JOINT PRODUCTS AND BY-PRODUCT

Introduction
The Concept of Joint Products
The process costing principles discussed s o f a r are shown to be all about determining the
cost of processing some inputs that yield the same types of products. At the end of the
processing activities, only one type of product would result from the processed raw material.
However, it is not always that we have only one type of product from a processing operation. It
is possible for a single raw material to yield two or more products simultaneously when
processed. Such products are known as Joint Products. For example, when crude oil (a single
raw material) is processed or refined, petrol, kerosene, gas, etc., could be obtained from it.

The cost of processing a production input (raw material) that would amount to joint products is
known as Joint Cost. The joint cost is to be restricted to the split-off point (point after which
each joint product would be incurring separate processing cost). Joint cost is not to be traced to
any particular product but rather to all the joint products as a group. There are many ways of
apportioning joint cost to joint products for financial accounting purposes.
In practice, it is normal to identify one product out of the joint products as the main or
principal product and the rest to be treated as joint products or even by-products. In the
example above, it is clear that petrol is the main product to be identified as crude oil is
processed. Pairs of shoes could be main products as leather is processed, while bags, wallets,
etc., could be seen as joint or by-products.

One way of differentiating between by-product and joint product is to consider their cost of
production or sales value. A product that costs 10% to 15% of the main product cost should be
treated as a by-product. Any product that costs 15% to 40% of the main product cost is a joint
product. Any product that costs above 40% of the identified main product cost should also be
treated as a main product.

As a result of changes in price, therefore, a by-product can become a joint-product or even a

main product and vice versa
Joint products are two or more products separated in a process, each of which has a significant
value.
A by-product is an incidental product from a process which has an insignificant value
compared to the main product.
Joint products are two or more products which are output from the same processing operation,
but which are indistinguishable from each other up to their point of separation.
A by-product is a supplementary or secondary product (arising as the result of a process) whose
value is small relative to that of the principal product.
(a) Joint products have a substantial sales value. Often they require further processing before
they are ready for sale. Joint products arise, for example, in the oil refining industry where diesel
fuel, petrol, paraffin and lubricants are all produced from the same process.
(b) The distinguishing feature of a by-product is its relatively low sales value in comparison to
the main product. In the timber industry, for example, by-products include sawdust, small offcuts
and bark.
What exactly separates a joint product from a by-product?
(a) A joint product is regarded as an important saleable item, and so it should be separately
costed.
The profitability of each joint product should be assessed in the cost accounts.
(b) A by-product is not important as a saleable item, and whatever revenue it earns is a 'bonus'
for the organisation. Because of their relative insignificance, by-products are not separately
costed.

Problems in accounting for joint products

The point at which joint products and by-products become separately identifiable is known as
the splitoff point or separation point. Costs incurred up to this point are called common costs
or joint costs.
Costs incurred prior to this point of separation are common or joint costs, and these need to be
allocated (apportioned) in some manner to each of the joint products. In the following sketched
example, there are two different split-off points.
Problems in accounting for joint products are basically of two different sorts.
(a) How common costs should be apportioned between products, in order to put a value to
closing inventories and to the cost of sale (and profit) for each product
(b) Whether it is more profitable to sell a joint product at one stage of processing, or to process
the product further and sell it at a later stage

Methods of Apportionment of Joint Cost

There are three popular methods of sharing joint cost to the joint (or main) products. These are
the Physical Units Bases, Sales Value (at the point of separation) and Net Realization Basis.
These methods are briefly discussed below:

(a)Physical UnitsBasis
Under this method, the joint cost is shared among the joint products on the basis of the
quantities of physical units, provided all the products are measured by a common unit of
measurement, such as kilograms or litres. The problem with this method is that
consideration is not given to price and, so, it does not consider the value of the products.
Usually, the value of products is the most important factor to be considered.
 Anadariya Company Ltd., Tiga has a processing system that produces three products: K, S and
T with 5,000 kg, 3,000 kg and 2,000 kg, respectively, in a year. The total cost incurred up to
the split-off point in the year 2000 was N1,000,000. Use the physical units basis to share the
joint cost among the three products. Calculate also their unit cost.
The Ratio:
K = 5,000 x 100 =
50%
10,000
S = 3,000 x 100 =
30%
10,000
T = 2,000 x 100 =
20%
10,000

Share of joint cost:

K = 50% of N1,000,000 = N500,000
S = 30% of N1,000,000 = N 300,000
T = 20% of N 1,000,000 = N 200,000

2. Unit Cost based on the share of joint

cost: K = N500,000 = N100/unit
5,000
S = N300,000
N100/unit
3,000

T = N200,000 N100/unit
2,000
b. Sales Value (at the Point of Separation)
Under this method, the joint cost is shared among the joint products on the basis of their sales
value before further processing. At the split off point, market value can be estimated per unit of
each of the joint products. It is the ratios of the sales value of the joint products that are to be
used as basis of apportioning the joint cost.

The problems with this method are two-fold: One, a product may have zero value at the point
of separation but significant value with little processing cost after the split-off point. Secondly, a
product may have high selling price at the split-off point and hence high sales value but may
involve large selling and distribution cost (advert, carriage, etc.).

Assuming that Anadariya Company Ltd has estimated the following selling prices for its
three products at the point of separation:
K = N400/unit
S = N440/unit
T = N340/unit
Use the Sales Value method to apportion the joint cost and determine the unit cost of each of
the three products.

Product Unit SP/Unit Sales Value Ratio Share of

JC N N N
N
K 5000 400 2,000,000 50% 500,000
S 3000 440 1,320,000 33% 330,000
T 2000 340 680,000 17% 170,000
4,000,000 1,000,000
Unit cost based on the share of joint cost: K
= N500,000 = N100/Unit
50
00
S = N330,000 = N110/Unit
3000
T = N170,000 = N85/Unit
2000
(c) Net Realizable Value Basis
This method is used only when further processing is necessary or when high marketing
and distribution costs are involved. Net realization is sales value less the incremental
cost of further processing after the split-off point and any other cost necessary for the
selling or distribution of the product.
 Assuming that the sales values in illustration in the previous example are market prices after
further processing and that separate processing and marketing costs are as follows:
K = N200,000
S = N300,000
T = N160,000

Determine the share of the joint cost to the three (3) products. Show also the unit cost of each
of the three products.
1.
Product Units SP/Unit Sales Value SPC NRV Share of
N N N N JC N

K 5000 400 2,000,000 200,000 1,800,000 538,922

S 3000 440 1,320,000 300,000 1,020,000 305,389
T 2000 340 680,000 160,000 520,000 155,689
Total 10,000 4,000,000 3,340,000 1,000,000

(a) Net Realizable Value (NRV) = Sales Value Less separate processing costs (SPC)
(b) The total of the NRV of all the joint products is obtained and the joint cost is shared in
proportion to the NRV of each product.
(c) This method is the 'best' as it considers the quantity (units) produced of all the joint
products, their sales values and their further processing costs.

Unit cost based on the share of joint cost:

K = N538,922 = N108/unit
5,000
S = N305,389 = N102/unit
3,000
T = N155,689 = N78/unit
2,000
Accounting for by-products
Accounting for by-products
Accounting for by-products
Introduction
The most common method of accounting for by-products is to deduct the net realisable value of
the byproduct from the cost of the main products.
A by-product has some commercial value and any income generated from it may be treated as
follows.
(a) Income (minus any post-separation further processing or selling costs) from the sale of the
byproduct may be added to sales of the main product, thereby increasing sales turnover for the
period.
(b) The sales of the by-product may be treated as a separate, incidental source of income
against which are set only post-separation costs (if any) of the by-product. The revenue would be
recorded in the statement of profit or loss as 'other income'.
(c) The sales income of the by-product may be deducted from the cost of production or cost of
sales of the main product.
(d) The net realisable value of the by-product may be deducted from the cost of production
of the main product. The net realisable value is the final saleable value of the by-product minus
any post-separation costs. Any closing inventory valuation of the main product or joint products
would therefore be reduced.

The choice of method (a), (b), (c) or (d) will be influenced by the circumstances of production
and ease of calculation, as much as by conceptual correctness. The method you are most likely to
come across in examinations is method (d). An example will help to clarify the distinction
between the different methods.

Example: Methods of accounting for by-products

During November 20X3, Splatter Co recorded the following results.
Opening inventory main product P, nil Cost of production ₦120,000 by-product Z, nil
Sales of the main product amounted to 90% of output during the period, and 10% of production
was held as closing inventory at 30 November.
Sales revenue from the main product during November 20X2 was ₦150,000.
A by-product Z is produced, and output had a net sales value of $1,000. Of this output, ₦700 was
sold during the month, and ₦300 was still in inventory at 30 November.
Required
Calculate the profit for November using the four methods of accounting for by-products.