How do you compare and benchmark joint and by-product costing with other methods or competitors?

1 What are joint and by-product costs?

Joint and by-product costs are the costs that are incurred in a joint production process, where two or more products are generated simultaneously from a common input. For example, when crude oil is refined, it produces various products, such as gasoline, diesel, jet fuel, and asphalt. These products have different market values and demand, but they share the same production costs. Joint and by-product costs are the costs that cannot be traced or identified to a specific product, such as the cost of the crude oil, the labor, and the overhead.

2 How to allocate joint and by-product costs?

Different methods of allocating joint and by-product costs to the products exist, depending on the purpose and criteria of the allocation. The physical measure method allocates costs based on physical units or quantities of the products, such as gallons, tons, or barrels. This is simple and objective but ignores differences in value and quality. The sales value method allocates costs based on relative sales value at the split-off point, which is the point where products become separately identifiable. This reflects economic value but requires an estimate of sales value at the split-off point. The net realizable value method allocates costs based on relative net realizable value, which is sales value minus further processing costs after split-off point. This considers additional value added by further processing but may be complex and subjective to determine. Lastly, the constant gross margin percentage method allocates costs based on a constant gross margin percentage for all products, calculated by dividing total gross margin by total sales value of all products. This ensures same profitability ratio but may be unrealistic to assume a constant gross margin percentage for different products.

3 Why compare and benchmark joint and by-product costing?

Comparing and benchmarking joint and by-product costing with other methods or competitors can help you assess the effectiveness and efficiency of your cost allocation system, as well as identify areas of improvement or adjustment. For instance, you can analyze the impact of different methods of allocation on product costs, profitability, and pricing decisions. You can also evaluate whether your chosen method is consistent with your cost objectives. Additionally, you can compare your joint and by-product costing with those of competitors or industry benchmarks to see how you perform relative to them. This comparison may reveal any gaps or opportunities in your cost structure, market share, or product mix.

4 How to compare and benchmark joint and by-product costing?

To compare and benchmark joint and by-product costing with other methods or competitors, you need to collect and analyze relevant data and information, such as the joint and by-product costs and allocation methods used, the sales value, net realizable value, and further processing costs of the products at the split-off point and after further processing, the physical units or quantities of the products produced and sold, and the gross margin percentage and profitability ratio of the products. Various tools and techniques can be used for comparison and benchmarking, such as ratio analysis for calculating cost per unit, sales value per unit, net realizable value per unit, gross margin percentage, and profitability ratio; variance analysis for calculating differences or variances between actual joint and by-product costing and budgeted or standard joint and by-product costing; and benchmarking analysis for identifying best practices in your industry or sector. By using these tools, you can evaluate your performance against competitors or industry leaders to improve your joint and by-product costing.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?