Costing/Valuation of Joint and By Products
Following are self explanatory diagrams which help in understanding the concept of joint product and by products.
Valuing by-products and joint products
Either of the following methods may be adopted when valuing by-products:
(a) The proceeds from the sale of the by-product may be treated as pureprofit
(b) The proceeds from the sale, less any handling and selling expenses, may be applied in reducing the cost of the main products.
If a by-product needs further processing to improve its marketability, such cost will be deducted in arriving at net revenue, treated as in (a) or (b) above. Recorded profits will be affected by the method adopted if stocks of the main product are maintained.
Accounting for joint products
Joint products are by definition, subject to individual accounting procedures. Joint costs may require apportionment between products if only for joint valuation purposes. The main bases for apportionment are as follows:
Physical measurement of joint products
When the unit of measurement is different, e.g. liters and kilos, some method should be found of expressing them in a common unit. Some joint costs are not incurred strictly equally for all Joint products: such costs can be separated and apportioned by introducing weighting factors.
The effect is to make each product appear to be equally profitable. Where certain products are processed after the point of separation, further processing costs must be deducted from the market values before joint costs are apportioned.
Technical estimates of relative use of common resources
Apportionment is, of necessity, an arbitrary calculation and product costs which include such an apportionment can be misleading if used as a basis for decision-making.
Problems of common costs
Even if careful technical estimates are made of relative benefits, common costs apportionment will inevitably be an arbitrary calculation. When providing information to assist decision-making, therefore, the cost accountant will emphasize cost revenue differences arising from the decision. Here are some examples of decisions involving joint products:
Apportioned common costs are not relevant to any of the above decisions although a change in marketing strategy may affect total joint costs, e.g. withdrawing a product may allow capacity of the joint process to be reduced. In the short or medium term, it is probably impractical and/or uneconomic to alter the processing structure. The relative benefit derived by joint products is, therefore, irrelevant when considering profitability or marketing opportunities.