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MAC2601 LEARNUNG UNIT 13
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CHAPTER 2: Decision-making based on internal cost allocationCHAPTER 2
LEARNING UNIT 13: Joint products and by-products
ASSESSMENT CRITERIA
After working through this learning unit, you should be able to:
• distinguish between joint products and by-products
• allocate joint costs to products according to the different methods
• discuss the arguments for and against each of the methods of allocating joint costs to products
• explain why joint costs are irrelevant in a sell-or-process further decision
• record accounting entries for by-products
You should spend approximately 3 hours on mastering the learning outcomes of this Learning Unit.
13.1 INTRODUCTION
In discussing process costing in Learning Unit 12, we saw that input (direct materials) are introduced
into a process, whereafter conversion takes place and outputs (identical products) are delivered. The
cost of production is then allocated to all the identical units manufactured.
Joint products and by-products arise where the same materials put into production inevitably lead to
the production of two or more different (non-identical) products. Joint products are two or more
products separated while processing, each having a sufficiently high sales value to merit recognition
as a main product. By-products are outputs of some value that are produced incidental to the
production of a main product or joint products. The initial production process is a joint process, during
which the different products are not identifiable. When the products become individually identifiable,
they may or may not undergo further individual processing. The end of the joint process marks what
is referred to as the split-off point, i.e., the point where the different products are split up, either for
further processing or for selling on their own. Some examples of joint products are:
Material (input) Joint products (output)
Cocoa beans cocoa powder, cocoa butter
Pork ham, bacon, spareribs
Copper ore copper, silver, lead, zinc
Crude oil petrol, diesel, paraffin, benzene
By-products are incidental, secondary products that emerge from the joint process, but have little value
in relation to the main or joint products being manufactured. By-products are not scrap of rejects; they
are created inadvertently during the process of manufacturing a main product or joint products.
Decisions about to sell or further process by-products are usually made at the split-off point. Examples
of by-products are:
Material (input) By- products
Cocoa beans cocoa pod husk, used for manufacturing black soap.
cocoa shells, used for mulch in gardening.
Pork blood, bones, skin, lard, trotters, internal organs, etc, that can be used in many
applications, like food, pet food, medical and pharmaceutical uses, etc.
Copper ore sulfuric acid.
Crude oil paraffin wax, used to coat cheese, raw fruits and vegetables, as well as
manufacturing cosmetics such as lipstick.
polyester, used in clothing manufacturing. Note that, unlike cotton, which is a
100% natural fibre, polyester is not biodegradable.
Although by-products may well have a significant absolute value, the test for its classification in the
company is if its sales value is small compared to the sales values of the joint products or main product.
MAC2601 P a g e | 216 Learning unit 13
, CHAPTER 2: Decision-making based on internal cost allocation
Joint products are essential to the viability of the company while by-products are incidental. By-
products will not ordinarily influence decision-making in the company, and they usually do not affect
the prices set for the main (joint) products.
Sometimes a joint process leads to the production of one main product and one or more by-products;
at other times the process may lead to two or more joint products and one or more by-products.
Figure 13.1 uses the example of the production process for meat from a beef carcass. By-products (the
bones) are usually sold after the joint process (the split-off point) without any further processing. The joint
products (meat cuts and mince, in this example) undergo further, separate processing after the initial
joint process.
FIGURE 13.1 Production process for joint and by-products
Split-off
Steaks Sold
For further processing into cuts Furher processing Roasts Sold
Cooking Sold
Carcass Conversion in joint process For further processing into mince Further processing Mince Sold
By-product: bones Sold
The classification of products as main products, joint products or by-products, is not always obvious.
Companies would differ in what they deem as a relative sales value, high enough for the product to be
considered as a joint product and not a by-product. For example, the difference in the relative sales
values of petrol and paraffin is significant, yet some companies may classify paraffin as a joint product,
while others may consider it a by-product. On top of that, the classification may change over time as
market prices increase or decrease.
13.2 JOINT PRODUCTION COSTS
Joint and by-products are not identifiable as different (individual) products until a specific point in the
production process is reached. This point is known as the split-off point.
It should already be clear to you that, before the split-off point, production costs cannot be traced to
the individual product types. Take for example the manufacturing process of chocolate; cocoa growers
harvest cocoa pods and remove the cocoa beans (a manual process) whereafter the beans are
fermented for about a week and then dried. After drying, the beans are scooped into sacks and shipped
to the manufacturer. The manufacturing process comprises the following steps:
Step 1: Winnowing the outer shell of the beans is removed, and the inner cocoa bean ('meat') is
and drying broken into small pieces called cocoa nibs.
Step 2: Roasting The cocoa nibs are roasted.
Step 3: Grinding The roasted nibs are ground into a liquid, called mass.
Step 4: Cooling The mass solidifies on cooling and forms the basis for the production of e.g.,
cocoa powder and cocoa butter.
The end of step 4 marks the split-off point in the process. It is not possible to assign the production
costs incurred during the execution of steps 1 – 4 to the production costs of cocoa powder or cocoa
butter; up to this point the powder and butter are not even recognisable.
The production costs incurred up to the split-off point are referred to as joint costs (or common costs
or pre-separation costs) and all the joint products must carry their fair share of these costs. After the
split-off point products become separately identifiable and the costs become separable. Separable
MAC2601 P a g e | 217 Learning unit 13
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