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Modul ke:
Fakultas
Program Studi
Akuntansi Biaya Costing By-Products and Joint Products
Suryadharma Sim, SE, M. Ak
09 Ekonomi dan
Bisnis
S1 Manajemen
Costing By-Products and Joint Products
By-Products and Joint Products Defined
The term by-product is generally used to denote a product of relatively small total value
produced simultaneously with a product of greater total value.
Joint products are produced simultaneously by a common process or series of processes,
with each product possessing more than nominal value in the form in which it is produced.
Many industrial concerns are confronted with the difficult and often rather complicated
problem of assigning costs to their by-products and joint products. Chemical companies,
coke manufacturers, refineries, flour mills, coal mines, lumber mills, gas companies,
dairies, canners, meat packers, and many others produce in their manufacturing or
conversion processes a multitude of products to which some cost must be assigned.
Assignment of costs of these various products enhances equitable inventory costing for
income determination and financial statement purposes. An even more important aspect of
by product and joint product costing is that it furnishes management with data for use in
planning maximum profit potentials and evaluating actual profit performance.
Costing By-Products and Joint Products
Difficulties / Problems in Costing by Products and Joint Products:
By products and joint products are difficult to cost because a true joint cost is
indivisible. For example, an ore might contain both lead and Zink. In the raw
state, these minerals are joint products, and until they are separated by
reduction of the ore, the cost of finding mining, and processing is a joint cost;
neither lead nor Zink can be produced without the other prior to the split-off
point.
The cost accumulated to the split-off point must be born by the difference
between the selling price and the cost to complete and sale each mineral after
the split-off point.
Costing By-Products and Joint Products
Joint Products and Joint Product Cost:
Definition and Explanation of Joint Products:
Joint products are produced simultaneously by a common process or
series of processes, with each product processing more than a
nominal value in the form in which it is produced. The definition
emphasizes the point that the manufacturing process creates
products in a definite quantitative relationship. An increase in one
product's output will bring about an increase in the quantity of the
other products, or vice versa, but not necessarily in the same
proportion.
Costing By-Products and Joint Products
Definition and explanation of Joint Product Cost:
A joint product cost cay be defined as that cost which arises from the common processing or
manufacturing of products produced from a common raw material. Whenever two or more
different products are created from a single cost factor, a joint product cost results. A joint cost
is incurred prior to the point at which separately identifiable products emerge from the same
process.
Example:
For example, the production of coke, for which coal is the original raw material. In addition to
coke as its major product, the process produces sulfate of ammonia, light oil, crude tar and
gas. The greater quantity of gas is not sold but is used to fire the coke ovens and the boilers
in the power plant. The coke ovens are the split-off point for cost assignments. The cost of
each product consists of a pro rata share of the joint cost plus any separable or subsequent
costs incurred in order to put the products into saleable condition.
Costing By-Products and Joint Products
COKE AND ITS ASSOCIATED PRODUCTS
COAL (ORIGINAL RAW MATERIAL)
→ COKE OVEN (SPLIT-OFF POINT)
→ COKE (MAJOR PRODUCT)
Plus Separable cost →
COKE
→ SULFATE OF AMMONIA
Plus Separable cost →
SULFATE OF AMMONIA
→ LIGHT OIL Plus Separable cost →
BENZOL
→ CRUDE TAR Plus Separable cost →
TAR
→ COKE OVEN GAS Plus Separable cost →
GAS
Costing By-Products and Joint Products
Characteristics of Joint Products and Joint Cost:
Many products or services are linked together by physical relationships which
necessitate simultaneous production. To the point of split-off or to the point
where these several products emerge as individual units, the cost of the
products forms a homogeneous whole.
The classic example of joint products is found in the meat packing industry,
where various cuts of meet and numerous by products are processed from one
original carcass with one lump-sum cost. An other example of joint products
manufacturing is the production of gasoline, where the derivation of gasoline
inevitably results in the production of such items as naphtha, kerosene, and
distillate fuel oils.
Costing By-Products and Joint Products
Other examples of joint products manufacturing are the simultaneous
production of various grads of glue and the processing of soybeans into oil and
meal. Joint product costing is also found in industries that must grade raw
materials before it is processed. Tobacco manufacturers (except in cases
where graded tobacco is purchased) and virtually all fruit and vegetables
canners face the problem of grading. In fact, such manufacturers have a dual
problem of joint cost allocation:
1. Materials cost is applicable to all grades
2. Subsequent manufacturing costs are incurred simultaneously for all the
different grads.
Costing By-Products and Joint Products
By-Products:
Definition and Explanation of By Products:
The term "by product" is generally used to denote one or more products of
relatively small total value that are produced simultaneously with a product of
greater total value. The product with the greater value, commonly called the
"main product", is usually produced in greater quantities than the by products.
Ordinarily, the manufacturer has only limited control over the quantity of the by
product that comes into existence. However, the introduction of more advanced
engineering methods, such as in the petroleum industry, has permitted greater
control over the quantity of residual products. In fact, one company, which
formerly paid a trucker to haul away and dump certain waste materials,
discovered that the waste was valuable as fertilizer, and this by product is now
an additional source of income for the entire industry.
Costing By-Products and Joint Products
Nature of By-Products:
The accounting treatment of by-products necessitates a reasonably complete knowledge of
the technological factors underlying their manufacture, since the origins of by products may
vary. By-products arising from the cleansing of the main product, such as gas and tar from
coke manufacture, generally have a residual value. In some cases, the by product is left
over scrap or waste, such as sawdust in lumber mills. In other cases, the by product may
not be the result of any manufacturing process but may arise from preparing raw materials
before they are used in the manufacture of the main product. The separation of cotton seed
from cotton, cores and seeds from apples, and shells from coca beans are examples of this
type of product.
By product can be classified into the following two groups according to their marketable
condition at the split-off point:
1. Those sold in their original form without need of further processing.
2. Those which require further processing in order to be saleable.
Costing By-Products and Joint Products
Methods of Costing By-Products
Recognition of Gross Revenue Method-By Products Costing:
This method is typical non-cost procedure in which the final inventory cost of the
main product is overstated to the extent that some of the cost belongs to the by
product.
However this shortcoming is somewhat removed in procedure 4 (by product
revenue deducted from the production cost), although a sales value rather than a
cost is deducted from the production cost of the main product.
1. By-Product Revenue as Other Income:
2. By-Product Revenue as Additional Sales Revenue:
3. By-Product Revenue as a Deduction from the Cost of Goods Sold:
4. By-Product Revenue deducted from Production Cost:
Costing By-Products and Joint Products
Recognition of Net Revenue Method--By Product Costing:
This method recognizes the need for assigning some cost to the by-product. It does not
attempt, however, to allocate any main product cost to the buy product. Any expenses
involved in further processing or marketing the by-product are recorded in separate accounts.
All figures are shown on the income statement, following one of the procedures described at
recognition of gross revenue method page.
Journal entries in this method would involve charges to by-product revenue for the additional
work required and perhaps for factory overhead. The marketing and administrative expenses
might also be allocated to the by product on some predetermine basis. Some firms carry an
account called by-product to which all additional expenses are debited and all income is
credited. The balance of this account would be presented in the income statement, following
one of the procedures out lined at recognition of gross revenue method page. However,
accumulated manufacturing costs applicable to by product inventory should be reported on
the balance sheet.
Costing By-Products and Joint Products
Replacement Cost Method-By Product Costing:
Replacement cost method ordinarily is applied by firms whose by-products are
used within the plant, thereby avoiding the necessity of purchasing materials
and supplies from outside suppliers. The production cost of the main product is
credited for such materials, and the offsetting debit is to the department that
uses the by product. The cost assigned to the by product is the purchase or
replacement cost existing in the market. This method is common in the steel
industry. Although many by-products are sold in the open market, other
products, such as blast furnace gas and coke oven gas, are mixed and used
for heating in open hearth furnaces. The waste heat from open hearths is used
again in the generation of steam needed by the various producing
departments. The resourceful use of these by-products and their accounting
treatment are indicated by the following procedure used by a steel company:
Costing By-Products and Joint Products
1. Coke oven by-products are credited to the cost of coke at the average
sales price per unit for the month.
2. Coke oven and blast furnace gas are credited respectively to the cost of
coke and the cost of big iron at a computed value based on the cost of fuel
oil yielding equivalent heat units.
3. Tar and pitch used as fuel are credited respectively to the cost of coke at a
computed value based on the cost of fuel oil yielding equivalent heat units.
4. Scrape steel re-melted is credited to the cost of finished steel at market
cost of equivalent grades purchased.
5. Waste heat from furnaces used to generate steam is credited to the steel
ingot cost at a computed value based on the cost of coal yielding
equivalent heat units.
Costing By-Products and Joint Products
Market Value Method or Reversal Cost Method:
Market value method or reversal cost method is similar to the last technique (By Product
Revenue deducted from Production Cost) illustrated at recognition of gross revenue method
page. However it reduces the manufacturing cost of the main product , not by the actual
revenue received, but by an estimate of the by products value at the time of recovery. This
estimate must be made prior to split-off from the main product. Dollar recognition depends
on the stability of the market as to price and stability of by product; however, control over
quantities is important. The by product account is charged with this estimated amount and
the production (manufacturing) cost of the main product is credited. Any additional costs of
materials, labor, or factory overhead incurred after the by-product is separated from the main
product are charged to the by product. The marketing and administrative expenses might
also be allocated to the by product on some equitable basis. The proceeds from sales of the
by product are credited to the by-product account. The balance in this account can be
presented on the income statement in one of the ways outlined for recognition of gross
revenue method except that the manufacturing cost applicable to by product inventory
should be reported in the balance sheet.
Costing By-Products and Joint Products
Methods of Allocating Joint Production Cost to
Joint Products
Market or Sales Value Method-Allocation of Joint Cost:
Market or sales value method enjoys great popularity because of the
argument that market value of any product is a manifestation of the cost
incurred in its production. The contention is that if one product sells for more
than another, it is because more cost was expended to produce it. Therefore,
the way to prorate the joint cost is on the basis of the respective market
values of the items produced. The method is really a weighted market value
basis using the total market or sales value of each unit (quantity sold times
the unit sales price).
Costing By-Products and Joint Products
Quantitative or Physical Unit Method-Allocating Joint Product Cost:
Quantitative or physical unit method attempts to distribute the total joint cost
on the basis of some unit of measurement, such as pounds, gallons, tons, or
board feet. Of course, the unit products must be measurable by the basic
measurement unit. If this isn't possible, the joint units must be converted to a
denominator common to all units produced, For example, in the manufacture
of coke, products such as coke, coal tar, benzol, sulfate of ammonia, and gas
are measured in different units. The yield of these recovered units is
measured on the basis of the quantity of product extracted per ton of coal.
Costing By-Products and Joint Products
Average Unit Cost Method-Allocating Joint Product Cost:
Average unit cost method attempts to apportion total joint production cost
to the various products on the basis of a predetermined standard or index
of production. An average unit cost is obtained by dividing the total
number of units produced into the total joint production cost. As long as all
units produced are measured in terms of the same unit and do not differ
greatly, the method can be used without too much misgiving. When the
units produced are not measured in like terms, the method cannot be
applied.
Costing By-Products and Joint Products
Joint Cost Analysis for Managerial Decisions and Profitability Analysis
Joint cost allocation methods indicate that the amount of the cost to be apportioned to the
various products emerging at the split-off point is difficult to establish for any purpose.
Furthermore, the acceptance of an allocation method for the apportionment of joint cost does
not solve the problem. The idea has been advanced that no attempt should be made to
determine the cost of individual products up to the split-off point; rather, it seems important to
calculate the profit margin in terms of total combined units. Of course, costs incurred after the
split-off provide management with information needed for decisions relating to the desirability
of any further processing.
For profit planning, management should consider a joint product’s contribution margin after
separable costs-those incurred after split-off- are deducted from sales. This contribution
margin allows management to predict the amount that a segment or product line will add to or
subtract from company profits.