INTRODUCTION

The present industrial scenario has undergone a paradigm shift to a

multi product, rather than a single product production environment
being very common. What adds complexity is the simultaneous
production of more than one product from a common initial process.
Their determination at the cost of such products, individually, hence
posses a daunting task to the cost accountant especially because they
are of such varied nature characterized by many peculiarities. Difficult
though it may be it is essential to make a fair and equitable allocation
of cost to each product since this is imperative not only for stock
valuation and income determination but also increasingly for
assessment of excise duty, transfer pricing etc, and also for divisional
profitability.

The essence of joint product or by-product costing lies in the allocation

or apportionment of joint processing cost to the individual products in
as equitable a manner as possible. Although the allocation or
apportionment of joint costs to determine the full cost of individual
products may not be of much help from the point of view of
management decision-making, it is very much essential for external
financial reporting, reporting under various statutory requirements,
valuation for tax legislation and also for valuation of inventories for
short period profit determination.

Joint-Products:
.
A joint product cost cay be defined as that cost which arises
from the common processing or manufacturing of products produced
from a common raw material. Whenever two or more different
products are created from a single cost factor, a joint product cost
results. A joint cost is incurred prior to the point at which separately
identifiable products emerge from the same process.
Example: Ethylene and Propylene arising from the cracking of Naphtha
Joint Product Cost:
A joint product cost cay be defined as that cost which arises from
the common processing or manufacturing of products produced from a
common raw material. Whenever two or more different products are
created from a single cost factor, a joint product cost results. A joint
cost is incurred prior to the point at which separately identifiable
products emerge from the same process.

By Products:

The term "by product" is generally used to denote one or more

products of relatively small total value that are produced
simultaneously with a product of greater total value.

Difficulties / Problems in Costing by Products and Joint

Products:
By products and joint products are difficult to cost because a true
joint cost is indivisible. For example, an ore might contain both lead
and Zink. In the raw state, these minerals are joint products, and until
they are separated by reduction of the ore, the cost of finding mining,
and processing is a joint cost; neither lead nor Zink can be produced
without the other prior to the split-off point.
The cost accumulated to the split-off point must be born by the
difference between the selling price and the cost to complete and sale
each mineral after the split-off point.
joint costs are frequently confused with common costs. However, there
is a significant difference between the two: a joint cost is indivisible
and common costs are divisible. Common costs are allocable among
products or service. Because each of the products or services could
have been obtained separately. Therefore, any shared costs of
obtaining them can be allocated on the basis of relative usage of
common facilities. For example, the cost of fuel or power may be
allocated to products on the basis of production volumes or metered
usage. The indivisibility characteristics of a joint cost is not always
easy to comprehend, since in some cases a joint cost can be divided
among joint products in accordance with a common cost causing
characteristic. However the result of such a division is of limited use to
management for decision making.
Because of the indivisibility of a joint cost, cost allocation and
apportionment procedures used for establishing the unit cost of a
product are far from perfect and are, indeed, quite arbitrary. The
costing of joint products and by products highlights the problem of
assigning costs to products whose origin, use of equipment, share of
raw materials, share of labor costs, and share of other facilities cannot
truly be determined. Whatever methods of allocation are employed,
the total profit or loss figure is not affected--provided there are no
beginning or ending inventories--by allocation costs to the joint
products or by products, since these costs are recombined in the final
income statement. However, a joint cost is ordinarily allocated to the
products on some acceptable basis to determine product costs needed
for inventory carrying costs. For this reason, there is an effect on
periodic income, because different amounts may be allocated to
inventories of the numerous joint products or by products under
various allocation methods. In addition, product costs may be required
for such special purposes as justifying selling prices before
governmental regularity bodies. However, the validity of splitting a
joint cost to determine fair regulated prices for joint products has been
questioned by both accountants and economists.
Methods of Costing By-Products:
The accepted methods for costing by-products fall into two categories:

Category 1:

A joint production cost is not allocated to the by product. Any revenue

resulting from sales of the by product is credited either to income or to
cost of the main product. In some cases, costs subsequent to split-off
point may be offset against the by-product revenue. For inventory
costing, any independent value may be assigned to the by product.
The methods most commonly used in industry are:
Method 1: Recognition of Gross Revenue:
Revenue from sales of the by product is listed on the income
statement as:
Other income.
Additional sales revenue.
A deduction from the cost of goods sold of the main product.
A deduction from the total manufacturing cost of the main product.
Method 2: Recognition of Net Revenue:
Revenue from sales of the by product less the costs of placing the by
product on the market (marketing and administrative expenses) and
less any additional processing cost of the by-product is shown on the
income statement in a manner similar to that indicated in method 1.
Method 3: Replacement cost method:

Replacement cost method ordinarily is applied by firms whose by-

products are used within the plant, thereby avoiding the necessity of
purchasing materials and supplies from outside suppliers.

Category 2:
Some portion of the joint production cost is allocated to the by product.
Inventory costs are based on this allocated cost plus any subsequent
processing cost. In this category, the following method is used:
Method 4: Market value method or reversal cost
method:
The market value method or reversal cost method is similar to the last
technique (By Product Revenue deducted from Production Cost)
illustrated at recognition of gross revenue method page. However it
reduces the manufacturing cost of the main product , not by the actual
revenue received, but by an estimate of the by products value at the
time of recovery. This estimate must be made prior to split-off from the
main product.

Methods of Costing joint Products:

Market or Sales Value Method--Allocation of Joint Cost:.

Market or sales value method enjoys great popularity because of
the argument that market value of any product is a manifestation of
the cost incurred in its production. The contention is that if one product
sells for more than another, it is because more cost was expended to
produce it. Therefore, the way to prorate the joint cost is on the basis
of the respective market values of the items produced. The method is
really a weighted market value basis using the total market or sales
value of each unit (quantity sold times the unit sales price).

Quantitative or Physical Unit Method--Allocating Joint

Product Cost:
Quantitative or physical unit method attempts to distribute the
total joint cost on the basis of some unit of measurement, such as
pounds, gallons, tons, or board feet. Of course, the unit products must
be measurable by the basic measurement unit. If this isn't possible,
the joint units must be converted to a denominator common to all units
produced, For example, in the manufacture of coke, products such as
coke, coal tar, benzol, sulfate of ammonia, and gas are measured in
different units. The yield of these recovered units is measured on the
basis of the quantity of product extracted per ton of coal.

Average Unit Cost Method--Allocating Joint Product

Cost:
unit cost method attempts to apportion total joint production cost to
the various products on the basis of a predetermined standard or index
of production. An average unit cost is obtained by dividing the total
number of units produced into the total joint production cost. As long
as all units produced are measured in terms of the same unit and do
not differ greatly, the method can be used without too much misgiving.
When the units produced are not measured in like terms, the method
cannot be applied.

Weighted Average Method--Allocating Joint Product

Cost:
many industries, the previously described methods do not give a
satisfactory answer to the joint cost apportionment problem. For this
reason, weight factors are often assigned to each unit, based upon size
of the unit, difficulty of manufacture, time consumed in making the
unit, difference in type of labor employed, amount of materials used
etc. Finished production of every kind is multiplied by weight factors to
apportion to total joint cost to individual units.

Conclusion:
 As many industries today, are confronted with the
difficult and complicated problem of assigning costs to their by-
product and joint products these industries should Determine a
more accurate and reliable cost allocation system for each
individual products on a consistent and uniform basis.

References:
Matz Adolph and Usry F Milton (2008),Cost Accounting.(7th ed).Dogar
Brothers.pp 186-191.
http://www.accountingformanagement.com/by_products_and_joint_products_costing.ht
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