Joint products are two or more outputs having significant values that are generated from a single production process and 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. Any outputs having insignificant economic value and which are not primarily desired to be manufactured are termed as by-products. This differentiation is needed because costs accountants typically allocate all the costs incurred on a joint production process to joint products. No costs are typically allocated to by-products.
- Few examples of joint products are:
- Processing of crude oil to obtain gasoline, diesel, asphalt, jet fuel and lubricants
- Production of butter, cheese and cream from milk
- Different grades of wood obtained from a same kind of tree
The point at which a joint process yields separately identifiable joint products is called split-off point. Cost are allocated to joint products at split-off point using one of several methods including:
- Physical measurement method: allocation of joint costs based on the quantity of each joint product manufactured.
- Net realizable value method: allocation of joint costs based on sale price less any additional expenses to be incurred before sale.
Some of the joint products may need further work after split-off point in a separate process to bring them into usable or saleable form. In such cases it is necessary to perform such additional work to avoid loss and the total cost of the resultant product includes additional expenses incurred after slit-off. Joint products that are useable/saleable at split-off point may also be further processed but the management of a company will assess whether or not such additional work will result in net incremental benefit. If the increase in value of the joint product from further processing exceeds the additional expenses needed to further process, it is beneficial to further process the joint product.
Bestwood Inc. is engaged in basic wood processing and supplies following products:
All of the above products are obtained from a joint process.
Here, lumber and firewood are joint products whereas sawdust is a by-product due to its insignificant value. All of the three products may be further processed e.g. sawdust may be compressed to create wood pallets which are used as a biofuel.