Provide a clear and simple explanation of Joint-and by-product costing, as covered in learning unit 9 of the 2024 curriculum. This should be based on the textbook "Principles of Management Accounting - Third Edition."
- A process costing system calculates the average cost for making similar
products. Sometimes, one process produces multiple items, like milk, butter,
cheese, and cream from raw milk. This is called a joint process.
- The main challenge is dividing the costs fairly among these products before
they are clearly identifiable. We need fair ways to split these costs, as
explained in Section 9.2, and international standards address this in Section
9.3.
- Besides, we must think about how these joint costs aJect decisions. Often,
they're unavoidable and don't impact choices thus irrelevant. This is
discussed further in Section 9.4.
Cost accounting treatment of joint costs:
Joint costs must be divided among the products made from a joint process to fairly
value inventory. DiJerentiating between joint products, by-products, scrap, and waste
helps decide how to handle these costs.
- Joint products are items made simultaneously during the process,
distinguishable only at the end. They have significant sales value.
- By-products, with minor sales value compared to joint products, can be sold
as is or require further processing.
- Scrap is leftover material still identifiable at the end of the process. It has
some value.
- Waste has no value and may require disposal at a cost.
For example, a meat processing organisation produces T-bone and rump steaks from
cattle. The hides become low-quality leather goods, considered by-products. Less
popular parts like tripe are sold as scrap, while unusable parts are waste.
Table 9.1 summarizes these product types:
Product Value Form (to distinguish by- Example
products from scrap)
Joint Significant sales T-bone and rump
product value steak
By-product Relatively smaller DiJerent from the Leather
sales value original materials
Scrap Relatively small Raw materials still Tripe
sales value identifiable
Waste No sales value Remaining parts of
the carcass
, LU 9 – Joint and By-product costing
Labour and Product A
overheads
Joint
process Product B
Raw materials Product C
Split-oJ point
Joint process.
The main characterising features of by-products are the following:
- Their production arises incidentally as a result of producing the main
product/s.
- They are not crucial to the commercial success of the organisation.
- Their production does not normally influence the selling prices of the main
products.
Unlike joint products, by products are therefore not allocated any of the joint costs.
Where by-products have some sales value (either at the split-oJ point or after further
processing), the sales value or the net sales value, after deducting the further
processing costs, is deducted from the joint costs and in this way is allocated to the
joint products. This treatment is illustrated in example 9.1.
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