ICAI Notes: Joint Products & By Products | Cost and Management Accounting for CA Intermediate PDF Download

 Page 1


LEARNING OUTCOMES 
CHAPTER 
11 
 
 JOINT PRODUCTS AND  
BY PRODUCTS
? Discuss the meaning of Joint products and By products. 
? Differentiate between joint products and by products. 
? Discuss the various methods of apportionment of joint 
costs to joint products and to by products. 
? State the treatment of by product’s cost in cost accounting.
Joint Products & By-
Products
Meaning of Joint 
Products and By-
Products
Apportionment of 
Joint Costs
Treatment of By-
Product Cost in Cost 
Accounting
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 2


LEARNING OUTCOMES 
CHAPTER 
11 
 
 JOINT PRODUCTS AND  
BY PRODUCTS
? Discuss the meaning of Joint products and By products. 
? Differentiate between joint products and by products. 
? Discuss the various methods of apportionment of joint 
costs to joint products and to by products. 
? State the treatment of by product’s cost in cost accounting.
Joint Products & By-
Products
Meaning of Joint 
Products and By-
Products
Apportionment of 
Joint Costs
Treatment of By-
Product Cost in Cost 
Accounting
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
     
11.2 COST AND MANAGEMENT ACCOUNTING 
11.2 
1. MEANING OF JOINT PRODUCTS AND BY
PRODUCTS 
Agricultural product industries, chemical process industries, sugar industries, 
and extractive industries are some of the industries where two or more products 
of equal or unequal importance are produced either simultaneously or in the 
course of processing operation of a main product. 
In all such industries, the management is faced with the problems such as, 
valuation of inventory, pricing of product and income determination, problem 
of taking decision in matters of further processing of by-products and/or joint 
products after a certain stage etc. In fact, the various problems relate to 
(i)  apportionment of common costs incurred for various products and  
(ii)  aspects other than mere apportionment of costs incurred upto the point 
of separation. 
Before taking up the above problems, we first define the various necessary 
concepts. 
(i) Joint Products - Joint products represent “two or more products 
separated in the course of the same processing operation usually requiring 
further processing, each product being in such proportion that no single 
product can be designated as a major product”.  
In other words, two or more products of equal importance, produced, 
simultaneously from the same process, with each having a significant relative 
sale value are known as joint products. For example, in the oil industry, gasoline, 
fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all produced from 
crude petroleum. These are known as joint products. 
(ii) By-Products - These are defined as “products recovered from material 
discarded in a main process, or from the production of some major products, 
where the material value is to be considered at the time of severance from the 
main product.” So in a nutshell By product is a product which is recovered 
incidentally from the material used in the manufacture of main or desired 
products, such a by-product having either a net realisable value or a usable 
value which is relatively insignificant in comparison with the saleable value 
of the main or desired products. By-product may be further processed to 
© The Institute of Chartered Accountants of India
Page 3


LEARNING OUTCOMES 
CHAPTER 
11 
 
 JOINT PRODUCTS AND  
BY PRODUCTS
? Discuss the meaning of Joint products and By products. 
? Differentiate between joint products and by products. 
? Discuss the various methods of apportionment of joint 
costs to joint products and to by products. 
? State the treatment of by product’s cost in cost accounting.
Joint Products & By-
Products
Meaning of Joint 
Products and By-
Products
Apportionment of 
Joint Costs
Treatment of By-
Product Cost in Cost 
Accounting
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
     
11.2 COST AND MANAGEMENT ACCOUNTING 
11.2 
1. MEANING OF JOINT PRODUCTS AND BY
PRODUCTS 
Agricultural product industries, chemical process industries, sugar industries, 
and extractive industries are some of the industries where two or more products 
of equal or unequal importance are produced either simultaneously or in the 
course of processing operation of a main product. 
In all such industries, the management is faced with the problems such as, 
valuation of inventory, pricing of product and income determination, problem 
of taking decision in matters of further processing of by-products and/or joint 
products after a certain stage etc. In fact, the various problems relate to 
(i)  apportionment of common costs incurred for various products and  
(ii)  aspects other than mere apportionment of costs incurred upto the point 
of separation. 
Before taking up the above problems, we first define the various necessary 
concepts. 
(i) Joint Products - Joint products represent “two or more products 
separated in the course of the same processing operation usually requiring 
further processing, each product being in such proportion that no single 
product can be designated as a major product”.  
In other words, two or more products of equal importance, produced, 
simultaneously from the same process, with each having a significant relative 
sale value are known as joint products. For example, in the oil industry, gasoline, 
fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all produced from 
crude petroleum. These are known as joint products. 
(ii) By-Products - These are defined as “products recovered from material 
discarded in a main process, or from the production of some major products, 
where the material value is to be considered at the time of severance from the 
main product.” So in a nutshell By product is a product which is recovered 
incidentally from the material used in the manufacture of main or desired 
products, such a by-product having either a net realisable value or a usable 
value which is relatively insignificant in comparison with the saleable value 
of the main or desired products. By-product may be further processed to 
© The Institute of Chartered Accountants of India
11.3 
JOINT PRODUCTS AND BY PRODUCTS 11.3 
increase their realisable value Thus by-products emerge as a result of 
processing operation of another product or they are produced from the scrap 
or waste of materials of a process. In short a by-product is a secondary or 
subsidiary product which emanates as a result of manufacture of the main 
product. 
The point at which they are separated from the main product or products is known 
as split-off point. The expenses of processing are joint till the split –off point.  
Split of Point – this is a point in a production process where joint products 
emerging from the process gets separately identifiable.  
Split of Point has its importance in the joint product costing as joint cost 
incurred up to this point only and needs to be borne jointly by the products 
emerging from the common process. 
Any cost incurred after Split of Point is a product specific cost and to be 
borne by the product concerned. 
Examples of by-products are molasses in the manufacture of sugar, tar, 
ammonia and benzole obtained on carbonisation of coal and glycerin obtained 
in the manufacture of soap. 
Distinction between Joint-Product and By-Product - The main points of 
distinction as apparent from the definitions of Joint Products and By-Products are: 
(a)  Joint products are of equal importance whereas by-products are of small 
economic value. 
(b)  Joint products are produced simultaneously but the by-products are 
produced incidentally in addition to the main products. 
(iii) Co-Products - Joint products and co-products are used synonymously in 
common parlance, but strictly speaking a distinction can be made between two. 
Co-products may be defined as two or more products which are 
contemporary but do not emerge necessarily from the same material in the 
same process. For instance, wheat and gram produced in two separate farms 
with separate processing of cultivation are the co-products. Similarly, timber 
boards made from different trees are co-products. 
© The Institute of Chartered Accountants of India
Page 4


LEARNING OUTCOMES 
CHAPTER 
11 
 
 JOINT PRODUCTS AND  
BY PRODUCTS
? Discuss the meaning of Joint products and By products. 
? Differentiate between joint products and by products. 
? Discuss the various methods of apportionment of joint 
costs to joint products and to by products. 
? State the treatment of by product’s cost in cost accounting.
Joint Products & By-
Products
Meaning of Joint 
Products and By-
Products
Apportionment of 
Joint Costs
Treatment of By-
Product Cost in Cost 
Accounting
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
     
11.2 COST AND MANAGEMENT ACCOUNTING 
11.2 
1. MEANING OF JOINT PRODUCTS AND BY
PRODUCTS 
Agricultural product industries, chemical process industries, sugar industries, 
and extractive industries are some of the industries where two or more products 
of equal or unequal importance are produced either simultaneously or in the 
course of processing operation of a main product. 
In all such industries, the management is faced with the problems such as, 
valuation of inventory, pricing of product and income determination, problem 
of taking decision in matters of further processing of by-products and/or joint 
products after a certain stage etc. In fact, the various problems relate to 
(i)  apportionment of common costs incurred for various products and  
(ii)  aspects other than mere apportionment of costs incurred upto the point 
of separation. 
Before taking up the above problems, we first define the various necessary 
concepts. 
(i) Joint Products - Joint products represent “two or more products 
separated in the course of the same processing operation usually requiring 
further processing, each product being in such proportion that no single 
product can be designated as a major product”.  
In other words, two or more products of equal importance, produced, 
simultaneously from the same process, with each having a significant relative 
sale value are known as joint products. For example, in the oil industry, gasoline, 
fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all produced from 
crude petroleum. These are known as joint products. 
(ii) By-Products - These are defined as “products recovered from material 
discarded in a main process, or from the production of some major products, 
where the material value is to be considered at the time of severance from the 
main product.” So in a nutshell By product is a product which is recovered 
incidentally from the material used in the manufacture of main or desired 
products, such a by-product having either a net realisable value or a usable 
value which is relatively insignificant in comparison with the saleable value 
of the main or desired products. By-product may be further processed to 
© The Institute of Chartered Accountants of India
11.3 
JOINT PRODUCTS AND BY PRODUCTS 11.3 
increase their realisable value Thus by-products emerge as a result of 
processing operation of another product or they are produced from the scrap 
or waste of materials of a process. In short a by-product is a secondary or 
subsidiary product which emanates as a result of manufacture of the main 
product. 
The point at which they are separated from the main product or products is known 
as split-off point. The expenses of processing are joint till the split –off point.  
Split of Point – this is a point in a production process where joint products 
emerging from the process gets separately identifiable.  
Split of Point has its importance in the joint product costing as joint cost 
incurred up to this point only and needs to be borne jointly by the products 
emerging from the common process. 
Any cost incurred after Split of Point is a product specific cost and to be 
borne by the product concerned. 
Examples of by-products are molasses in the manufacture of sugar, tar, 
ammonia and benzole obtained on carbonisation of coal and glycerin obtained 
in the manufacture of soap. 
Distinction between Joint-Product and By-Product - The main points of 
distinction as apparent from the definitions of Joint Products and By-Products are: 
(a)  Joint products are of equal importance whereas by-products are of small 
economic value. 
(b)  Joint products are produced simultaneously but the by-products are 
produced incidentally in addition to the main products. 
(iii) Co-Products - Joint products and co-products are used synonymously in 
common parlance, but strictly speaking a distinction can be made between two. 
Co-products may be defined as two or more products which are 
contemporary but do not emerge necessarily from the same material in the 
same process. For instance, wheat and gram produced in two separate farms 
with separate processing of cultivation are the co-products. Similarly, timber 
boards made from different trees are co-products. 
© The Institute of Chartered Accountants of India
     
11.4 COST AND MANAGEMENT ACCOUNTING 
11.4 
 2. APPORTIONMENT OF JOINT COSTS
Joint product costs occur in many industries such as petroleum, oil refinery, textiles, 
dairy, food processing and many other process industries. The management of 
business concerns require accurate and reliable cost information related with the 
joint products to make managerial decisions such as to process further or to sell at 
split-off stage. To arrive at either decision, it is necessary to know the share of joint 
costs to be apportioned to the different joint products. 
Joint costs are the expenditures incurred upto the point of separation i.e. 
split-off pointJoint Cost is the resources spent by a manufacturer\producer 
for producing more than one product from processing a common input. 
These costs include raw material, labour, power, fuel, depreciation and 
overhead costs towards the production of the joint products. 
The main problem faced in the case of joint products/ by-products is the 
apportionment of this joint costs to joint products/ or by products. For costs 
incurred after the split off point there is no problem, as these costs can be directly 
allocated to individual joint products or by-products.  
 3. METHODS OF APPORTIONMENT OF 
JOINT COST TO JOINT PRODUCTS 
Proper apportionment of joint cost over the joint products is of considerable 
importance, as this affects (a) Valuation of closing inventory; (b) Pricing of 
products; and (c) Profit or loss on the sale of different products. As the relations 
between materials, processes and joint products are complex and 
unobservable, there is no way to determine the cost of the different 
production factors used in the processes for the production of each of the 
joint products. Therefore, the costs incurred in the manufacture of each of 
the joint products cannot be correctly identified. 
It can only be apportioned to the joint products by using some rational 
methods 
The commonly used methods for apportioning total process costs upto the 
point of separation over the joint products are as follows: 
 2. 
 3. 
© The Institute of Chartered Accountants of India
Page 5


LEARNING OUTCOMES 
CHAPTER 
11 
 
 JOINT PRODUCTS AND  
BY PRODUCTS
? Discuss the meaning of Joint products and By products. 
? Differentiate between joint products and by products. 
? Discuss the various methods of apportionment of joint 
costs to joint products and to by products. 
? State the treatment of by product’s cost in cost accounting.
Joint Products & By-
Products
Meaning of Joint 
Products and By-
Products
Apportionment of 
Joint Costs
Treatment of By-
Product Cost in Cost 
Accounting
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
     
11.2 COST AND MANAGEMENT ACCOUNTING 
11.2 
1. MEANING OF JOINT PRODUCTS AND BY
PRODUCTS 
Agricultural product industries, chemical process industries, sugar industries, 
and extractive industries are some of the industries where two or more products 
of equal or unequal importance are produced either simultaneously or in the 
course of processing operation of a main product. 
In all such industries, the management is faced with the problems such as, 
valuation of inventory, pricing of product and income determination, problem 
of taking decision in matters of further processing of by-products and/or joint 
products after a certain stage etc. In fact, the various problems relate to 
(i)  apportionment of common costs incurred for various products and  
(ii)  aspects other than mere apportionment of costs incurred upto the point 
of separation. 
Before taking up the above problems, we first define the various necessary 
concepts. 
(i) Joint Products - Joint products represent “two or more products 
separated in the course of the same processing operation usually requiring 
further processing, each product being in such proportion that no single 
product can be designated as a major product”.  
In other words, two or more products of equal importance, produced, 
simultaneously from the same process, with each having a significant relative 
sale value are known as joint products. For example, in the oil industry, gasoline, 
fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all produced from 
crude petroleum. These are known as joint products. 
(ii) By-Products - These are defined as “products recovered from material 
discarded in a main process, or from the production of some major products, 
where the material value is to be considered at the time of severance from the 
main product.” So in a nutshell By product is a product which is recovered 
incidentally from the material used in the manufacture of main or desired 
products, such a by-product having either a net realisable value or a usable 
value which is relatively insignificant in comparison with the saleable value 
of the main or desired products. By-product may be further processed to 
© The Institute of Chartered Accountants of India
11.3 
JOINT PRODUCTS AND BY PRODUCTS 11.3 
increase their realisable value Thus by-products emerge as a result of 
processing operation of another product or they are produced from the scrap 
or waste of materials of a process. In short a by-product is a secondary or 
subsidiary product which emanates as a result of manufacture of the main 
product. 
The point at which they are separated from the main product or products is known 
as split-off point. The expenses of processing are joint till the split –off point.  
Split of Point – this is a point in a production process where joint products 
emerging from the process gets separately identifiable.  
Split of Point has its importance in the joint product costing as joint cost 
incurred up to this point only and needs to be borne jointly by the products 
emerging from the common process. 
Any cost incurred after Split of Point is a product specific cost and to be 
borne by the product concerned. 
Examples of by-products are molasses in the manufacture of sugar, tar, 
ammonia and benzole obtained on carbonisation of coal and glycerin obtained 
in the manufacture of soap. 
Distinction between Joint-Product and By-Product - The main points of 
distinction as apparent from the definitions of Joint Products and By-Products are: 
(a)  Joint products are of equal importance whereas by-products are of small 
economic value. 
(b)  Joint products are produced simultaneously but the by-products are 
produced incidentally in addition to the main products. 
(iii) Co-Products - Joint products and co-products are used synonymously in 
common parlance, but strictly speaking a distinction can be made between two. 
Co-products may be defined as two or more products which are 
contemporary but do not emerge necessarily from the same material in the 
same process. For instance, wheat and gram produced in two separate farms 
with separate processing of cultivation are the co-products. Similarly, timber 
boards made from different trees are co-products. 
© The Institute of Chartered Accountants of India
     
11.4 COST AND MANAGEMENT ACCOUNTING 
11.4 
 2. APPORTIONMENT OF JOINT COSTS
Joint product costs occur in many industries such as petroleum, oil refinery, textiles, 
dairy, food processing and many other process industries. The management of 
business concerns require accurate and reliable cost information related with the 
joint products to make managerial decisions such as to process further or to sell at 
split-off stage. To arrive at either decision, it is necessary to know the share of joint 
costs to be apportioned to the different joint products. 
Joint costs are the expenditures incurred upto the point of separation i.e. 
split-off pointJoint Cost is the resources spent by a manufacturer\producer 
for producing more than one product from processing a common input. 
These costs include raw material, labour, power, fuel, depreciation and 
overhead costs towards the production of the joint products. 
The main problem faced in the case of joint products/ by-products is the 
apportionment of this joint costs to joint products/ or by products. For costs 
incurred after the split off point there is no problem, as these costs can be directly 
allocated to individual joint products or by-products.  
 3. METHODS OF APPORTIONMENT OF 
JOINT COST TO JOINT PRODUCTS 
Proper apportionment of joint cost over the joint products is of considerable 
importance, as this affects (a) Valuation of closing inventory; (b) Pricing of 
products; and (c) Profit or loss on the sale of different products. As the relations 
between materials, processes and joint products are complex and 
unobservable, there is no way to determine the cost of the different 
production factors used in the processes for the production of each of the 
joint products. Therefore, the costs incurred in the manufacture of each of 
the joint products cannot be correctly identified. 
It can only be apportioned to the joint products by using some rational 
methods 
The commonly used methods for apportioning total process costs upto the 
point of separation over the joint products are as follows: 
 2. 
 3. 
© The Institute of Chartered Accountants of India
11.5 
JOINT PRODUCTS AND BY PRODUCTS 11.5 
(i) Physical Units Method 
(ii)  Net Realisable Value at split-off point 
(iii) Using Technical Estimates 
Some other methods, which managers may also use for making decisions are: 
(i)  Market value at the point of separation 
(ii) Market value after further processing 
(iii) Average unit cost method 
(iv) Contribution margin method 
(i) Physical Unit Method: This method is based on the assumption that the 
joint products are capable of being measured in the same units. Accordingly, 
joint costs here are apportioned on the basis of some physical base, such 
as weight, numbers etc. In other words, the basis used for apportioning joint 
cost over the joint products is the physical volume the joint products at the 
point of separation. Any loss arises during the joint production process is also 
apportioned over the products on the same basis.. In situation where physical 
units are different, the joint products must be converted to a common unit 
of measurement. In case, the same cannot be converted to a common unit 
of measurement, this method cannot be applied. The main defect of this 
method is that it gives equal importance and value to all the joint products. 
This method of apportioning is mostly followed when sale price of all the 
products is uniform. 
ILLUSTRATION 1 
A coke manufacturing company produces the following products by using 5,000 
tonnes of coal @ `1,100 per tonne into a common process. 
 Coke 3,500  tonnes 
 Tar 1,200  tonnes 
 Sulphate of ammonia 52  tonnes 
 Benzol 48  tonnes 
PREPARE a statement apportioning the joint cost amongst the products on the 
basis of the physical unit method. 
© The Institute of Chartered Accountants of India