Joint Products and Joint Product Cost PART 2

CRASH CLASSE OF CA MODULE D
COST ACCOUNTING
FOR STUDENTS IN KARACHI
0322-3385752



Definition and Explanation of Joint Products:

Joint products are produced simultaneously by a common process or series of processes, with each product processing more than a nominal value in the form in which it is produced. The definition emphasizes the point that the manufacturing process creates products in a definite quantitative relationship. An increase in one product's output will bring about an increase in the quantity of the other products, or vice versa, but not necessarily in the same proportion.

Definition and explanation of Joint Product Cost:
A joint product cost cay be defined as that cost which arises from the common processing or manufacturing of products produced from a common raw material. Whenever two or more different products are created from a single cost factor, a joint product cost results. A joint cost is incurred prior to the point at which separately identifiable products emerge from the same process.

Example:
For example, the production of coke, for which coal is the original raw material. In addition to coke as its major product, the process produces sulfate of ammonia, light oil, crude tar and gas. The greater quantity of gas is not sold but is used to fire the coke ovens and the boilers in the power plant. The coke ovens are the split-off point for cost assignments. The cost of each product consists of a pro rata share of the joint cost plus any separable or subsequent costs incurred in order to put the products into saleable condition.

COKE AND ITS ASSOCIATED PRODUCTS

COAL
(ORIGINAL RAW MATERIAL) → COKE OVEN
(SPLIT-OFF POINT) → COKE
(MAJOR PRODUCT) Plus Separable cost
→ COKE

→ SULFATE OF AMMONIA Plus Separable cost
→ SULFATE OF AMMONIA
→ LIGHT OIL Plus Separable cost
→ BENZOL
→ CRUDE TAR Plus Separable cost
→ TAR
→ COKE OVEN GAS Plus Separable cost
→ GAS

Characteristics of Joint Products and Joint Cost:

Many products or services are linked together by physical relationships which necessitate simultaneous production. To the point of split-off or to the point where these several products emerge as individual units, the cost of the products forms a homogeneous whole.

The classic example of joint products is found in the meat packing industry, where various cuts of meet and numerous by products are processed from one original carcass with one lump-sum cost. An other example of joint products manufacturing is the production of gasoline, where the derivation of gasoline inevitably results in the production of such items as naphtha, kerosene, and distillate fuel oils. Other examples of joint products manufacturing are the simultaneous production of various grads of glue and the processing of soybeans into oil and meal. Joint product costing is also found in industries that must grade raw materials before it is processed. Tobacco manufacturers (except in cases where graded tobacco is purchased) and virtually all fruit and vegetables canners face the problem of grading. In fact, such manufacturers have a dual problem of joint cost allocation:

Materials cost is applicable to all grades
Subsequent manufacturing costs are incurred simultaneously for all the different grads.
The chief characteristic of the joint cost is the fact that the cost of these several different products is incurred in an indivisible sum for all products, rather than in individual amounts for each product. The total production cost of multiple products involves both joint cost and separate, individual products cost. These separable product costs are identifiably with the individual product and, generally, need no allocation. However, the joint production cost requires allocation or assignment to the individual products.