. A-1 Fancy has $\$ 1,300$ less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. A-1 Fancy has $\$ 1,300$ more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. “Managers should consider only additional revenues and separable costs when making decisions about selling at splitoff or processing further.” Do you agree?

It will distort cost allocation due to fluctuations in market prices. Show how you would propose to apportion the joint costs of manufacture. For materials and conversion i,e an average cost per equivalent unit is calculated for all units of output and closing inventory. It is the expected loss in processing and is usually expressed as a percentage of input units of materials. Various methods are used to deal with the cost and sales value of by-products.

Which Is An Example Of Joint Products?

Products $X$ and $Y$ are ready for sale immediately upon splitoff without further processing or any other additional costs. Product $Z$, however, is processed further before being sold. There is no available market price for $Z$ at the splitoff point. Quality Chicken is computing the ending inventory values for its July $31,2017,$ balance sheet. Ending inventory amounts on July 31 are 15 pounds of breasts, 4 pounds of wings, 6 pounds of thighs, 5 pounds of bones, and 2 pounds of feathers. Quality Chicken’s management wants to use the sales value at splitoff method.

But salary is direct cost to the production department. Similarly, the rent of the factory is common to all departments located in the factory.

Prepare product-line income statements per batch for requirements 1 and 2 . The method or pattern of production may be determined. Correct collection, compilation and classification joint products are outputs from common inputs and a common production process. of process costs. This method is highly useful if the weights assigned are on objective basis. If subjective element creeps in, the method may not give accurate results.

What Is The Split Off Point Of Joint Products?

We are a non-profit group that run this website to share documents. Cost center whose costs are charged to other departments in the organization. It is not an accurate indicator of cost incurred in their manufacture up to the point of separation.

The manufacturing process and raw material requirement is common up to a certain stage of manufacturing. After the stage is crossed, further processing becomes different for each product. Joint products are the result of utilization of the same raw material and same processing operations. The processing of a particular raw material may result into the output of two or more products. The chloralkali process, one of the basic processes in the chemical industry, is the electrolysis of sodium chloride providing the joint products chlorine, sodium hydroxide and hydrogen. Due to the molar relation in the chemical equation, the proportions are fixed. Over the long term, a company must set prices to achieve revenue levels above its total cost of production, or risk bankruptcy.

Discuss the pros and cons of the two methods to sinclair Oil \& Gas for making decisions about product emphasis (pricing, sell-or-process-further decisions, and so on). Describe two major methods to account for byproducts. “Joint products is two or more products separated in the course of https://business-accounting.net/ processing each having a sufficiently high value to merit recognition as a main product”. Reliability of cost (e.g., rail freight rates) and revenue estimates, and the risk of depending on these estimates. Timing of the revenue stream from coal fines and impact on the need for liquidity.

What Are The Joint Cost Allocation Methods For By Products?

Have a material effect on the financial statements.

• The physical quantities method allocates joint costs based on a physical measure of output (e.g., pounds or yards of material).
• However, the joint costs will continue to be incurred as long as the process is run regardless of what is done with one of the end products.
• A-1 Fancy has $\$ 1,300$ less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.
• Horizontally merging with or acquiring another company is another a way to achieve economies of scope.
• The third chip, Cobalt, is used to manufacture and market a solid-state device under the AT name.
• The latest costs are then used to valuate inventory.

Joint production processes are common in the agriculture industry, the food manufacturing industry, and the chemical industry. (40 min.) Alternative methods of joint-cost allocation, product-mix decisions. A diagram of the situation is in Solution Exhibit 16-33.

Under quantitative unit method , the joint cost is allocated among joint products on the basis of measurement units like tons, gallons, pounds or feet etc. To use this method, all the joint products must be measurable by some basic unit of measurement. Cost of joint products is based on selling price. Therefore, if there is any change in the selling price of individual joint products, that will be a reallocation of total costs between joint products.

What Is A Joint Cost And How Is It Usually Allocated Among The Products Produced From Them?

The pasteurization of milk is a common process for all the products and after this process; each product has to be processed separately. If there are any by-products, do not allocate any costs to them; instead, charge the proceeds from their sale against the cost of goods sold. Joint products are two or more outputs other than by-products, that are generated from a single production process that uses common inputs. In cost accounting, all of the outputs of a single process are not joint products, only those that have significant economic value are considered joint products. 16-42 Joint-cost allocation, process further or sell. Arnold Technologies manufactures a variety of flash memory chips at its main plant in Taiwan.

• Then divide them into proportions of sales value that add up to 100%.
• The selection of an allocation base in the direct method is easier than the selection of an allocation base in the step method.
• Batch costing is similar to job costing in that each batch of similar articles isseparately identifiable.
• A physical base such as raw materials weight, linear measure volume etc. is applied in apportioning pre-separation point costs to joint products.
• The selling prices of products A, B and C are Rs.2, Rs.3 and Rs.4 respectively.

Data regarding these three products for the fiscal year ended April 30,2017 , are given below. A federal law that has recently been passed taxes crude oil at $30 \%$ of operating income. Starting August 2017 , sinclair 0 il $\&$ Gas must report a separate product-line income statement for crude oil. One challenge facing sinclair 0 il $\&$ Gas is how to allocate the joint cost of producing the three separate salable outputs.

What Does It Mean When A Manufacturer Has Joint Costs?

Allocation of cost means a process in which the entire amount of overhead is charged to a specific cost center. Conversely, apportionment of the cost is needed when the cost cannot be allocated to a particular cost center. Instead, the cost is shared by two or more cost centers, as per the expected benefit received. Scope is a project management term for the objectives necessary to complete a project, allowing managers to estimate costs and time required. The final goods being produced might not seem to be direct complements or share many inputs, but producing them together reduces the cost of both. The paper aims to generate further discussion, with illustration from more industries to help formulate proper guidelines on this complex issue of Joint and by-product costing. The methods fall under two broad categories a) Market value basis and b) Physical measurement basis.

The cost before split off point for the four products was Rs.1,40,000. Using the average unit cost method calculate the unit cost, and show how the joint cost would be apportioned among the products. Moreover, where the end products cannot be expressed in some common unit, this method breaks down. Process industry across the globe is faced with the challenge of costing joint-products (Co-products) which are getting produced simultaneously in the process using the same inputs.

Possible environmental problems, i.e., dumping of waste and smoke from unprocessed coal. It also results in identical cost being assigned to different grades or quantities of products. It cannot be used for setting prices of the products especially in highly competitive market. If it is assumed that all losses occur at the end of the process, the cost per unit of finished output and the value/cost of abnormal gain is calculated as the cost per expected unit of output. When losses in a process has scrap value then the company is able to recover some of input costs.

$\bullet$ Amber chips can be incorporated into Arnold’s own memory stick. The separable costs to further process Amber chips are estimated to be $\$ 750,000$ annually. The memory stick would sell for $\$ 5.50$ per unit. Some chips are sold to makers of electronic equipment while others are embedded into consumer products for sale under Arnold’s house label, AT.

This approach requires additional cost accumulation work, but may be the only viable alternative if it is not possible to determine the sale price of each product as of the split-off point . Although both the terms, “common cost” and “joint cost” are some­times used interchangeably, they differ from each other. Joint costs emerge when multiple products are manufactured in a common process and when common inputs are used. The multiple products have a definite quantitative relationship to each other and the production of one product influences the output of the other product, though in a lesser proportion. Common costs are not the result of any manufacturing compulsion or the use of any single raw material.

Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol ? Should the company produce the alcoholic beverage? In case of joint products, the main objective of accounting of the cost is to apportion the joint costs incurred up to the split off point. As discussed earlier, the manufacturing process is same up to a certain stage and after crossing that stage; each product has distinct manufacturing process. Therefore the main problem is apportionment of the joint cost or the cost incurred up to the split off point.

The allocation methodology should be rational, systematic, and applied consistently. Process costing is a system of allocating production expenses of comparable products at each stage of the manufacturing process. Learn about the definition, real-world examples, and steps in process costing.

This method will not be useful if the production units are not similar with each other. All the products emerging from the manufacturing process are of the same economic importance.

First, and most common, is the idea that efficiency is gained through related diversification. Products that share the same inputs or that have complementary productive processes offer great opportunities for economies of scope through diversification. Because productive inputs (i.e. land, labor, and capital) usually have more than one use, economies of scope can often come from common inputs to the production of two or more different goods. For example, a restaurant can produce both chicken fingers and French fries at a lower average expense than what it would cost two separate firms to produce each of the goods separately. This is because chicken fingers and french fries can share use of the same cold storage, fryers, and cooks during production. An economy of scope means that the production of one good reduces the cost of producing another related good. Economies of scope occur when producing a wider variety of goods or services in tandem is more cost effective for a firm than producing less of a variety, or producing each good independently.