What is a Joint Product? Definition, and Example

Joint product

Joint products are the products that are produced as a result of a single production process. These products are produced as a result of the joint cost incurred by the company.

This is the reverse concept of the joint cost. The joint cost is the start of the process and the joint product is the final stage of the process.

In other words, the joint cost is an input and the joint product is an output obtained from the process. As the quality/quantity of the input does affect the quality/quantity of the output same is true in the case of joint cost and joint product.

If the resources consumed in the process are of food quality, the output is expected to be of better quality.

The joint products are separated from each other once the split-off point is reached in the run of a process.

After the split-off point, the products can be further processed individually. For instance, different products are obtained from milk that, includes cheese, cream, butter, etc.

Joint product, by-product, and spoilage

To be a joint product, the products obtained from the process must be of equal value without significant differences.

If the products obtained are of different significant values, the product with the greater value is the main product and the product with the less value is a by-product/secondary product.

If there is any loss of the resources consumed by the process, the losses are called spoilage/wastage.

Difference between joint products and co-products

Co-products are when different varieties of products are produced from the process. The requirement of the material, the pattern of usage, and the way the process may be different for the production of the different co-products.

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For instance, the furniture business may produce different types of furniture that include beds, chairs, tables, sofas, and many other items manufactured from the process.

The business does not have to consider the production of the bed to fulfill the order for the chair, as the two products are not dependent on each other. On the contrary, the production of one joint product is dependent on the production of another joint product.

For instance, if the business needs to fulfill the customer’s order for cheese, it must process the milk although the cheese will be produced with the process other joint products like cream and butter will be produced as well.

Hence, the business can’t produce a single product when the process is for the production of a joint product. On the contrary, the co-products can be processed at the will of the business.

Cost allocation for the joint products

The cost can be allocated for the joint products after the split-off point has been achieved. The allocated cost can be used for accounting purposes, including as a cost to be added for the further process cost or as a complete cost if the business does not further processes the products.

Two methods are mostly used to allocate the cost to the joint products. These methods of cost allocation include allocation based on the gross margins and the allocation based on the sales values of the joint products. Let’s discuss these methods of cost allocation for joint products.

Allocation based on the gross profit margins

The following steps help to allocate the joint cost based on the gross margins of the product.

  1. Calculate the total process cost, including pre-split-off and post-split-off points.
  2. Calculate the total revenue for the finished product sales after incurring further processing costs.
  3. Subtract the cost calculated in step 1 from the total revenue to get the gross margin.
  4. Calculate the gross profit margin percentage for the overall business.
  5. Deduct the gross profit margin by 100% to get the percentage of the cost of sales.
  6. Apply the percentage of the cost of sales with revenue.
  7. Extract the further processing cost/ post-split-off cost with the cost calculated in stage 6.
  8. Check accuracy by adding the cost of a specific product calculated in stage 7, and it should be equivalent to the joint cost.
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This method of cost allocation is suitable where the sales price is not available for the products on the split-off point.

Examples of the joint cost allocation based on the gross profit margin

Consider a business carrying out the process requiring the joint cost amounting to USD 10,000. The joint cost results in two products product-A, and product-B. The products do not have selling prices at the time of split-off points.

Both products have to be processed after the split-off point with the cost of USD 5,000 for each product. Product-A is sold for USD 12,000, and product B is sold for USD 14,000.

StepsCalculations
Total cost20,000 (10,000+5,000+5,000)
Total revenue26,000  (12,000+14,000)
Subtraction6,000  (26,000-20,000)
Gross margin23.077%   (6,000/26,000)
Percentage of cost76.923% (100-23.077)
Joint product cost of salesProduct-A =9,230.76 (12,000*76.923%), Product-B=10,769.22 (14,000*76.923%)      
Extraction of post-split-off costProduct-A =4,230.77 (9,230.76–5,000), Product-B =5,769.23  (10,769.22-5,000)
Check accuracy10,000 (4,230.77+5,769.23)

Allocation based on the sales value

The following steps help to allocate the joint cost based on the sales value of the product.

  1. Account for all the costs required to reach the split-off point for the process. This may include the costs related to the material, labor, and overheads.
  2. Determine the expected/known sales price of each product and get the total expected/known revenue with consideration of the volume.
  3. Calculate relative sales revenue for each of the products – (divided revenue from specific products with the total revenue for all the products).
  4. Allocated the joint cost based on the relative revenue generated by each of the products.
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Example of joint cost allocation based on the sales value

Consider a business carting the process that costs USD 20,000 (including raw material, labor cost, and overhead cost) till the split-off point and three resulting products that include product-A, product-B, and product-C.

The resulting product has total sales worth equivalent to USD 10,000, USD 15,000, and USD 12,000 for product-A, product-B, and product-C, respectively.  The cost allocation based on the sales value can be carried out as follows.

Products manufacturedSales worth considering the volumeAllocation ratioAllocated amount (Cost*allocation ratio)
Product-A10,0000.265,200
Product-B15,0000.418,200
Product-C12,0000.336,600
Total37,000120,000