Joint and by-product costing

Joint and by-products are complications that can occur within the context of process costing.

Definitions

Joint products

Joint products are two or more products separated in the course of processing, each having a sufficiently high saleable value to merit recognition as a main product.

• Joint products include products produced as a result of the oil-refining process, for example, petrol and paraffin.
• Petrol and paraffin have similar sales values and are therefore equally important (joint) products.

By-products

By-products are outputs of some value produced incidentally in manufacturing something else (main products).

• By-products, such as sawdust and bark, are secondary products from the timber industry (where timber is the main or principal product from the process).
• Sawdust and bark have a relatively low sales value compared to the timber which is produced and are therefore classified as by-products

Treatment of joint costs

Accounting treatment for joint products

The distinction between joint and by-products is important because the accounting treatment of joint products and by-products differs.

• Joint process costs occur before the split-off point. They are sometimes called pre-separation costs or common costs.
• The joint costs need to be apportioned between the joint products at the split-off point to obtain the cost of each of the products in order to value closing inventory and cost of sales.
• The basis of apportionment of joint costs to products is usually one of the following:
  • sales value of production (also known as market value)
  • production units
  • net realisable value.

Accounting treatment for by-products

As by-products have an insignificant value the accounting treatment is different.

• The costs incurred in the process are shared between the joint products alone. The by-products do not pick up a share of the costs, like normal loss.
• The sales value of the by-product at the split-off point is treated as a reduction in costs instead of an income, again just the same as normal loss.
• If the by-product has no known value at the split-off point but does have a value after further processing, the net income of the by-product is used to reduce the costs of the process.

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Tags:	process costing;joint products;by-products