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.
Any outputs having insignificant economic value and which are not primarily intended to be manufactured are called by-products. This differentiation is needed because of difference in accounting between by-products and joint products. Usually, all the costs incurred on a joint production process are allocated to the joint products whereas no costs are typically allocated to any by-products.
Few examples of joint products are:
- Processing of crude oil to obtain gasoline, diesel, asphalt, jet fuel and lubricants etc.
- Production of butter, cheese and cream from milk
- Different grades of wood obtained from a same kind of tree
Split-off point and cost allocation
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 the sale prices of the joint products less any additional expenses to be incurred before sale.
For additional explanation, please go to: joint products cost allocation.
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 a loss and the total cost of the resulting product includes additional expenses incurred after slit-off.
Joint products may be sold or further processed but the management of a company will assess whether or not any additional work will result in a net incremental benefit. If the increase in value of the joint product from further processing exceeds the additional expenses needed to further process the product, it is beneficial to further process it.
Bestwood Inc. is engaged in basic wood processing, which produces the following joint/by-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. Therefore, all of the joint costs are likely to be allocated to lumber and firewood.
All of the three products may be sold directly or further processed. For example,
- sawdust may be compressed to create wood pallets which are used as a biofuel,
- firewood may be converted into charcoal briquettes, and
- lumber may be converted into furniture or building material.
by Irfanullah Jan, ACCA and last modified on