By-product costing and joint product costing

A joint cost is an expenditure that benefits more than one product, and for which it is not possible to separate the contribution to each product. These expenditures can include direct materials, direct labor, and factory overhead. Moreover, the variable cost is determined with the help of units sold, and the fixed cost is ascertained through the contribution margin ratio. However, there is no formal logic for adopting a particular method of apportionment. An organization can opt for any of the methods available, depending upon the business type, uniformity of products, etc. This helps calculate the total cost price and selling price of those products and conjecture the profit overall.

Definition of Joint Costs

At the split-point, we have option to sell both products or processes further for more revenue. In dairy products, the skimming of raw milk yields skimmed milk, cream and butter. Also, in the case of processing coconut, we get coconut water, coconut cream, desiccated coconut and jute. You can change your settings at any time, including withdrawing your consent, by using the toggles on the Cookie Policy, or by clicking on the manage consent button at the bottom of the screen. It also helps to set the point on the products according to their economic value.

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Companies normally use common costing information in managerial decisions, but this type of cost tracking is particularly useful for external accountants. Production costs remain universal, or common, until a split-off point where the product undergoes different processes. For example, an entire field of corn costs the same to grow, but after harvest and distribution these processes change when half is prepared as popcorn and the other designated as corn flour. At first the single product had a common cost, then at the split-off point, the two products' costs began to differ. The cost allocations are entirely different between the two allocation methods, since the first calculation is based on revenue at the split-off point, and the second is largely based on costs incurred after the split-off point. The cost of raising livestock to the point of butchering can be considered a joint cost.

If the company is issuing GAAP based financial statements, on the other hand, the joint costs must be allocated to the products or departments benefiting from the costs either on a physical basis or a value basis. Most of the time a physical basis is used to allocate joint costs because it is less subjective than the value basis. Accounting attributes common costs to all production departments since these costs cannot be assigned to any specific area.

Common costs are harder to identify, but include all costs that keep the business running but which cannot be attributed to one product, department, project, territory or other specific cost center. Understanding the full scope of such concepts helps accountants and managers know which departments to charge for incoming costs. The accountant needs to determine a consistent method for allocating joint costs to products. This means identifying the products to which joint costs will be assigned as soon as they are separately identifiable in the production process (known as the split-off point). Joint costs pertain to the shared costs of producing main products up to the split-off point.

A joint cost is a kind of common cost that occurs after a raw product, such as a sunflower crop, undergoes two separate production processes, reports Strategic CFO. For example, the cost of fertilizing and harvesting sunflowers qualifies as a common cost. If a company uses the kernels in two or more different processes – such as roasting and crushing – the costs become joint costs. In the end, you'll have two different kinds of products but with similar shared costing until a split-off point. It is the cost accountant’s job to trace these costs back to a certain product or process (cost object) during production. Almost all manufacturers incur joint costs at some level the manufacturing process.

This complexity underscores the importance of using consistent and logical methods to ensure the reliability of cost information for decision-making purposes. The physical units method is usually applied to the joint products which are similar in state and have a standard unit of measurement. In this method, the apportionment of the joint cost is done through relative quantity or weight of the joint products, at the split-off-point.

By-products are secondary products that have less commercial value compared to the main products. While joint costs are allocated to the main products, by-products are often accounted for separately, sometimes even tax filing options 2020 credited against the joint costs to reduce the total cost attributed to the main products. The method chosen depends on the nature of the products and the information available at the split-off point.

Examples of Joint Products

1. This complexity underscores the importance of using consistent and logical methods to ensure the reliability of cost information for decision-making purposes.
2. Moreover, the allocation process can be complicated and may require estimates and assumptions, which introduces a margin of error.
3. Common costs are general, not attributable to any one department or area of the small business.

It is the cost accountant's job to trace these costs back to a certain product or process (cost object) during production. Some costs benefit more than one product or process in the manufacturing process. These methods are mainly classified onto engineering and non-engineering methods. Nonengineering methods are mainly based on the market share of the product; the higher help for solving cpas' ethical dilemmas market share, the higher proportion assigned to it e.g. net realizable value. In this method, the proportions are determined based on the sales value proportions.

Methodologies For Joint Cost Calculation

The Tax Calendar 2024 provides a roadmap for individuals and businesses, highlighting key dates and actions mandated by federal tax laws, to ensure compliance and financial efficiency. They turned 100 gallons of petroleum into 38 gallons of gasoline, 35 gallons of diesel, and 27 gallons of crude oil. Some costs are specific to the services, for instance, meals and flight attendants are specific costs of carrying passengers. It is in their very nature that Joint products or By-products can’t be produced individually.

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Accurate allocation and analysis of these costs play a critical role in pricing, profitability analysis, cost control, and strategic decision-making. While joint costs and common costs may, on the surface, appear very similar, they have a very different meaning in business accounting. Joint costs arise when the same resource results in two or more different products at the same time.

Typical universal costs in small businesses include electrical expenses, transportation and money costs such as depreciation and income taxes, reports Send Pulse. These shared costs include the basic production of multiple goods, and fuel costs. Some common costs change according to increases or decreases in overall production.

The quantity produced is 100Kg and 150Kg; and sold at ₹750 and ₹600 per Kg, respectively. If the estimated profit on sales is 50% on Sugar, 40% on Molasses and 34.27% on Jaggery, apportion the joint cost using reverse cost method. When we undergo the apportionment of joint cost for accounting purpose, we will see that there are different methods available for determining it.

While manufacturing, there comes the point where those yielded products get differentiated from each other. Joint cost allocation has advantages for a growing company, but it may also get difficult. The net realizable value method will take into account both sale and the additional cost require to complete the product.