Process Costing – Joint Products

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1 Introduction

Sometimes, one process may produce several products. In this case we need to decide on a cost per unit for each of the products. These products, produced in the same process, are known as joint products.

Joint products refer to our main products with full sales value. However, there may be an additional product (or products) which is produced incidentally and has a relatively low sales value (effectively a waste product). This is known as a by-product.

2 Accounting treatment

Any sale proceeds of a by-product are subtracted from the joint costs of the process.
The net total cost of the process is then split between the joint products.
For the examination, there are two ways of splitting the joint costs:
- The physical units basis
- The market value at the point of separation basis.

3 Physical units basis

Under this method, the same cost per unit is applied to all the joint products

During August, the following costs were incurred in a process:

Materials (3,500 kg)	$5,000
Labour and overheads	$2,300

The production from the process was as follows:

	kg
Product A	1,000	selling price $5 per kg
Product B	2,000	selling price $2 per kg
by-product X	500	scrap value $0.20 per kg

Calculate a cost per kg and profit per kg for A and B using the physical units basis.

Total joint costs:	$
Materials	5,000
Labour & o/h	2,300
	7,300
Less: proceeds of by-product
(500 kg × $0.20)	(100)
Started & finished (25,000 u)	$7,200

Production of joint products:	kg
A	1,000
B	2,000
	3,000	kg

Cost per kg	7,200	= $2.40
Cost per kg	3,000	= $2.40
(for A and B)

4 Market value basis

Under this method the costs per unit are calculated so as to be in the same proportions as the market values of each product

During August, the following costs were incurred in a process:

Materials (3,500 kg)	$5,000
Labour and overheads	$2,300

The production from the process was as follows:

	kg
Product A	1,000	selling price $5 per kg
Product B	2,000	selling price $2 per kg
by-product X	500	scrap value $0.20 per kg

Sales during the period were 800 kg of A and 1,500 kg of B.

Calculate a cost per kg and profit per kg for A and B using the market value basis

Total joint costs:	$
Materials	5,000
Labour o/h	2,300
	7,300
Less: Proceeds of by-product
(500 kg × $0.20)	(100)
	$7,200

Sales value of production of joint products:

	$
A (1,000kg × $5)	5,000
B (2,000kg × $2)	4,000
	$9,000

Allocation of joint costs to production:

	$
A	4,000	for 1,000 kg
B	3,200	for 2,000 kg

Cost per kg:

A	= $4.00 per kg
B	= $1.60 per kg

5 Net-realisable value approach

The market value approach is not always possible. This is because the products will often require further work (and therefore costs) after leaving the process. We have to use the net realisable value at a point of separation as an approximation to the market value.

The net realisable value is the final market value less costs incurred after leaving the joint process.

During September the following costs were incurred in a process:

Materials (3,500 kg)	$5,000
Labour and overheads	$2,300

The production from the process was as follows:

	kg
Product A	1,000	selling price $8.40 per kg
Product B	2,000	selling price $4.50 per kg
by-product X	500	scrap value $0.20 per kg

All the output of A and B incurred further processing at a cost of $4.80 per kg for A and $2.20 per kg for B.

Calculate a cost per kg for A and B using the net realisable value approach.

Total joint costs:	$
Materials	5,000
Labour o/h	2,300
	7,300
Less: Proceeds of by-product
(500 kg × $0.20)	(100)
	$7,200

Net realisable value of production

		$
A	1,000 kg × ($8.40 – $4.80) =	3,600

B	2,000 kg × ($4.50 – $2.20) =	4,600
		$8,200

Allocation of joint costs to production:

		$
A		3,161
B		4,039
		$7,200

Cost per kg:

A	= $3.16 per kg
B	= $2.02 per kg

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