Chapter 13-2 Notes
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Accounting For Joint Product Costs
Joint Products and By-Products are produced from one
For example, on a dairy farm, the raw milk is
processed into a number of Joint Products: milk, cheese,
cream, butter and other dairy products.
Similarly, in a
slaughter house operation, one cow produces a number
Additionally, in a petroleum refining process, crude oil is
kerosene, heating oil, and lubricating oil. The point at
which you can identify the Joint Products as separate
products is referred to as the Split-Off Point (e.g., after
churning the milk).
Joint Products are the main products produced from the Joint
Process (determined by value and/or quantity). By-Products, on the
other hand, are outputs from the Joint Process that are relatively
minor in quantity and/or value.
For example, the parts of the cow
that humans do not ordinarily eat are considered By-Products (e.g.,
dog food and animal feed). They have a value, but we did not raise
the cow in order to get these parts (e.g., the heart and brains).
subjective determination, and there is no objective test to distinguish
between Joint Products and By-Products.
Also, the characterization of a product as a By-Product or Joint Product can change as
characterized as By-Products.
Now, with the increased popularity of particle board,
they are characterized as Joint Products.
The production costs up to the Split-Off Point are called Joint Costs.
For example, the
cost of raising and milking a cow is a Joint Cost in a diary operation.
were no separate products at the time that the Joint Costs were incurred, it is not clear
which Joint Costs should be allocated to which Joint Products. In practice, a number of
different methods are used to allocate Joint Costs to the Joint Products.
It is preferred
to base the allocation of Joint Costs to Joint Products using the relative fair market
values of the Joint Products.
The rationale for this preference is that we entered into
the Joint Process more for the higher value Joint Products than the lower value Joint
Products, and the allocation of Joint Costs should reflect this.
For example, it is likely
that a cow was raised more for its steaks than for its hamburger.
We will discuss three