Joint product costing
What is meant by Joint Products? – Definition
When two or more products must be produced together, they are called joint products. The purpose of this article is to describe the explanation, examples, and accounting techniques for costing joint products.
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. 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.
A joint product costing may be defined as that cost that 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, joint product cost results. A joint cost is incurred prior to the point at which separately identifiable products emerge from the same process.
Characteristics and examples
Many products or services are linked together by physical relationships, which necessitate simultaneous production. To the point of split-off or 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 meatpacking industry, where various cuts of meat and numerous by-products are processed from one original carcass with one lump sum cost. Another example of joint product 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.
The chief characteristic of the joint product costing is the fact that the cost of these several different products is incurred in an indivisible sum for all products, rather than in individual amount for each product. The total production cost of multiple products involves both joint cost and separate, individual product costs. These separable product costs are identifiable with the individual product and generally need no allocation. However, the joint production cost requires allocation or assignment to the individual