Define the following terms:-

Joint products: Two or more outputs generated simultaneously, by a single manufacturing process using common input, and being substantially equal in value. Joint products (such as butter, cheese, and cream from milk, and fuel oil, gasoline, and kerosene from crude oil) are separately unidentifiable, and incur undifferentiated joint costs, until they reach the split-off point.

Products from a joint process that have relatively high sales value and are not separately identifiable as individual products until the split-off point.

Joint Costs: Expense which simultaneously benefits two or more products or department, and where it may not be possible to separate the contribution between the beneficiaries.

Joint cost is the Cost of a single process that yields multiple products simultaneously.

Split-off point: Juncture in a production process where the product stream splits into two or more distinct products which become identifiable as joint products.

Split-off point is the Juncture in the process when one or more products in a joint-cost setting become separately identifiable.

Distinguish between joint product and by-product. Describe two methods to account for by-product.

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.

X company is considering dropping one of its product lines. What cost of product line would be relevant to decision? Irrelevant?

If x company mention these follows reason then it may relevant with decision.  Every decision involves a choice from among at least two alternatives. The costs and benefits of the alternatives should be compared when making the decision.

1. Identifying relevant costs. A relevant cost or benefit is a cost or benefit that differs between alternatives. Differential costs are relevant costs. Any cost or benefit that does not differ between alternatives is irrelevant and can be ignored in a decision. This is a tremendously powerful concept that allows us to ignore mounds of data when making decisions since most things are not affected by any given decision.

a. All sunk costs (i.e., costs already irrevocably incurred) are irrelevant since they will be the same for any alternative. All future costs that do not differ between alternatives are irrelevant.

b. Any cost that is avoidable is potentially relevant. An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.

c. When making a decision, eliminate all irrelevant costs. Make the decision based on the remaining, relevant costs.

2. If irrelevant. Costs that are relevant in one decision situation are not necessarily relevant in another. In each situation the manager must examine the data and isolate the relevant costs.

                                               

NOTE: Don't develop incorrect rules of thumbs for identifying relevant costs. One such popular thumb-rule is that variable costs are relevant and fixed costs are irrelevant. This thumb-rule is wrong. The fixed costs that differ between alternatives and that are therefore relevant.

For decision making point of view, should joint costs be allocated among joint products?

Yes, that should joint costs be allocated among joint products.

There are some reasons that require joint costs to be allocated:

1.      To reimburse cost incurred under contracts for companies that have few of their services or products reimbursed under cost-plus contracts with government agency for example.

2.      To compute and calculate inventorial costs and cost of goods sold for internal reporting purposes. These reports affect evaluation of division managers’ performance and thus are used in division profitability analysis.

3.      Also inventorial costs and cost of goods sold are used for financial accounting purposes and reporting purposes for income tax authorities.

4.      To regulate rates for one or more of the jointly produced products or services that is subject to price regulation.

5.      As a basis for settlement insurance claims such as damage claims made on the basis of cost information by businesses having joint products, main products, or byproducts.