Joint products – What are joint products?
Joint products are two or more products that are generated within a single production process; they cannot be produced separately and incur undifferentiated joint costs.
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Joint products cannot be separated until a specific ‘split-off point’ or ‘separation point’. From this point onwards, the two products can be processed individually.
Examples of join products include:
- Milk – butter, cream, cheese
- Crude oil – fuel, gas, kerosene
Joint products, by-products, and spoilage
To be considered a joint product, each product must be of roughly equal economic importance. If the two products have considerably different market value, the more valuable product considered a main product, and the secondary product is known as a by-product.
If the secondary product has no saleable value, it is considered spoilage, waste, or scrap.
Joint products vs. co-products
Co-products are a type of product produces in different varieties. Co-products may require a different type of raw material and may be processes in different ways, but they will use the same facilities. For example, a company specialising in furniture manufacturing may produce tables, chairs, desks, and benches – these would be considered co-products.
Co-products are not the same as joint products; co-products can be produces in different quantities without affecting the production of other co-products. On the other hand, joint products can only be produced together, so adjusting levels of production for a joint product will affect production for the other product.
Allocating costs for joint products
The costs incurred in the production of joint products is undifferentiated the specific split-off point, after this split-off point costs are allocated to individual products.
There are two ways to allocate joint costs. The first approach allocates costs based on estimated gross margins; the second approach allocates costs based on the sales value of the products.
Costs allocated by gross margins
Alternatively, you can allocate joint costs based on products’ gross margins. Using this method, you should:
1) Calculate the total processing cost for each joint product after the split-off point.
2) Subtract this amount from the total revenue that each product will earn.
If it is not possible to determine the sale price of each product at the split-off point, the gross margin method may be the only option.
Costs allocated by sales value
To allocate joint costs based on products’ sales value, you should:
1) Calculate the total production costs up until the split-off point – this might include direct labour costs, as well as raw materials and overheads.
2) Determine the sales price and volume of all of the resulting products.
3) Calculate the relative sales value of each product – the total value of sales for each product, divided by the overall revenue generated by the joint products.
4) Assign the joint costs according the relative sales value.