Joint products, by-products and joint costs
- Definition and explanation of joint products
- Definition and explanation of joint cost
- Examples of joint products and joint cost
- Definition and explanation of by-products
- Examples of by-products
Definition and explanation of joint products
The joint products may be defined as two or more different products that are produced simultaneously by processing one or more raw materials through a common production process or a series of production processes. The point at which these products emerge in their separately identifiable form is known as point of separation or split-off point. At this point, some of the joint products have an economic value and can be sold to customers while others require a further processing before they can be placed in the salable condition.
The common examples of businesses where the production of joint products can be found include chemical companies, refineries, coke manufacturers, flour mills, coal mines, gas companies, lumber mills, meat processors and packers, dairies and canners etc.
Mostly, a quantitative relationship exists among the production of joint products; that is, if the production of one product is increased, the production of other joint products will also increase and vice versa. However, the proportion in which the output of one product impacts the output of other products may not be the same throughout the production process.
Definition and explanation of joint cost
A joint cost is the result of producing two or more different products from a single cost factor. It may be defined as the cost incurred to produce two or more different products by processing one or more raw materials through a common production process or a series of production processes.
The joint cost is incurred upto the split-off point (the point at which various products are separated). Any cost incurred on a particular product after the split-off point is not included in joint cost but is regarded as further processing cost of that individual product.
The joint cost should not be confused with the common cost because they are significantly different from each other. A true joint cost is always indivisible whereas a common cost is divisible. In case of common cost, the products or services can be obtained separately and any shared or common cost incurred to obtain the products and services can be allocated among them on the basis of relative usage of shared facilities. For example, the costs related to power and fuel may be allocated among products on the basis of metered usage or production volume of each individual product.
Examples of joint products and joint costs
Some examples of joint products and joint cost are given below:
- The coal is the basic raw material for the production of coke. In addition to coke, the production process also produces four other products – light oil, sulfate of ammonia, gas and crude tar. The most quantity of the gas produced during the process is not sold but is used to fire the coke ovens and the boilers of the power plant. For assigning cost to all the products, the coke ovens act as split-off point. The total cost of each product consists of a share of joint cost plus any subsequent cost incurred to put the product in marketable condition.
- For manufacturing steel, the iron ore is heated at high temperatures in blast furnaces. This process not only makes steel out of iron ore but also other joint products like pig iron and carbon monoxide and nitrogen gases. Pig iron is further processed to obtain cast iron, charcoal and anthracite and carbon monoxide and nitrogen are used as fuel in many metallurgy procedures such as shaping, re-shaping and corrosion of metals etc. The cost that is incurred for the process is jointly allocated to all the joint products in the process. After the obtainment of steel, if further purification of pig iron is done the costs incurred will not be said as the joint costs as this is the individual cost which is spent after the point of separation. The ‘point of separation’ in this process will be the point at which steel and other joint products are acquired.
- Meat packing industry is also a classical example where joint products are found. In meat packing industry, the original carcass with a joint cost is processed to obtain various cuts of meats. The process also results in the production of some by-products.
- The soybean is processed to obtain two products – the soybean oil and the meal.
- The derivation of gasoline results in the production of various products like kerosene, naphtha and distillate fuel oils etc.
- Different kinds of dairy products that are produced are a result of joint process. Raw milk is mostly the primary product which is further processed using different ways to extract other products like cream, cheese, yogurt, khoa, ice cream, butter and saturated oil (ghee) etc. Raw milk in its purest form can be called as “whole fat milk”. This product is further passed through different processes and screens to extract further products. If butter is required, the fat of milk is separated from the whole fat milk and then passed through a centrifuge after mixing water in it. Butter settles in the bottom of the utensil used for centrifuge. To obtain cheese, the milk is normally curdled. The curdled part can be further processed based on the type of cheese required. During the curdling process, another product called “whey” is obtained. The whey has many commercial uses like making and adding nutrition to juices, fermenting vegetables and using as a substitute for cooking oil etc.
- When glue is produced, it is produced in several grades which is also an example of the production of joint products.
Definition and explanation of by-products
Along with main products, some manufacturing processes produce one or more products having a relatively small value or no value at all. These products are usually termed as by products or secondary products. The main products are produced in larger quantities whereas by-products are produced in relatively small quantities.
Normally, the by-products are not considered as finished goods because their production is not intended in the first place. They come into existence because their production cannot be avoided because of the nature of production process or the raw materials being used in the production process. The introduction of advanced production and engineering processes, however, has made it possible to control the production of such secondary products to some extent. An example of such processes can be found in petroleum industry.
Examples of by-products
Some examples of by-products are given below:
- During the extraction of gold and copper a product named as Pyrite (fool’s gold) is normally mined and extracted. The gold is the end finished product. Copper can be referred as a ‘Side Product’ and Pyrite (Brassy Gold or fool’s gold) is the by-product of the extraction process. Although the sales value of this by-product is very low, still it has some economic value. It was normally used in old guns to flame a spark. Now-a-days pyrite is used in jewelry or in processes to obtain sulfur and sulfuric acid. Crushed pyrite is used to make concrete, asphalt and other building materials.
- The white sugar is obtained by refining the sugarcane juice. The process includes the extraction of by-products like molasses, gum, wax, bagasse etc. At first the sugar cane juice is boiled and mixed with carbon dioxide so that sugar could be separated from gum and wax. This wax and gum is used to make erasers and bubble gums respectively. At this stage the sugar is normally dark in color and known as “brown sugar”. In the next step sugar is refined to produce ‘white sugar’. This is the step in which by-products like molasses (mixture of water and sugar) and bagasse materialize. Molasses is used for cooking and baking purposes while bagasse can be used as bio fuel.
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