If there is any loss of the resources consumed by the process, the losses are called spoilage/wastage.

Calculating costs and profits of by-products 🔗

At some point, the complexity of trying to administer a firm with too many goods and services will offset any cost savings, particularly if the goods and services share little in terms of production resources or processes. However, sometimes firms discover scope economies that are not so obvious and can realize increased economic profits, at least for a time until the competition copies their discovery. This process only takes the total joint cost and divide the total quantity of all products type.

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We need to have a preset standard cost for each product type, and then the cost will absorb based on that rate. It still faces some problem when the selling price of product fluctuate based on various reasons. There will be a question of whether we calculate the cost first or we calculate the selling price first. Another example is meat production, in which we will end up with many outputs such as meat, hides, bones, and grease.

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• If it’s not possible to determine the sale price of each product at the split-off point, the gross margin method may be the only option.
• At this stage, either the products are sold directly or go for further processing, to turn out as finished product.
• Furthermore, internal factors, such as production efficiencies and changes in cost structure, require constant adjustments to pricing strategies to ensure they remain optimal and competitive.
• The challenge for the refinery is to determine how much of the total production cost to allocate to gasoline versus diesel.

Co-products are the secondary product that results alongside the main product. An increase in one product’s output will increase the quantity of the other products, or vice versa, how to claim the property tax deduction but not necessarily in the same proportion. Management may have decided, however, that it is more profitable to process certain products further before they are sold.

When we undergo the apportionment of joint cost for accounting purpose, we will see that there are different methods available for determining it. This method accurately reflects the relative value of the resources used in the production of each product and is consistent with accounting principles. One type of cost savings is the ability to share fixed costs across the product and service lines so that the total fixed costs are less than if the operations were organized separately. For example, suppose we have a company that expands from selling one product to two similar products.

The physical units method is usually applied to the joint products which are similar in state and have a standard unit of measurement. In this method, the apportionment of the joint cost is done through relative quantity or weight of the joint products, at the split-off-point. For example, a paper company produces paper pulp as the main product and wood chips as a by-product. The cost accountant uses the sales value at the split-off method to allocate joint costs between paper pulp and wood chips. Cost accountants must consistently use the same allocation method to ensure comparable financial statements. It may be difficult to compare the financial statements if different allocation methods are used for joint and by-product costs from year to year.

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Joint costs are incurred at the outset, even if each product possesses some value when it emerges from the process. The classic example of joint products is found in the meatpacking industry, where various cuts of meat and by-products are processed from one original carcass with one lump sum cost. Hence, the business can’t produce a single product when the process is for the production of a joint product. On the contrary, the co-products can be processed at the will of the business.

It may be defined as the cost incurred to produce two or more different products by processing one or more raw materials through a common production process or a series of production processes. Another method for allocating joint costs is the sales value at the split-off method. Under this method, joint costs are allocated based on the sales value of each joint product at the point where they are separated from each other in the production process. Any outputs having insignificant economic value and which are not primarily intended to be manufactured are called by-products. This differentiation is needed because of difference in accounting between by-products and joint products.

In summary, cost accountants must ensure that joint and by-product costing complies with regulatory requirements, including tax regulations and accounting standards. For example, if the wood chips have a value of $20 per batch, and 10% of the logs are turned into wood chips, then the cost accountant would allocate $2 of the total joint costs to the wood chips. When deciding on the most effective way to allocate costs, joint and by-product costing are two popular methods. Joint costing is used when two or more products are produced from a common process, and the costs must be divided between the products.

The chosen method depends on the nature of the products and the information available to the company. Allocating joint costs is an important aspect of cost accounting for companies that produce joint products. Joint costs are the costs incurred in the production of joint products, such as the cost of raw materials and direct labor. Cost accountants must choose an allocation method that accurately reflects the resources used and the value of the products produced.