INTRODUCTION

The following work will talk about the different cost systems as they are: Joint Product Cost
System-co-productions and by-products, activity-based cost system, Throuput accounting-
based cost system, their definition and examples of these cost systems, as well as the different
accounting methods for each of these systems, with examples, and final conclusions about
each of them in order to understand their pros and cons in each of the its uses.

SETS AND BY-PRODUCTS

When more than one product is generated in a company or industry in the production phase,
those products take the name of joint products or by-products which are classified according
to a market-generated value (sales income).

In most industries a product generates quite a few by-products, as in the oil industries
generate, Diesel, gasoline, etc. All this based on the refining of oil which is the main product.

JOINT PRODUCTS

These products are individual products, which have a significant sales value which are made on
the basis of the same raw material or process, which can be presented more commonly in
packaging industries, where oils are made, etc.

These products are characterized mainly because they have a physical relationship as to the
process that is carried out, that is, when making a series of joint products are produced or give
rise to the creation of other products derived from them. At a certain point these products go
on to make independent which can already be sold or will undergo a new process as the case
may be. But the main feature of these sets is that their none of these will be significantly
greater than the rest of the products.

Byproducts

For the production of these products it should be taken into account that these products
consist of direct labor, direct materials and indirect costs. Given this, a problem arises or
makes it difficult in terms of joint costs to be invisible, since these costs are not easily
associated with the products, although at other times these costs are confused with the
common costs, those common costs are those that are directly associated with the processed
products and can be effectively associated with each of the processed products. These by-
products as well as the joint products depend directly on a common raw material and an equal
production system. These by-products are generally not posted immediately but are posted at
the time they are sold.
The following are commonly used methods for allocation of total costs incurred upto the
separation point or split-off point among joint products:

1. PHYSICAL UNITS METHOD:

A physical base like raw materials weight or volume of the products like kgs., tonnes, litres,
gallons, bales, number of units etc. is taken as basis for apportioning the joint costs to products
under this method. The process is borne by the joint products in the ratio of their output
weight.

Advantages:

(a) It is a simple and easy method for understanding and application.

(b) It is technically sound.

Disadvantages:

(a) It is equitable to allocate joint costs on the basis of physical weight without consideration of
its sale value.

(b) If the output cannot be expressed in physical quantities, this method cannot be applied.
(c) Similar allocation will be made to all joint products irrespective of its quality.

(d) It is not logical to treat all products is equally important, desirable and valuable.

2. MARKET VALUE METHOD:

In this method, joint costs will be apportioned to the products in the ratio of selling price of
respective individual products. The rationale underlying this approach is that product with
higher sales value should be allocated with a larger proportion of joint costs than the products
with lower sales value.

This ability to absorb joint costs is measured either by sale value or selling price. This method is
advocated based on the argument that it is a convenient method for apportionment of joint
costs based on ability to absorb i.e., if one product sells more, more costs should be allocated
to it than the product with lower sale value.

Criticism is levelled against the above method based on the following reasons:

(a) Selling prices of some joint products are fairly stable while others fluctuate and it makes
allocation of joint costs difficult.

(b) Determination of relative selling prices of joint products itself a difficult and time
consuming process.

The following variants are in practice in this method of allocation of joint costs:

Market Value at Separation Point:

The market value of individual joint products at the point of separation i.e. at the split-off
point, is ascertained and the joint costs will be apportioned in the ratio of market value
ascertained as above.

Market Value at Finished Stage:

In this method, the common costs and joint costs are apportioned to the joint products in the
ratio of final selling price of individual products and costs incurred for further processing will
be added to the respective joint products for determination of product costs.

Net Realizable Value:

The sale value of final product reduced by the estimated net profits, direct selling and
distribution expenses and the cost of processing after the separation point will be taken as
basis for apportionment of joint costs to determine the product costs.

3. CONTRIBUTION MARGIN METHOD:

Under this method the joint costs are divided into variable and fixed costs. The variable costs
are applied to joint products on the basis of units produced or other physical quantities. In
case the products are processed further after split-off point, then all variable costs incurred be
added to the variable costs ascertained earlier.

Then total variable costs will be applied to joint products on the basis mentioned above and
deduct it from respective sales values to ascertain the contribution of each joint product. The
fixed costs will be apportioned in the ratio of contribution made by individual products.

4. AVERAGE UNIT COST METHOD:

Under this method total joint costs upto the point of separation are divided by the total units
produced to get average cost per unit of production. This method is advocated where
processes are common and inseparable for the joint products and where the resultant
products can be expressed in terms of common unit.

5. SURVEY METHOD:

Under this method, technical survey of the production process and the costs involved is made
and point values will be assigned to the products according to their relative importance and
joint products are multiplied by their assigned points to arrive at the weights for allocation of
joint costs to individual joint products. This method is more scientific as compared to other
methods.

6. STANDARD COST METHOD:

Where the Standard Costing system is in vogue, the joint costs of the product will be
apportioned on the basis of standard costs set for the respective joint products.

This method is supported for the following reasons:

(a) It is a convenient method for determining the maximum price that can be paid for raw
materials in the manufacture of joint products.

(b) It provides basis for measuring efficiency of the process in producing joint products.

(c) It provides for comparison of actual material and conversion costs with standards set,
which provides basis for fixing up purchase prices.

7. DIRECT ALLOCATION METHOD:

This method is applied where joint costs are identifiable or capable of being technically
estimated to be allocable to each of the joint products.

CONCLUSION

The key point to remember about the cost allocations associated with joint products and by-
products is that the allocation is simply a formula – it has no bearing on the value of the
product to which it assigns a cost. The only reason we use these allocations is to achieve valid
cost of goods sold amounts and inventory valuations under the requirements of the various
accounting standards.

BIBLIOGRAPHY

https://www.accountingnotes.net/cost-accounting/products/joint-products-definition-and-
accounting-cost-accounting/10516

https://www.accountingtools.com/articles/2017/5/14/by-product-costing-and-joint-product-
costing#:~:text=A%20joint%20cost%20is%20a,and%20which%20has%20minor
%20sales.&text=Besides%20the%20split%2Doff%20point,one%20or%20more%20by
%2Dproducts.

http://accioneduca.org/admin/archivos/clases/material/costos-conjuntos_1563976549.pdf