Joint products imply that they are produced from the same basic raw material, are comparatively of equal importance, are produced simultaneously by a common process and may require further processing after the point of separation.
ACCORDING TO CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON
“Joint products is two or more products separated in the course of processing each having a sufficiently high value to merit recognition as a main product”.
FEATURES OF JOINT PRODUCTS
(a) Joint products are the result of utilization of the same raw material and same processing operations. The processing of a particular raw material may result into the output of two or more products.
(b) All the products emerging from the manufacturing process are of the same economic importance. In other words, the sales value of those products may be more or less same and none of them can be termed as the major product.
(c) The products are produced intentionally which implies that the management of the concerned organization has intention to produce all the products.
(d) Some of joint products may require further processing or may be sold directly after the split off point.
(e) The manufacturing process and raw material requirement is common up to a certain stage of manufacturing. After the stage is crossed, further processing becomes different for each product.
This stage is known as ‘split off’ point. The expenditure incurred up to the split off point is called as joint cost and the apportionment of the same to different products is the main objective of the joint product accounting.
(f) The management has little or no control over the relative quantities of the various products that will result.
(g) Joint products are commonly produced in industries like, chemicals, oil refining, mining, meatpacking, automobile etc. In oil refining, fuel, oil, petrol, diesel, kerosene, lubricating oil are few examples of the joint products.
ACCOUNTING FOR JOINT PRODUCT COST
The following terms should be very clear before proceeding to account for Joint Product Cost:
(i) Split Off Point: This is a point up to which, input factors are commonly used for production of multiple products, which can be either joint products or by-products. After this point, the joint products or byproducts gain individual identity. In other words, up to a certain stage, the manufacturing process is the same for all the products and a stage comes after which, the individual processing becomes different and distinct.
For example, in a dairy, several products like, milk, ghee, butter, milk powder, ice-cream etc. may be produced. The common material is milk. The pasteurization of milk is a common process for all the products and after this process; each product has to be processed separately. This point is of special significance in the accounting of joint product and by-products because the joint cost incurred before this point is to be apportioned appropriately in the joint products.
(ii) Joint Costs: Joint cost is the pre separation cost of commonly used input factors for the production of multiple products. In other words, all costs incurred before or up to the split off point are termed as joint costs or pre separation costs and the apportionment of these costs is the main objective of joint product accounting. Costs incurred after the split off point are post separation costs and can be easily identified with the products.
In case of joint products, the main objective of accounting of the cost is to apportion the joint costs incurred up to the split off point. As discussed earlier, the manufacturing process is same up to a certain stage and after crossing that stage; each product has distinct manufacturing process. Therefore the main problem is apportionment of the joint cost or the cost incurred up to the split off point.
The total cost of production of the joint product will be cost incurred up to the split off point duly apportioned plus the cost incurred after the split off point. There is no problem of charging the cost incurred after the split off point as the cost can be identified easily. The main problem therefore is that of apportionment of the joint cost and the following methods are used for apportioning the same.
(I) PHYSICAL QUANTITY METHOD: Under this method, cost apportionment is made in proportion to the volume of production. These physical measures may be units, pounds, liters, kilos, tones, gallons etc.
(II) AVERAGE UNIT COST METHOD: Under this method, the joint cost is apportioned to the joint products by computing the average unit cost of the product units. The average unit cost is computed by dividing the total manufacturing cost by the total number of units produced of all products.
This method is useful where all the products produced are uniform with each other in all the respects. This method will not be useful if the production units are not similar with each other.
(III) WEIGHTED AVERAGE METHOD: Under this method, weights are assigned to each unit based upon size of the units, difference in type of labor employed, material consumption, market share, efforts of labour required and so on. The joint cost is apportioned on the basis of the weights assigned to each product.
This method is highly useful if the weights assigned are on objective basis. If subjective element creeps in, the method may not give accurate results.
(IV) SELLING PRICE METHOD: Under this method, the joint cost is apportioned on the basis of sales value at the split off point. The logic is that a product should bear the share of the joint cost according to its sale price. If sales price is higher than that of the other products, more share of joint cost should be charged to that product and if it is comparatively less than that of other products, less share of joint cost should be charged to the same.
Though logically this method seems to be sound, in practice, charging higher share of joint cost to the product with higher sales value may not be justified due to the fact that lesser efforts are required for manufacturing of the same.