Definition
Joint products are two or more significant products that emerge together from a single production process and cannot be produced separately until a split-off point, such as cream and skimmed milk, or petrol and diesel. The costs incurred up to split-off are joint costs and must be allocated between the products to value inventory.
How it works
There are three common allocation methods. The physical units method splits joint costs by weight or volume; it is simple but can make a low-value product look unprofitable. The sales value at split-off method uses relative selling prices. The net realisable value method uses final selling price less further processing costs when products are not saleable at split-off.
By-products are outputs with low value relative to the main products. They are usually measured at net realisable value and deducted from joint costs instead of receiving an allocation.
Joint cost allocation is for inventory valuation, not for decisions. Whether to sell at split-off or process further depends only on the extra revenue and extra cost after split-off. Ledgeriano supports joint products by physical units, sales value or net realisable value, and by-products, in process costing.
Formula
Share of joint cost = Joint cost × Product measure ÷ Total measure (units, sales value or NRV)
Example: joint cost of 60,000
A process costs 60,000 and yields 4,000 units of A (selling at 15) and 6,000 units of B (selling at 5).
| Method | Product A | Product B |
|---|---|---|
| Physical units (40% / 60%) | 24,000 | 36,000 |
| Sales value (60,000 / 30,000) | 40,000 | 20,000 |
| Gross margin under sales value | 20,000 (33%) | 10,000 (33%) |