3.9 Joint and by-products Costing
3.9.1 Joint Products
Joint products are two or more products which emerge at a certain point from the
same process. These emerge simultaneously, in natural proportions.
Features of joint products
1) All the joint products are of equal importance such that none can be considered
as the main product or minor product.
2) These products emerge in natural proportion and it is very difficult to control or
change their proportions.
3) Joint products emerge from the same raw material simultaneously.
4) Joint products emerge from the same process simultaneously.
5) These products may or may not require further processing before sales.
6) Joint products emerge inevitably in the process.
Example: Kerosene, diesel, petrol etc emerging in the process of refining crude
Joint products are also called co-products.
Accounting for joint products
In any process in which joint products emerge, there are two main stages.
– The stage till the point of split off.
– The stage after the point of split off.
Accounting for the products after split off is easy as each joint product is treated as a
separate process. Such costs are called subsequent costs.
It is the cost which is incurred before the point of split off which has to be analysed
and divided over the various joint products. Such cost incurred till the stage of split
off is called ‘joint cost’. This joint cost is apportioned to various joint products on an
Objectives of apportionment of joint costs
1) To calculate the accurate cost of the products.
2) To value the closing inventory of the products.
3) To fix selling prices of the products realistically.
4) To calculate the profit or loss of the products individually.
Methods of apportionment of joint costs
The following are commonly used to apportion joint costs:
1) Average unit cost method
2) Physical unit method
3) Survey method
4) Contribution/Gross Margin method
5) Standard Cost method
6) Market value at separation point method
7) Market Value after further processing method
8) Net realizable value or reverse cost method
1) Average unit cost method
The total joint cost incurred up to the point of split/separation is divided by the total
number of all the joint products. Thus, according to this method, all the units bear
the same average cost. This method is suitable when all the joint products can be
expressed in terms of a common unit.
Advantages of Average unit cost method
1) It is easy to calculate
2) All the joint products will have the same cost.
3) This method seems reasonable as all the joint products emerge from the same
Limitations of Average unit cost method
1) This method cannot be used in a situation where the different joint products
cannot be expressed in terms of a common unit.
2) This method may not help prices fixation in a severely competitive situation.
3) This method may not help decision making.
4) It is not a logical method as different units carry a same price.
Average cost per unit = Total joint cost__________
Total number of units of joint products
2) Physical Unit Method
Under this method, a physical base such as weight, number of units etc., of raw
materials in the output is taken as the basis for distribution of joint cost to join
Advantages of Physical Unit Method
1) This method is technically sound.
2) It is simple to understand and use.
Limitations of Physical Unit Method
1) This method becomes inapplicable when the joint products are of different types
of units such as – kgs, litres, metres etc.
2) This method values more valuable and less valuable joint products similarly.
3) It is a wrong presumption that all products are equally desirable and valuable.
3) Survey method
Under this method, the various aspects of the joint products such as the volume,
sale price, technical aspects etc., are considered and based on this, point values
are allotted to the joint products. These values are actually based on the relative
importance of these products. The total cost of the process up to the point of
separation is distributed to these joint products on the basis of such points. The
total cost is actually distributed by dividing the total cost by the sum of the products
got by multiplying the output of each joint product with its point allotted. This
method actually resembles the weighted average method.
Advantages of Survey Method
1) An appropriate allocation of points can be made.
2) This method is considered more equitable as due consideration is given to each
aspect of the joint products.
3) The joint cost is distributed based on the expected benefits of the joint products.
Limitations of Survey Method
1) It is difficult to allot appropriate values/weights to the joint products.
2) An inappropriate allocation of weights renders the entire process inappropriate.
4) Contribution/Gross Margin Method
Under this method, the total joint cost is divided under – variable and fixed cost.
The variable cost portion (variable cost is also called the marginal cost) is divided
over the joint products based on their quantity or units.
The fixed cost is apportioned to the joint products based on their contribution.
Contribution is the excess of sales over the marginal cost. Therefore the
contribution is calculated as:
Contribution = Sales – Variable (marginal) cost
The profit of the joint products is calculated as:
Sales – Variable cost – fixed cost.
Advantages of Contribution/Gross Margin Method
1) It is simple.
2) This provides an appropriate basis for pricing.
3) This is a rational method as contribution is a reliable basis to determine profits.
4) This method ensures a proper allocation of joint cost.
5) This method can also be used as technique of cost control.
Limitations of Contribution/Gross Margin Method
1) Classification of total cost under fixed and variable costs is difficult.
2) This method requires the application of marginal costing.
5) Standard Cost Method
Under this method, the cost of the joint products is determined based on the pre-
determined standard costs.
Advantages of Standard Cost Method
1) It is a simple method.
2) This method can be used to study the efficiency of operations.
Limitations of Standard Cost Method
1) Setting standards for different elements of cost is a difficult task.
2) A faulty set of standards will render the entire results wrong.
6) Market Value at Separation point Method
Under this method, the joint cost of the products is distributed to the joint products in
the ratio of their market values at the point of separation.
This method is suitable in a situation where the further processing costs are either
disproportionate or absent.
7) Market Value after further Processing Method
Under this method, the joint costs are apportioned to the joint products in the ratio of
their sales values minus their respective further processing costs.
This method is suitable when the further processing costs are proportionate.
8) Net Realizable Value or Reverse Cost Method
Under this method, the following are deducted from the selling prices of the joint
a) Estimated net profit
b) Direct selling and distribution expenses.
c) Further processing/expenses after the point of split off.
The amounts after the above deductions represent the costs of the joint products at
the split off point.
The total amount of joint cost is apportioned to the joint products in this ratio.
Advantages of Market Value based Methods:
1) Joint products generally tend to have uniform profit margins.
2) These methods are logical as they reflect the market prices.
3) These methods are reasonable as market values are the reflection of costs.
Limitations of Market Value based Methods:
1) Determination of market prices is difficult.
2) It is difficult to determine the selling prices at split off point.
3) Market price fluctuations will distort cost allocations.
4) These methods consider only external factors such as prices.
By-products are products of insignificant value, which emerge incidentally in the
production of certain products. The intention of the manufacturer is to manufacture
only the main product, but the by-products emerge incidentally. The by-products may
be either usable or saleable. The value of the by-products is very insignificant as
compared with the value of the main product. The product with greater value called
the main product is manufactured in larger quantities as compared with the product
called by-product, that has lesser value.
Some by-products may require further processing for enhancing their sale value.
By-products may also be produced from waste or scrap of a process.
Definition of by-product
By-product is a “product which is recovered incidentally from t he material used in
the manufacture of recognized main products such as having either net realizable
value or a useable value which is relatively low in comparison with saleable value of
the main products. By-products may further be processed to increase their realizable
Example: In an oil refinery where crude oil is processed to get petrol, by-products
like sulphur, bitumen etc. emerge as by-products. The main product is petrol.
In a rice mill, where paddy is dehusked, rice is the main product and husk is the by-
Classification of by-products
1) By-products which can be sold immediately after the point of split off.
2) By-products which need further processing after the point of split off, before
Methods of accounting of By-products
These methods of accounting are classified as follows:
I. Non Cost or Sales Methods: These methods do not consider cost at all. The
following are the methods:
1) Other income or miscellaneous income method.
2) By-product sales added to main product sales.
3) By-products value deducted from total cost.
4) Credit of sales value of by-products less their selling and distribution costs.
5) Credit of sales value less selling ad distribution expenses as well as cost
incurred after split off.
6) Credit of sales value less selling and distribution expenses, cost incurred
after split off and estimated profit or reverse cost method.
II. Cost Methods: Under these methods, a small portion of the joint cost is
apportioned to the by-products. The following are the methods under this:
1) Opportunity or Replacement Cost Method.
2) Standard Cost Method.
3) Apportionment on suitable basis.
I. Non Cost or Sales Methods:
1) Other income or miscellaneous income method:
Under this method, the by-products are sold at their market price and the amount is
treated as miscellaneous income. This amount is credited to profit and loss account.
By-products which are not sold are not valued at all and therefore the stock of such
products is shown as nil.
This method suffers from the following limitations:
a) The time gap between production and sales of by-products makes this method
b) The by-products of a certain period may be sold during another period and
therefore income of a period may be credited to a different period. The profit of
both the periods get distorted.
2) By-product sales added to main product sales.
Under this method, the total cost incurred on the manufacture of main and by-
products is deducted from the combined sales amount of main products and by-
Under this method also, the by-products remaining unsold are not valued.
3) By-product value deducted from total cost.
Under this method, the sales value of the by-products is deducted from either
(a)cost of production or
(b) cost of sales of the products.
This method is also imperfect as the sales value of by-products may keep
4) Credit of sales values of by-products less their selling and distribution
Under this method, the net sales value of the by-products (sales value – selling and
distribution expenses) is calculated. This amount is either credited to the process
account or deducted from the total cost.
The closing stock of by-products is valued at its sales value minus their estimated
selling and distribution costs.
5) Credit of Sales Value less Selling and Distribution Expenses as well as cost
incurred after split off.
Under this method, the selling and distribution cost and cost of further processing of
the by-products are deducted from the sales value of the by-products. Such an
amount is credited to the process account.
This method suffers from a limitation that if the selling price of the by-product
fluctuates, the credit to the process account also fluctuates.
6) Credit of Sales Value less Selling and Distribution Expenses. Cost incurred
after split off and estimated profit or Reverse Method.
Under this method the following are subtracted from the amount of sales:
– Estimated profit.
– Selling and distribution expenses.
– Further processing costs after the split-off point.
The remaining amount is credited to the main point.
II. Cost Methods
1) Opportunity or Replacement Cost Method:
This method is suitable in industries where the by-products are used in some other
process of the same industry. The opportunity or replacement cost means the cost
at which these by-products are available in the market. The industry would be
compelled to purchase the materials in the market at such price, in the absence of
the by-products emerging within the industry itself.
Such a price of the by-products is credited to the process account from which the by-
2) Standard Cost Method
Under this method, the standard cost of the by-products is calculated and the by-
products are valued at such a standard cost. This value is credited to the process
giving the by-products.
The standard cost is calculated on the basis of averaging the previous cost figures of
3) Apportionment on suitable basis
If the total value of by-products is considerable, their actual cost should be
ascertained by apportioning the joint cost up to the point of physical separation.
The apportionment of joint cost is a complicated affair and involves the use of
intricate calculations. This method is followed where by-products are processed (i)
to dispose of waste materials more profitably or (ii) to utilize the idle plant. In the
first case, the by-product after separation is charged with overhead at full rate
whereas in the second case it will include variable costs only.