In cost accounting, joint products and by-products are two types of products that are produced from the same manufacturing process.
Joint products are two or more products that are produced simultaneously from a common input or process, each having a significant relative sale value. They are also known as co-products or primary products.
For example, milk is processed into butter, cream, and cheese, all of which are joint products. Similarly, crude oil is refined into gasoline, kerosene, and fuel oil, all of which are joint products.
By-products, on the other hand, are secondary products that are produced in conjunction with the main product but have a relatively low sales value compared to the main products. They are also known as secondary products or incidental products. For example, sawdust is a by-product of lumber production, and molasses is a by-product of sugar production.
Differences Between Joint and By-Products
The key distinction between joint products and by-products lies in their relative sales value. Joint products have significant sales values, while by-products have comparatively lower sales values. This distinction is crucial for allocating joint costs to the respective products.
Joint cost allocation is the process of assigning the total cost of producing joint products to each product individually. There are two main methods for joint cost allocation:
- Sales value method: This method allocates joint costs based on the relative sales value of each joint product.
- Physical quantity method: This method allocates joint costs based on the relative physical quantities of each joint product.
The choice of joint cost allocation method depends on the specific circumstances of the production process.
By-products are typically valued at their net realizable value, which is the estimated selling price of the by-product minus any additional processing costs required to make it salable. This net realizable value is then subtracted from the total joint cost to determine the cost of the joint products.
In summary, joint products and by-products are two important concepts in cost accounting. Joint products have significant sales values and require joint cost allocation, while by-products have lower sales values and are typically valued at their net realizable value. Understanding these concepts is essential for accurately determining the cost of products and making informed management decisions.