Joint and by-product costing

 Introduction

Processes often produce more than one output e.g. oil refining will produce petrol, diesel, paraffin, aviation spirit, as well as a host of other products.  This section explores how these types of products are accounted for as cost.

The costing procedure used depends on whether products are classed as joint or by-products.

Joint Products

Joint products have substantial though not necessarily equal value e.g. petrol and diesel.  Joint products share in the process costs up to the point of product split off.

By-Products

By-products have two characteristics:

  • They have very minor value compared to the other process outputs e.g. sawdust and timber.
  • They are not produced deliberately i.e. sawmills are not constructed to produce sawdust.

By-product does not share the main process costs. However, if cost is incurred after split off these will be charged against revenue generated through the sale of the by-product. The net revenue for the by-products is then typically used to reduce the costs of the main process.

Scrap and Losses

In many cases losses from a process can have a scrap value.  How this scrap revenue is dealt with depends on whether it was due to a normal or an abnormal loss.

Normal Loss

The scrap revenue gained from selling normal loss units is used to offset the costs of production.