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Commonly used input factors

Same materials Same process Output consists of multiple products

Agriculture Extractive Chemical Dairy farming Petroleum Flour milling Saw mill

Problem is allocation of costs up to point of separation. Correct determination of product costs and managerial decision making Leads to incorrect inventory valuation Wrong income measurements which is disastrous for managerial analysis and control


BY PRODUCTS Secondary product which incidentally results from the main product By products are secondary result of operation Joint product usually has greater commercial importance Relationship between by product and main product changes with changes in economic or industrial conditions(soap and glycerin) What is by product of one industry may become main product of another(coke and gas)

Dairy farming: butter milk is by product Manufacture of soap Methanol is a gas ;a by product in the manufacture of acetone

COMMON COSTS Cost of facilities or services employed in the output of two or more simultaneous produced operations ,commodities , services. Cost of indirect material, indirect labour and indirect expenses enjoyed by different products in a factory during course of production.




Convenient in tobacco industry, timber industry, flour milling, glue making industry Advantages are: 1. Simple and easy to use 2. All joint products have uniform costs 3. Logical to use Disadvantages: 1. Cannot be used till end products are expressed in same unit 2. Cannot be used to set prices in highly competitive markets 3. Not all joint products are equally costly. Adequate weightage is not given 4. This method is not useful for decision making as operator has to rely on experience and rule of thumb for determining types and grades of products to be produced.

Example: Total production- 25,00,000 ft Total cost (upto split off point)- Rs.53,000 Average cost per 1,000 ft Rs.21.20 Grade Qty produced(ft)
1 2 3 4 2,50,000 12,50,000 5,00,000 5,00,000

PHYSICAL UNIT COST METHOD A physical base like raw material in physical output quantity is taken as basis for apportioning costs Advantages: 1. Easy to use and simple 2. Technically sound Disadvantages: 1. When output has different types of units like liquids and solids 2. Assigns same costs to low and high quality joint products

Example The following data have been extracted from the books of Bharat Coke Co. Ltd. Yield per tonne of coal Coke 665 Tar 57 Benzol 19 Sulphate of ammonia 19 Gas 190 Water(waste) 50 The price of coal is Rs.200 per ton. Direct labour and overhead costs to the point of split-off are Rs.300 and Rs.400 resp. per ton of coal. Calculate material, labour and overhead and total cost of each product on the basis of weight.

SURVEY METHOD Joint products are multiplied by their weight factors prior to allocation of joint costs to individual joint products When it is possible to assign weight to joint products this method maybe used Advantages: 1. Accurate allocation 2. More equitable than other methods 3. Effort is made to allocate costs according to the benefits of each of the joint product Disadvantages: 1. Weights are assigned arbitrarily. Maybe baseed on intuitive judgement 2. Weights used maybe inappropriate

EXAMPLE In a company , following pre-separation costs are incurred: Material: Rs.20,000 Wages: Rs. 10,000 Production overhead: Rs.10,000 Output and weights of 3 products: Product Output Weight A 200 units 8 B 1200 units 5 C 800 units 3

CONTRIBUTORY MARGIN METHOD Joint costs are divided into 2 categories : fixed and variable. The variable costs are applied on the basis of units produced or other physical quantities and fixed costs on the basis of contribution made by the various products.

Example A firm produces 3 grades A,B and C of pickles at a total cost of Rs. 2,095 of which fixed costs are Rs.975. The quantity produced and sold are 50kgs, 30 kgs. and 60 kgs. and selling prices are resp. Rs. 18, Rs. 16 and Rs. 15 per kg. Apportion the joint costs.

MARKET VALUE METHOD Under this method joint cost are allocated on the basis of sales value.i.e. product with higher sales bears more of the joint cost. Following variants of this method are more commonly used: Market value at point of separation Market value after further processing Net value method Under this method the value of individual joint product is reduced by the following : a. Estimated profit margin b. Estimated selling & distribution expenses, if any c. Cost of processing after the split-off point

X Ltd manufactures 3 products A,Band C. The actual joint costs for the period were Rs.16,000.It was estimated that the profit on each product as percentage of sales would be 30%,25% and 15% resp. Subsequent expenses were as follows: A B C Materials Rs. 200 Rs.150 Rs. 50 Direct wages 400 250 100 Overheads 300 250 150 TOTAL 900 650 300 Sales 12000 8000 5000 Prepare a statement showing apportionment of joint costs of manufacture over the different products.


Sales of by-products credited to costing profit&loss account as misc. income. In this case the entire cost is debited to the main product Sales income credited to process account Reverse cost method: This process is used mostly in cottonseed processing industry. Under this method sale value of by-product is first reduced by : Estimated profit margin Selling& distribution costs Post split-off costs and cost of main product is thus reduced by this net figure

Example: In manufacturing the main product A, a company processes the resulting waste material into two byproducts B1and B2. Using the method of working backward from sales value to an estimated cost ,prepare comparative profit & loss statement of the 3 products from the following data: Total cost upto separation point: Rs.60,000
Cost after separation(Rs.) Estimated net profit as a% to sales value Estimated selling expenses as % to sales value 100,000

10,000 3,000 20%

20,000 6,000 30% 20%