Joint products are multiple products that result from a single process and the same materials. In general, the manufacturing will convert raw materials to finished products and waste that does not have any economic value. The company usually sells the products for revenue. The wastage is the minority output that is lost during the production process. It is not considered as output due to the immaterial value. The company usually ignores the wastage and excludes it from the consideration.
In the joint product’s process, there are multiple outputs produced at the same time, they have similar economic value. By the end of the process, the company has two or more output which has significant value. The company has enough knowledge to produce all the outputs.
Some outputs of the joint product may require further process after the split point. We cannot identify all the products as primary or secondary products.
Example of Joint Product
In oil production, we will generate many outputs such as petroleum naphtha, gasoline, diesel fuel, asphalt base, heating oil, kerosene, liquefied petroleum gas, jet fuel, and fuel oils. We can see that all these outputs are joint products.
Another example is meat production, in which we will end up with many outputs such as meat, hides, bones, and grease.
The production of butter, cheese, and cream from milk is also another example of a joint product.
What are the Characteristics of Joint Product?
|Characteristics of joint product|
|It requires the same raw material||As we can see in the example above, all the products need the same input, but they will generate different types of output. The inputs can be multiple types of materials, but they contribute to all output.|
|The output has a similar economic value||All the joint products have similar economic value, and we cannot identify the primary or secondary product base on its value.|
|A further process to turn into the finished product||Some products will require additional processing to be completed products in the market.|
|All outputs are not produced by accident||There is no such kind of surprise output here, the company knows clearly about its production process and the result.|
Accounting for joint product – Cost Allocation
It is quite challenging for the company to allocate the cost of each product that results from the same process. All the joint products have come from the same material, process, and cost. We must allocate the total cost to each product cost. There are several methods that can use to make cost allocation as follows:
Physical unit method
All of the output will measure by their physical weight or volume such as tones, kg, liter, and so on. The cost of raw material will be proportion to all products base on each physical output.
It sounds reasonable and easy to understand. The way of calculation is also simple; we can measure it one time and use it forever unless there is something change within the production process.
However, it will be hard for some products in which the output cannot be measured easily. Some process uses the same raw material but produces the output of a liquid and solid item. It will be not practical to use this method.
Market Value method
This method will compare all product selling prices as a percentage of total sales. The cost will be proportion by that percentage. We assume that the product will higher value and should consume at a higher cost.
It still faces some problem when the selling price of product fluctuate based on various reasons. So we will need to update it so often, which is time-consuming. There will be a question of whether we calculate the cost first or we calculate the selling price first.
First, we need to separate the variable cost from the total cost; the remaining will be the fixed cost. The variable cost will be allocated base on the actual or physical method.
Then we will perform a simple calculation to define the contribution margin of each product type (Contribution margin = sale – variable cost).
The next step is to calculate the percentage of each product contribution margin. And the fixed cost will be separated by the contribution margin percentage.
Average Unit cost method
This process only takes the total joint cost and divide the total quantity of all products type.
It will be simple but only apply to the product with similar features and price, and the output can separate in common units.
This method will take a look at all aspects in the production process which impact the cost of each product. From the material use, worker wage, how the machine performs, and the level of work difficulties, then we will decide the cost of each product base on our professional judgment.
Standard Cost method
It will calculate the product’s costing base on the Standard Costing system. We need to have a preset standard cost for each product type, and then the cost will absorb based on that rate.
Joint products Vs Co-Products
Both joint products and co-products are the output that arrives from the same raw material and process.
Joint products are the multiple outputs that have similar value to the company. We have discussed this issue in the article above.
Co-products are the secondary product that results alongside the main product. The co-products have a significantly low value compared to the main product.