Joint products
The accounting classification of products created from the
same manufacturing process into joint products.
Are when two or more products are
produced or separated in the course of processing, each having a sufficiently
high saleable value.
Joint products are produced simultaneously,
however, in contract.
Ex-In the petroleum industry, petrol and
paraffin are produced. Each have similar sales value and are the main products.
By-products
By-products depends upon the relative importance to the
overall production system of good and the products respective value.
Are outputs of some value
produced incidentally in manufacturing something else.
By-products are produced incidentally during the production of
the main product.
Ex-In the timber
industry, by products like sawdust and bark are secondary products. Each have
low sales value compared to timber.
This
could be determined by looking at the overall goal of the manufacturing process
and then use to determine if something is a joint product
or a by-product of the process.
Two methods to account for by-product are follows:
Activity-Based Costing and Relevant Costs:
Activity-based
costing is a resource consumption model, not a spending model. Activity-based
costing gives an idea of the magnitude of resources involved in carrying out
activities, but it should be used with a great deal of caution in making
particular decisions. The costs assigned to products and other cost objects are
only potentially relevant costs. Whether they are relevant or not in any
particular situation should be carefully considered.
For example, in
most activity-based costing systems the fixed depreciation costs of a sophisticated
milling machine would be allocated to products based upon their usage of that
resource. Suppose you are trying to decide whether to drop a product that uses
the milling machine. The fact that the product uses the milling machine is
relevant only if the milling machine is a bottleneck (and opportunity costs are
involved in its use) or somehow future cash flows associated with the machine
will be affected by how much it is used. If the machine is not a bottleneck and
using some of its excess capacity has no effect on future spending, then there
really is no cost associated with using the machine. In this case, the costs
assigned by the activity-based costing system to the product would not be
relevant.
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