Joint products are of equal importance in terms of sale value and profits. Therefore, they are treated as main products. They cannot be separated until the process has reached a certain stage of completion.
Apportionment of costs incurred up to the split-off point (joint costs) is arbitrary and has the limited purpose of determining the cost of stock of each joint product at the end of the accounting period. We shall discuss some commonly used methods of apportioning joint costs.
Apportionment on the Basis of Physical Measurement:
i. Physical Measure Method:
Cost up to the point of separation may be apportioned in proportion to the weight, volume, or any other physical measurement of output.
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This method can be used when products are homogeneous and the same measuring unit is used to measure the quantity of all the joint products. This method is not very common.
ii. In Proportion to the Weighted Volume of Output:
When products are not homogenous, e.g., at split-off point one product is measured in litre and the other product is measured in kilogram, some sort of weights is assigned to the products based on some technical estimate about the relative costs of producing different products.
Apportionment on the Basis of Net Realizable Value (NRV):
In Proportion of NRV at Split-Off Point:
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NRV of each product at split-off point is ascertained and joint costs are apportioned in the ratio of relative NRVs.
NRV is the estimated sale value minus estimate selling and distribution expenses. Some firms use sale value instead of NRV for apportioning join costs. Results from those two methods do not differ significantly if selling and distribution expenses as a percentage of sales value are uniform for all the products.
It is not the selling price per unit, but the sale value of units produced that forms the basis for apportionment. This method is useful where disproportionate costs are incurred for further processing the products.
When one or more of the products cannot be sold at split-off point but need further processing to make them saleable, sale value after further processing is used to estimate NRV at the split-off point.
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NRV at the split-off point = Final sale value — Estimated selling and distribution expenses – Cost of further processing.
Decision of Further Processing:
The choice of a particular method of apportionment of joint cost does not alter the decision on further processing. Decision on further processing of joint products is taken by estimating the change in cash flow to the firm. Incremental revenue is compared to further processing cost. If the incremental revenue i.e. the difference between NRV after further processing and NRV before further processing is more than the further processing cost, the decision will be in favour of further processing.
Accounting for By-Product Costs:
As in the case of joint products, emergence of by-products is incidental to the production process. By-products differ from joint products only in one aspect—they have relatively insignificant sale as compared to the sale value of joint products.
If an item is accounted for as by-product, no part of the joint cost is assigned to it. Process account is credited by the net realizable value of the by-product. Net realizable value is calculated by deducting ‘post-split-off costs’ incurred to make the by-product saleable from its sale value. If the by-product is used internally, the process account is credited with opportunity costs of the same.
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Opportunity cost is the estimated realizable value or estimated cost at which the by-product or its substitute can be procured from the market. This method is in common use in steel industry where blast furnace gas and coke oven gas are mixed and used further for heating in open hearth furnaces.