Joint Product and By-Product | CMA Inter Syllabus
Table of Content
CMA Inter Blogs :
Joint products are two or more products separated in a process each of which has a significant value compared to the other.
Joint products:
For example, in the oil refining industry the following joint products arise from the same process:
By-products:
A by-product is an incidental product from a process which has an insignificant value compared to the main product(s)
A by-product is a product which is similarly produced at the same time and from the same common process as the ‘main product’ or joint products. The distinguishing feature of a by-product is its relatively low sales value in comparison to the main product. In the timber industry, for example, by-products include sawdust, small offcuts and bark.
Distinguishing joint products from by-products
The answer lies in management attitudes to their products, which in turn is reflected in the cost accounting system. The difference between joint product and by-product are as follows:
Accounting for joint products
The point at which joint and by-products become separately identifiable is known as the split-off point or separation point. Costs incurred up to this point are called common costs or joint costs. Common or joint costs need to be allocated (apportioned) in some manner to each of the joint products. In the following sketched example, there are two different split-off points. A pictorial representation is given below:
Methods for allocation of joint cost
In case of joint products, the main objective of accounting of the cost is to apportion the joint costs incurred up to the split off point. The manufacturing process is same up to a certain stage and after crossing that stage, each product has distinct manufacturing process. The total cost of production of the joint product will be cost incurred up to the split off point duly apportioned plus the cost incurred after the split off point. The cost after the split off point can be identified easily. The following methods are adopted for apportionment of joint cost:
i. Physical Quantity Method: Under this method, cost apportionment is made in proportion to the volume of production. These physical measures may be units, pounds, litres, kilos, tonnes, gallons etc. The following example will clarify the point:
| Product | Quantity – kg | Production to total | Cost allocated | Cost per kg |
| A | 30,000 | 1/2 | ₹1,80,000 | ₹6 |
| B | 20,000 | 1/3 | ₹1,20,000 | ₹6 |
| C | 10,000 | 1/6 | ₹60,000 | ₹6 |
| Total | 60,000 | ₹ 3,60,000 | ₹6 |
ii. Average Unit Cost Method: Under this method, the joint cost is apportioned to the joint products by computing the average unit cost of the product units. The average unit cost is computed by dividing the total manufacturing cost by the total number of units produced of all products. This method is useful where all the products produced are uniform with each other in all the respects. This method will not be useful if the production units are not similar with each other.
iii. Weighted Average Method: Under this method, weights are assigned to each unit based upon size of the units, difference in type of labour employed, material consumption, market share, efforts of labour required and so on. The joint cost is apportioned on the basis of the weights assigned to each product. This method is highly useful if the weights assigned are on objective basis. If subjective element creeps in, the method may not give accurate results.
iv. Selling Price Method: Under this method, the joint cost is apportioned on the basis of sales value at the split off point. The logic is that a product should bear the share of the joint cost according to its sale price. If sales price is higher than that of the other products, more share of joint cost should be charged to that product and if it is comparatively less than that of other products, less share of joint cost should be charged to the same. Though logically this method seems to be sound, in practice, charging higher share of joint cost to the product with higher sales value may not be justified due to the fact that lesser efforts are required for manufacturing of the same.
Accounting for by-products
Despite the fact that the by-product has a small value relative to that of the main product, it does have some commercial value and its accounting treatment usually consists of one of the following:
The net realisable value of the by-product may be deducted from the cost of production of the main product.
The net realisable value is the final saleable value of the by-product minus any post-separation costs. The choice of method will be influenced by the circumstances of production and ease of calculation, as much as by conceptual correctness. The most common method is Net Realisable Value. Notice that this method is the same as the accounting treatment of a normal loss which is sold for scrap.
Illustration 36
XY Ltd manufacturers Product A which yields two By-Products B and C. The actual joint expenses of manufacturing for a period were ₹ 8,200. The profits on each product as a percentage of sales are 33 1/3 %, 25% and 15% respectively.
Subsequent expenses are as follows:
| Particulars | Products | ||
| ‘A’ | ‘B’ | 'C' | |
| Amount (₹) | Amount (₹) | Amount (₹) | |
| Material | 100 | 75 | 25 |
| Direct Labour | 200 | 125 | 50 |
| Overheads | 150 | 125 | 75 |
| 450 | 325 | 150 | |
| Sales | 6,000 | 4,000 | 2,500 |
Apportion the joint expenses.
Solution:
Illustration 37
A chemical process yields 60% of the material introduced as main Product A and By-Product B - 15%, By-Product C - 20% and 5% being the wastage.
The ratio of absorption of Raw Material and Labour in the process products is as follows:
Calculate cost of distribution between the above products.
Solution:
Illustration 38
The following data have been extracted from the books of M/s. Southern Coke Co. Ltd
| Joint Products | Yield in kg of Recovered Products Per Tonne of Coal |
| Coke | 1,420 |
| Coal Tar | 120 |
| Benzol | 22 |
| Sulphate of Ammonia | 26 |
| Gas | 412 |
| 2,000 |
The price of coal is ₹ 80 per tonne. The direct labour and overhead costs to the point of split-off are ₹ 40 and ₹ 60 respectively per tonne of coal. Calculate the material, labour and total cost of each product on the basis of weight.
Solution:
Illustration 39
A factory engaged in the production of Chemical X and in the course of manufacture in a By-Product – Y is produced which after a separate process has a commercial value. Following are the information for the month of March:
| Joint Expenses | Separate Expenses | ||
| X | Y | ||
| ₹ | ₹ | ₹ | |
| Materials | 10,000 | 2,000 | 2,800 |
| Labour | 4,000 | 2,500 | 2,500 |
| Overheads | 2,500 | 1,400 | 1,000 |
The output for the month was 150 quintals of X and 50 quintals of Y. the selling price of product Y is ₹ 200 per quintal. The profit on product Y is 33 1/3 % on cost price. Prepare an Account to show the cost of X per quintal.
Solution:
Illustration 40
In manufacturing the main Product ‘A’, a company processes the resulting waste material into two By-Products B and C. Using reversal cost method of By-Products, prepare a comparative profit and loss statement of the three products from the following data:
(i) Total cost up to separation point was ₹ 68,000
| A | B | C | |
| (ii) Sales (all production) | ₹ 1,64,000 | ₹ 16,000 | ₹ 24,000 |
| (iii) Estimated net profit % to Sale Value | - | 20% | 30% |
| (iv) Estimated Selling Expenses as % of Sales Value | 20% | 20% | 20% |
| (v) Costs after separation | - | ₹ 4,800 | ₹ 7,200 |
Solution:
Illustration 41
The progressive manufacturing company manufactures one main product and two By-Products. Data for a month are shown below:
| Particulars | Main Product | By-Product A | By-Product B |
| Sales | 1,50,000 | 12,000 | 7,000 |
| Manufacturing Cost: | |||
| (a) Before separation | 75,000 | - | - |
| (b) After separation | 23,000 | 2,200 | 1,800 |
| Administration Cost | 12,000 | 1,500 | 1,000 |
| Ratio of Distribution of Selling Cost | 85% | 10% | 5% |
| Net Profit in Sales | 20% | 15% | 10% |
Assuming no beginning and ending inventories, apportion the joint cost among Main Product and the By-Products.
Solution:
Illustration 42
In a factory producing joint products of two varieties, the following data are extracted from the books:
| Total (₹) | |
| Sales of products X and Y | 7,50,000 |
| Direct Material | 2,25,000 |
| Direct Labour | 1,10,000 |
| Variable Overhead (150% on Labour) | 1,65,000 |
| Fixed Overhead | 2,00,000 |
The analysis of sales reveals that the percentage of sale of product X is 66 2 /3 % . %. Management contemplates to process further joint products so that they could be sold at higher rates. Facilities for this are available. The additional expenditure for the further process and total sales anticipated at higher selling prices are given below.
Make recommendations presenting the effect of the proposal.
| Particulars | Product X | Product Y | Total |
| Amount (₹) | Amount (₹) | Amount (₹) | |
| Sales after further processing | 6,00,000 | 3,00,000 | 9,00,000 |
| Additional Material | 50,000 | 20,000 | 70,000 |
| Additional Direct Labour | 20,000 | 8,000 | 28,000 |
Solution:
Illustration 43
A vegetable oil refining company obtains four products whose cost details are:
Joint costs of the four products: ₹ 8,29,600
Outputs: A – 5,00,000 litres; B – 10,000 litres; C – 5,000 litres and D – 9,000 kgs
Further processing costs: A - ₹ 2,40,000; B - ₹ 48,000; C – Nil and D - ₹ 8,030.
The products can be sold as intermediates i.e., at split-off point without further processing. The sale prices are:
| As Finished Product | As Intermediate | |
| A ₹ per litre | 1.84 | 1.20 |
| B ₹ per litre | 8.00 | 4.00 |
| C ₹ per litre | 6.40 | 6.40 |
| D ₹ per kg | 26.67 | 24.00 |
(a) Calculate the product-wise profit allocating joint costs on Net Realisable Value (NRV)
(b) Compare the profitability in selling the products with and without further processing.
Solution:
Illustration 44
T Ltd., in the course of refining crude oil obtains four joints products A, B, C and D. The total cost till the split off point was ₹ 97,600. The output and sales in the year 2021 were as follows:
| Product | Output (units) | Sales Amount (₹) | Separate Costs Amount (₹) |
| A | 5,00,000 | 1,15,000 | 30,000 |
| B | 10,000 | 10,000 | 6,000 |
| C | 5,000 | 4,000 | - |
| D | 9,000 | 30,000 | 1,000 |
You are required:
(a) Calculate the net income for each of the products if the joint costs are apportioned on the basis of net realisable value of the different products.
(b) What would be the net income of the company from each product if it decides to sell the products at the spit off point itself A @ 15 paise, B @ 50 paise, C @ 80 paise and D @ 3 per unit.
(c) In case the company expects to operate at the same level of production and sales in the year 2022 could the company increase the net income by altering its processing decision? If so, what would be the expected overall net income? Which product should be sold at split off? Assume that all costs incurred after split off are variable.
Solution:
Illustration 45
Beauty soap, company manufactures four different brands of soaps namely Komal, Lovely, Makeup and Nice. The data on production and sale of these brands during 2022 is reproduced below:
| Brand Name | Komal | Lovely | Makeup | Nice |
| Production & Sales (units) | 3,00,000 | 5,00,000 | 70,000 | 40,000 |
| Sale Value (₹) | 15 | 31 | 2.8 | 1.2 |
All the above soaps are manufactured jointly up to a particular process. At split off point they are formed into cake-sand packed. The annual cost data were as under.
Direct Material Cost ₹ 30 lakhs
Value added ₹ 20 lakhs
(Includes profit at 25% on total cost)
Out of the above brands, Makeup is sold in unpacked condition without further processing while the other 3 brands further processed at an additional cost as follows:
Komal ₹ 1,20,000
Lovely ₹ 1,30,000
Nice ₹ 50,000
You are required to:
(a) Work out the profit and cost of each brand of soap after allocating joint cost on the basis of Net Realisable value at split up point. (per unit cost not required).
(b) Find out revised cost and profit on each brand if the company decides to sell all soaps at split up point at following prices; Komal ₹ 4.50; Lovely ₹ 6.00; Makeup ₹ 4.00 and Nice ₹ 1.50 per unit. Assume that for allocation of joint cost Net Realisable Value Method is used.
(c) With the working results in (a) and (b) above, advice Beauty Soap Company about the processing decision as to which soap to be sold at split off point and which to be processed further so as to maximise profit. Substantiate your decision with suitable costing technique.
Solution:
Illustration 46
In the course of manufacture of the Main Product ‘P’ By-Products ‘A’ and ‘B’ also emerge. The joint expenses of manufacture amount to ₹ 1,19,550. All the three products are processed further after separation and sold as per details given below:
| Main Product | By-Products | ||
| P | A | B | |
| Sales | ₹ 90,000 | ₹ 60,000 | ₹ 40,000 |
| Cost incurred after separation | ₹ 6,000 | ₹ 5,000 | ₹ 4,000 |
| Profit as percentage of sales (%) | 25 | 20 | 15 |
Total fixed selling expenses are 10% of total cost of sales which are apportioned to the three products in the ratio of 20 : 40 : 40.
(a) Prepare a statement showing the apportionment of joint costs to the Main Product and the two By-Products.
(b) If the By-Product A is not subjected to further processing and is sold at the point of separation for which there is a market, at ₹ 58,500 without incurring any selling expenses. Would you advise its disposal at this stage? Show the workings.
Solution:
Illustration 47
“If the products are truly joint products the cost of the process can be applied to these products”.
Illustrate the above statement by using the following figures in respect of joint production of A and B for a month.
Total Cost: Direct Material ₹ 5,000
Direct Labour ₹ 3,000
Variable Overheads ₹ 2,000
Fixed Overheads ₹ 2,000
Sales A 100 Quintals @ ₹ 80 per quintal
Sales B 150 Quintals @ ₹ 40 per quintal
Solution:
1. In sugar manufacturing industries molasses is also produced along with sugar. Molasses may be of small value as compared with the value of sugar and is known as:
Answer : b
A by-product is a secondary or incidental product that is produced alongside the main product. In this case, sugar is the main product, and molasses is the by-product. By-products are typically of lesser value or significance than the main product and are often used or sold for a different purpose.
2. Method of apportioning joint costs on the basis of output of each joint product at the point of split off is know as :
Answer : b
The physical unit method, also known as the physical quantity method, allocates joint costs to joint products based on the relative quantities of each product produced at the split-off point. This method is straightforward and considers the actual physical output of each product to determine the allocation of joint costs.
3. The main purpose of accounting of joint products and by- products is to:
Answer : c
Accounting for joint products and by-products involves allocating costs and revenues among different products that are produced from a common process. The goal is to determine the profitability of each product line and assess the contribution of each product to overall profit or loss. This helps in making informed decisions about production, pricing, and resource allocation.
4. Under net realizable value method of apportioning joint costs to joint products, the selling & distribution cost is:
Answer : c
The NRV method considers the estimated final sales value of each joint product minus the estimated additional costs required to bring each product to its final condition and sell it. Selling and distribution costs are part of these additional costs, and they are deducted from the sales value to arrive at the NRV. The NRV is then used to allocate joint costs to the individual joint products.
5. Which of the following is an example of by-product
Answer : b
In this case, when edible oils are extracted from oilseeds, the leftover material is processed into oil cakes, which are used as animal feed. The oil cakes are considered by-products because they are produced alongside the main product (edible oils) but have a lower value and are often used for a different purpose.
6. Which of following method can be used when the joint products are of unequal quantity and used for captive consumption :
Answer : a
Using Technical Estimates: This method uses technical estimates to apportion the joint costs over the joint products. This method is used when the result obtained by the above methods does not match with the resources consumed by joint products or the realisable value of the joint products are not readily available.
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
Ruchika Ma'am has been a meritorious student throughout her student life. She is one of those who did not study from exam point of view or out of fear but because of the fact that she JUST LOVED STUDYING. When she says - love what you study, it has a deeper meaning.
She believes - "When you study, you get wise, you obtain knowledge. A knowledge that helps you in real life, in solving problems, finding opportunities. Implement what you study". She has a huge affinity for the Law Subject in particular and always encourages student to - "STUDY FROM THE BARE ACT, MAKE YOUR OWN INTERPRETATIONS". A rare practice that you will find in her video lectures as well.
She specializes in theory subjects - Law and Auditing.
Yashvardhan Saboo
A Story teller, passionate for simplifying complexities, techie. Perfectionist by heart, he is the founder of - Konceptca.
Yash Sir (As students call him fondly) is not a teacher per se. He is a story teller who specializes in simplifying things, connecting the dots and building a story behind everything he teaches. A firm believer of Real Teaching, according to him - "Real Teaching is not teaching standard methods but giving the power to students to develop his own methods".
He cleared his CA Finals in May 2011 and has been into teaching since. He started teaching CA, CS, 11th, 12th, B.Com, M.Com students in an offline mode until 2016 when Konceptca was launched. One of the pioneers in Online Education, he believes in providing a learning experience which is NEAT, SMOOTH and AFFORDABLE.
He specializes in practical subjects – Accounting, Costing, Taxation, Financial Management. With over 12 years of teaching experience (Online as well as Offline), he SURELY KNOWS IT ALL.
"Koncept perfectly justifies what it sounds, i.e, your concepts are meant to be cleared if you are a Konceptian. My experience with Koncept was amazing. The most striking experience that I went through was the the way Yash sir and Ruchika ma'am taught us in the lectures, making it very interesting and lucid. Another great feature of Koncept is that you get mentor calls which I think drives you to stay motivated and be disciplined. And of course it goes without saying that Yash sir has always been like a friend to me, giving me genuine guidance whenever I was in need. So once again I want to thank Koncept Education for all their efforts."
"Hello everyone, I am Kaushik Prajapati. I recently passed my CA Foundation Dec 23 exam in first attempt, That's possible only of proper guidance given by Yash sir and Ruchika ma'am. Koncept App provide me a video lectures, Notes and best thing about it is question bank. It contains PYP, RTP, MTP with soloution that help me easily score better marks in my exam. I really appericiate to Koncept team and I thankful to Koncept team."
"Hi. My name is Arka Das. I have cleared my CMA Foundation Exam. I cleared my 12th Board Exam from Bengali Medium and I had a very big language problem. Koncept Education has helped me a lot to overcome my language barrier. Their live sessions are really helpful. They have cleared my basic concepts. I think its a phenomenal app."
"I cleared my foundation examination in very first attempt with good marks in practical subject as well as theoretical subject this can be possible only because of koncept Education and the guidance that Yash sir has provide me, Thank you."
