What is Joint production as well as by-Product costing?
Concept of articulation production as well as by-product
When ii or to a greater extent than products are produced from the same process, these products are termed as articulation products i.e. master copy production as well as by-product. Both the products are important. However, the cost of master copy produced is to a greater extent than oftentimes than non higher than the past times product. Therefore, articulation products refer to products that are produced past times a unmarried procedure as well as identifiable as private products afterwards merely about definite point. The next are merely about of the definitions of articulation as well as past times products. The next tabular array presents merely about articulation as well as past times production produced from dissimilar industries.
Some of the definitions of articulation as well as past times products are given below:
According to grapheme institute of management accounts (Cima), London, "two or to a greater extent than products separated inwards the class of processing, each having a sufficiently high saleable value to, each recognition as a master copy product,"
Therefore Lang defines as "two or to a greater extent than products separated inwards the class of processing operative, normally required farther processing. Each production beingness inwards such proportion that no unmarried production tin live on designed as a major product."
From the inwards a higher house definitions it is clear that when ii or to a greater extent than products of equal importance are simultaneous produced from the same footing raw materials from a mutual process, they are known as articulation products.
The next are the features of articulation products:
• Joint products are produced jointly from the same procedure as well as they cannot live on produced separately.
• Joint products are produced using identical raw materials as well as mutual straight labour.
• These products operate past times through the same procedure upwards to the separate point.
• After the splitting off the articulation products, they required farther processing.
• All the articulation production are of equal economical importance as well as none of them tin live on considered as major product.
The human relationship as well as differences betwixt articulation product, master copy production as well as past times production are given below:
a. Value: the goods having higher value is called the master copy production as well as the goods having lower value is called the past times product, if they are produced from the same procedure as well as materials. If the values of both the products are close same, they are called articulation products.
b. Manufacturing objective: the production that is set the showtime priority during the production procedure is master copy product. On the other hand, past times production gets 2nd propriety. If ii or to a greater extent than than ii products larn showtime proportions, they are called articulation product.
c. Production: the articulation products are produced continually whereas past times products may raw non live on produced continuously.
Some of importance terms used inwards the concepts continuously whereas past times products may non live on produced continuously.
The extra signal inwards a manufacturing procedure where ii or to a greater extent than products tin live on distinguished is denoting as the split-off-point. This split-off-point tin live on either at live on phase when the manufacturing procedure is complete, i.e. when the raw materials guide hold been converted into finished goods or alternatively at merely about intermediate signal inwards the manufacturing process.
Generally, the products are non identifiable as dissimilar private products until a for sure phase or production known as splits-of-point.
Joint cost
All the cost incurred earlier the split off signal is known as articulation costs.
Further processing or sub-sequence cost
After the split off signal articulation products required additional processing cost of every production that is known as farther processing cost.
Accounting for articulation product
Accounting for articulation products includes the distribution of the articulation cost to each of the articulation products. The articulation cost is the total cost that is incurred earlier the split off point. After the split off point, the products are separated into ii or to a greater extent than as well as subsequence costs begin. If joints costs are non properties as well as reasonably distributed to dissimilar articulation products, the cost of the articulation products volition non live on reasonable as well as their volition non demo the existent valuation of inventory, pricing of production as well as net or loss on sale of dissimilar products.
Apportionment of articulation cost
Following methods are commonly used for apportionment of articulation costs that takes house upwards to the signal of separation.
• Average unit of measurement cost method
• Physical unit of measurement method
• Survey method
• Contributions margin ration method
• Market value method
These methods are discussed below inwards detail.
Average unit of measurement cost method
Under this method averages unit of measurement cost is ascertained past times divided articulation cost past times units of articulation products. After ascertaining the average units cost. The articulation cost of each production is calculated past times multiplying thee average units cost as well as the respective units of the products. This method tin live on applied where processes are mutual as well as inwards separate for the articulation products as well as where the resultant products tin live on experienced is same mutual unit.
Average unit of measurement cost = total articulation cost/ total output units
Physical unit of measurement method
Under this method, articulation costs are allocated to articulation products on the footing of the relative weight, book ot other physical measure. This method is non suitable where i production is gas as well as merely about other production is liquid. This method pre-supposes that each articulation production to every bit valuable which volition live on rarely possible inwards practical loss is borne past times the articulation products inwards the ration of their output weight.
Survey method
In this method, articulation products are ranked according to their importance. All the major component such as volume, selling price, technical side, marketing procedure etc. which touching on the cost are ascertained past times agency of extensive survey. Point value or percentages are given to each production according to their importance. Joint costs are apportioned on the footing of total points. Generally, these points or rations are reversed from fourth dimension to fourth dimension depending upon the factors affecting production as well as sales.
Contribution margin ratio method
In this method, variable cost of the articulation cost is apportioned on the footing of lineament of each production as well as fixed cost of the articulation cost is apportioned on the footing of contribution margin. Contribution margin Is the dissimilar of total sales as well as total variable cost. This method volition live on appropriate for the determination making on maximization of net past times re-arrangement of products as well as sales mix.
Market value method
This method is also known as sales value method as well as it is the most pop as well as convenient method. Under this method the articulation costs are apportioned to the articulation products on the footing of selling price. This method has next ii assumptions. (i) All articulation products were uniform net margin (ii) since articulation costs are allocated on the footing of selling cost if selling cost of articulation products change, the articulation costs should live on allocated to the articulation products. Sales or marketplace value of each production may hateful whatever of the following:
a. Market value at separation point
In this method, ii methods are applied to allocate the articulation cost to each product.
h. Sales cost basis: nether this method, the articulation costs are apportioned to the articulation products inwards the ration of selling cost per unit of measurement of each product.
i. Sales value method: inwards this, articulation costs are apportioned to the products inwards the ration of total sale value. Total sales value is ascertained past times multiplying the sales units of each production alongside relative selling price.
b. Market value afterwards farther processing
Under this method showtime of all, total sales value of each production afterwards farther processing is ascertained as well as farther processing cost is deducted from the total sales value of each production inwards gild to calculate the ratio inwards which the articulation costs are to live on apportioned.
c. Net releasable value or opposite cost method
In this method, estimated cyberspace profit, selling as well as distribution expenses as well as farther processing cost are deducted from total sales value of master copy products as well as cyberspace amount volition live on ascertained. Total articulation costs are apportioned on the footing of ratio of cyberspace amount. This method is used; most of the industries such as crude oil refineries lumber mills etc.
Accounting for by-products
Concept of by-product
In the manufacturing concern, the production what is produced against the objective of the fellowship is called master copy production as well as the products that are produced alongside the master copy products simultaneously are called past times products. For example, inwards crude oil refinery unsmooth crude oil is processed but by-products i.e. sculptures, bitumen, chemic fertilized are obtained alongside the master copy product-refined oil. In coke ovens, gas as well as tar are incidentally produced inwards improver to the master copy production coke. Gas as well as tar are, thus considered as by-products. By-products may or may non live on salable as well as produced incidentally along alongside the master copy products. They guide hold less commercial value as well as produced inwards fewer quantities as well. Some of the definitions of past times production are given below.
According to CIMA. "a production which is recovered incidentally from the cloth used inwards the industry of recognized master copy product, such a by-product having either a cyberspace realized value or a usable value which is relatively depression inwards comparing alongside the saleable value of the master copy products. By-product may live on farther processed to increase their realized value."
According to Theodore Lang, "by-product refers to whatever saleable or usable or usable value incidentally produced inwards improver to the master copy product."
A by-product has the next characteristics as mentioned above:
a. By-products are produced incidentally along alongside master copy production during the process.
b. By-products guide hold insignificant sales values.
c. By-products may or may non required farther processing.
d. Sometimes by-products are products from the combat or waste matter materials during a manufacturing process.
Different betwixt articulation products as well as by-products
Main points of dissimilar betwixt articulation products as well as by-products are as under:
Accounting of By-products
There are ii types of accounting of by-products, which are given below:
a. Non-cost or sales method
Under this method, the costs of by-products are non considered, rather it is assumed as income. The dissimilar ways of maintaining the records of past times production are given below.
1. Treating as miscellaneous incomes: inwards this method the sales value of by-product is considered as negligible as well as that is demo inwards credit of net as well as loss work concern human relationship considering as other incomes or miscellaneous income. By-products, which are non sold, they volition non look inwards residue canvass as stock, thus vitiate the valuation of closing stock. This method is inaccurate if at that spot is a fourth dimension lag betwixt sales as well as production. Under this method, at that spot is a possibility that by-product may arise inwards i menses but may live on accounted inwards merely about other menses as well as thus distort the net of ii period.
2. Adding alongside sales of master copy product: inwards this method, the total cost of master copy production as well as by-products are deducted from total sales of master copy production as well as by-product. This method is appropriate when the value of by-product is real minor or the by-products are sold inwards the marketplace inwards the set down inwards which they emerge from the master copy product. In this method too, the value of by-product volition non look inwards the residue sheet.
3. Deducting from the total cost: in this method the sales values of by-product are deducted either cast cost of production or from total cost of sales. If the sales value of by-product fluctuates, it affects the cost of master copy production as well as may encourage concealing the inefficiencies therein. In this method stock are values either on the footing of total cost or cost of production.
4. Adjusting alongside selling as well as distribution costs: inwards this method, the selling as well as distribution cost of by-products are deducted from the sales value of by-products as well as the remaining amount is either credited to procedure work concern human relationship or deducted from total cost.
5. Adjusting alongside selling as well as distribution cost incurred afterwards split off points: nether this method, farther processing cost required for the by-products as well as selling as well as distribution cost are deducted cast the total sales value of by-products as well as the remaining value is credited to the procedure account. Closing stock is valued at selling cost as well as processing the stock of such by-products. This method volition non live on appearing ate if sales value of the by-products varies. The credits to the procedure work concern human relationship of master copy production volition vary according owing to the fact that credit to the master copy production procedure work concern human relationship varies; inefficiencies inwards that procedure may live on concealed.
6. Reverse cost method: inwards this method, net of every by-product is given. The profit, farther processing cost as well as selling as well as distribution cost are deducted from the marketplace value of by-products as well as the remaining value is credited to the master copy product.
b. Cost method
There are 3 methods nether this. They are mentioned below
a. Opportunity or replacement cost method: this method is used where by-products are utilized inwards the same project as materials for merely about other process. The chance or replacement cost. i.e., cost which could guide hold been incurred had the by-products beingness used as materials could guide hold been purchased from the market. The procedure work concern human relationship is credited alongside the value of by-products as well as then ascertained. For example, inwards the production of a master copy production a by-product X to merely about other obtained. In a for sure menses 400 units of by-product X are produced, which are transferred to merely about other division where they are consumed. If the by-product were purchased from the market, they would live on Rs.3 each.
b. Standard cost method: a criterion cost may live on fixed for each production past times averaging the cost figure of the previous menses as well as the procedure work concern human relationship credited alongside this criterion value. During the past times v years records aver been kept for the production costs of production C as well as production D which is a by-product of production C. these records demo the next information in observe of production D.
c. Apportionment on suitable basis: if the total value of by-products is considerable, their actual cost should live on as retained past times apportioning the articulation cost upwards to the signal of physical separate. The apportionment of articulation cost is a complicated thing as well as involves the purpose of iterate calculating. The method is followed where by-products are procedure (i) to dispose of waste matter cloth to a greater extent than profitable or (ii) to noontide the idle plant. In the showtime in-case, the case, the by-product afterwards reparation is charged alongside overhead at total charge per unit of measurement whereas inwards the 2nd instance it volition included variable cost only.
1. Give the pregnant of articulation product, master copy production as well as by-product.
Where ii or to a greater extent than than ii products are produced cast the same raw materials as well as process, the production are called articulation product. Therefore, articulation products referrer to products that are produced past times a unmarried procedure as well as identifiable as private products afterwards merely about definite signal the value of such products mightiness afterwards merely about definite signal the value of such products the master copy production whereas the production having lesser value is called the past times product.
2. Difference betwixt master copy production as well as by-product.
The dissimilar betwixt master copy production as well as past times production are given below.
a. Value: the production having higher value is called the master copy production as well as the production lower is called the past times product.
b. Manufacturing objective: master copy production is set the showtime priority during the production procedure by-product gets 2nd priority during the production process.
c. Production: The master copy products are produced continuously whereas by-products may non live on produced continuously.
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