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What are the direct and indirect costs of joint and by-product costing in corporate accounting?

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Joint and by-product costing are two methods of allocating costs to multiple products that are produced from a common input or process. In corporate accounting, these methods are useful for industries that have complex production processes, such as oil refining, chemical manufacturing, or dairy processing. However, joint and by-product costing also involve some direct and indirect costs that need to be considered and reported accurately.

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Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Deloitte | Financial Reporting & Modelling |

1 What are joint products and by-products?

Joint products are two or more products that have a relatively high sales value and are produced simultaneously from the same input or process. For example, gasoline and diesel are joint products of oil refining. By-products are products that have a relatively low sales value and are produced incidentally from the same input or process. For example, sawdust is a by-product of lumber production. The point at which the joint products or by-products can be identified and separated is called the split-off point.

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Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Deloitte | Financial Reporting & Modelling |
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Joint products is used to refer to two or more products that are produced at the same time from a sole process of production. While by-products refer to secondary products that can be produced from the production of another primary product.

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2 What are direct costs of joint and by-product costing?

Direct costs of joint and by-product costing are the costs that can be traced to the specific products before the split-off point. These include the costs of the common input, such as raw materials, labor, and direct expenses. For example, the cost of crude oil is a direct cost of joint and by-product costing for oil refining. Direct costs are usually allocated to the joint products based on their relative sales value, physical measure, or net realizable value at the split-off point. By-products are usually not allocated any direct costs, as they are considered to have no value until they are sold.

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3 What are indirect costs of joint and by-product costing?

Indirect costs of joint and by-product costing are the costs that cannot be traced to the specific products before the split-off point. These include the costs of the common process, such as overhead, depreciation, and utilities. For example, the cost of electricity is an indirect cost of joint and by-product costing for dairy processing. Indirect costs are usually allocated to the joint products based on the same basis as the direct costs, such as sales value, physical measure, or net realizable value. By-products are usually not allocated any indirect costs, as they are considered to have no value until they are sold.

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4 How are joint and by-product costing reported?

Joint and by-product costing are reported differently depending on the accounting method used. There are two main methods of accounting for joint and by-product costing: the gross method and the net method. The gross method reports the sales and costs of the joint products and by-products separately on the income statement. The net method reports the sales and costs of the joint products as usual, but deducts the sales value of the by-products from the cost of goods sold. The net method reduces the cost of goods sold and increases the gross profit margin.

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Ayuk Tarhbey, ACCA, MSc

Financial Management | Finance Control | Financial Cost & Process Optimization | Impact & Sustainable Finance | Oxford Alumni
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Joint and by-product costing are reported differently depending on the accounting method used. There are two main methods of accounting for joint and by-product costing: the gross method and the net method. The gross method reports the sales and costs of the joint products and by-products separately on the income statement. The net method reports the sales and costs of the joint products as usual, but deducts the sales value of the by-products from the cost of goods sold. The net method reduces the cost of goods sold and increases the gross profit margin.

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5 What are the advantages and disadvantages of joint and by-product costing?

Joint and by-product costing have some advantages and disadvantages for corporate accounting. For instance, they provide a consistent way of allocating costs to multiple products that share an input or process, as well as helping to measure the profitability and performance of each product and the overall production process. Additionally, they can encourage the efficient use of resources and the reduction of waste. On the other hand, joint and by-product costing involve some arbitrary and subjective decisions, such as choosing an allocation basis, valuing by-products, and selecting a split-off point. Furthermore, they may not accurately reflect market conditions like demand, supply, output quality/quantity, competition, or pricing strategies. Lastly, they may not capture the incremental costs and benefits of producing and selling by-products.

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6 How can joint and by-product costing be improved?

Joint and by-product costing can be improved by using alternative methods or techniques, such as the physical measure method, which allocates costs based on weight, volume, or other physical units of the products. This method is more objective and simple, but it may not reflect relative profitability. The constant gross margin percentage method, which allocates costs based on a predetermined gross margin percentage for all products, is more consistent and stable. However, it may not reflect actual gross margin of each product. The joint cost revisited method allocates costs based on incremental revenue or profit generated by each product and is more relevant and realistic. Yet, it may require more information and analysis.

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7 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?

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David Shonibare (ACA, ACTI)

Chartered Accountant || Financial Analyst 8yrs + Exp || Financial Reporting Expert || Top Business Strategist - Helping Organizations achieve their goals through the right strategies ??|| Professional Tutor
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The direct costs of joint and by-product costing in corporate accounting encompass expenses directly linked to the production process of joint or by-products, including raw materials, labor, and specific overhead costs. Indirect costs, on the other hand, involve expenses not directly attributable to production but incurred in the overall process, such as facility rent and utilities. Additionally, there are administrative expenses related to tracking and allocating costs, as well as the cost of implementing and maintaining a sophisticated costing system, contributing to the overall cost of joint and by-product costing.

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What are the direct and indirect costs of joint and by-product costing in corporate accounting?

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1 What are joint products and by-products?

2 What are direct costs of joint and by-product costing?

3 What are indirect costs of joint and by-product costing?

4 How are joint and by-product costing reported?

5 What are the advantages and disadvantages of joint and by-product costing?

6 How can joint and by-product costing be improved?

7 Here’s what else to consider

Corporate Accounting

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