By Products and Joint Products PART 1

CRASH CLASSES OF CA MODULE D
COST ACCOUNTING FOR STUDENTS IN KARACHI.
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Many industrial concerns are confronted with the difficult and often rather complicated problem of assigning costs to their by-products and joint products. Chemical companies, coke manufacturers, refineries, flour mills, coal mines, lumber mills, gas companies, dairies, canners, meat packers, and many others produce in their manufacturing or conversion processes a multitude of products to which some cost must be assigned. Assignment of costs of these various products enhances equitable inventory costing for income determination and financial statement purposes. An even more important aspect of by product and joint product costing is that it furnishes management with data for use in planning maximum profit potentials and evaluating actual profit performance.

Difficulties / Problems in Costing by Products and Joint Products:

By products and joint products are difficult to cost because a true joint cost is indivisible. For example, an ore might contain both lead and Zink. In the raw state, these minerals are joint products, and until they are separated by reduction of the ore, the cost of finding mining, and processing is a joint cost; neither lead nor Zink can be produced without the other prior to the split-off point.

The cost accumulated to the split-off point must be born by the difference between the selling price and the cost to complete and sale each mineral after the split-off point.

joint costs are frequently confused with common costs. However, there is a significant difference between the two: a joint cost is indivisible and common costs are divisible. Common costs are allocable among products or service. Because each of the products or services could have been obtained separately. Therefore, any shared costs of obtaining them can be allocated on the basis of relative usage of common facilities. For example, the cost of fuel or power may be allocated to products on the basis of production volumes or metered usage. The indivisibility characteristics of a joint cost is not always easy to comprehend, since in some cases a joint cost can be divided among joint products in accordance with a common cost causing characteristic. However the result of such a division is of limited use to management for decision making.

Because of the indivisibility of a joint cost, cost allocation and apportionment procedures used for establishing the unit cost of a product are far from perfect and are, indeed, quite arbitrary. The costing of joint products and by products highlights the problem of assigning costs to products whose origin, use of equipment, share of raw materials, share of labor costs, and share of other facilities cannot truly be determined. Whatever methods of allocation are employed, the total profit or loss figure is not affected--provided there are no beginning or ending inventories--by allocation costs to the joint products or by products, since these costs are recombined in the final income statement. However, a joint cost is ordinarily allocated to the products on some acceptable basis to determine product costs needed for inventory carrying costs. For this reason, there is an effect on periodic income, because different amounts may be allocated to inventories of the numerous joint products or by products under various allocation methods. In addition, product costs may be required for such special purposes as justifying selling prices before governmental regularity bodies. However, the validity of splitting a joint cost to determine fair regulated prices for joint products has been questioned by both accountants and economists.