Joint product

From CEOpedia | Management online

Joint product is one of two or more products which are made in enterprise from a common material or in common process. During all of the processing, or in a part of this, joint product cannot be recognize as a single product, because it is one of several products called - joint products[1].Joint product is made during single production process, which is called "joint process"[2]. Over the entire manufacturing process, joint product will be treated as joint products, until the "split-off point", where these two or more products "become separate and identifiable". In this moment company, decides about single products. Joint product can be sell, or transform into another form, and "sale to a different market"[3]. Examples of joint products are petrol, naptha, or diesel, which are made during oil refining processing from crude oil[4].

By-product and co-product

Joint product may be identified with a by-product, however it is a lot of differences between them. By-product is made accidentally, next to the main product, but joint product is made consciously, and is a part of the main product. The next distinction is in other economic importance. By-product is less important for company during the production, than the main producing product, and have lower economic importance. As opposed to by-products, every of joint products have the same economic importance. The second product which can be identified with joint products is co-product. In general co-product and joint product is the same, but there are some difference between them. Co-product, not always is made during one manufacturing process, and producer cannot control a number of co-products. Number of joint products is constant, and cannot be changed without accepting the amount of the rest of joint products[5].

Split-off point decisions

One of the main objective in business is to "maximize operating income". Therefore, decision that company will make in split-off point is very important. There are two ways, which helps enterprise make a further decisions of joint products in split-off point[6]:

  • The company can sell products at the split-off point, without any further processing - "if the incremental revenue is greater than the incremental costs of processing".
  • The company can transform products after split-off point, and sell them after this processing - "if incremental costs are greater than the incremental revenue".

Joint costs

Before split-off point, it is hard to separate cost between each of joint products, because they are produced together. This costs are called "joint costs". Only after split-off point, each cost of further processing can be assigned to a single specific product[7]. In accountancy, joint cost must be separate, to calculate "unit product cost". It is necessary to prepare balance sheet and profit and loss account.There are several different methods, which are used in joint cost allocation[8]. These methods can be divided into two categories[9]:

  1. Methods based on "physical measures" (weight, volume etc.)
  2. Methods based on "allocating joint cost relative to the market values of the product"

Examples of joint cost allocation methods[10]:

  • Physical Measure Method (Physical Unit Method or Quantitative Unite Method)
  • Weight Output Method
  • Market Value Method (Sales Value Method)
  • Average Unit Cost Method (Simple Average Method)

Examples of Joint product

  • Crude oil is a prime example of a joint product, since it can be refined into several different products such as gasoline, diesel, and kerosene.
  • Another example of a joint product is wheat. Wheat is used to make a variety of products such as flour, bread, and pasta.
  • Milk is also a joint product, as it can be used to make cheese, yogurt, and butter.
  • Wool is another joint product, as it can be used to make a variety of products such as clothing, blankets, and insulation.

Advantages of Joint product

Joint product has several advantages:

  • It reduces the cost of production, since the same raw material can be used to produce multiple products, saving time and money.
  • By using the same resources to produce multiple products, it increases the efficiency of the production process.
  • It also allows businesses to diversify their product range without having to incur the costs of additional production processes.
  • It also helps in reducing waste and maximizing the use of available resources.
  • Joint product also helps in increasing the market share of the company, as multiple products can be produced from the same raw material.

Limitations of Joint product

Joint product has several limitations which are worth to consider before implementing it. These limitations include:

  • Limited control over the quality of the product, since it is part of a shared production process.
  • Limited ability to respond quickly to changing customer demands and market conditions.
  • Increased complexity in managing inventory and logistics.
  • Difficulty in pricing the product, as each individual joint product may have a different market value.
  • Unpredictable output from the production process, as the quality of the joint product is difficult to control.
  • More expensive labor costs, since multiple products are being produced at the same time.

Other approaches related to Joint product

One approach to joint product is to separate the cost of production based on the relative sales value of the products. This is done by taking the total manufacturing costs, and then allocating them to each product based on its relative sales value. Another approach is to assign costs to the joint products based on the physical output of each product. This means that the costs are allocated based on the quantity of each product produced. A third approach is to assign costs based on the relative market value of the joint products. This means that the costs are allocated based on the market value of each product. Lastly, another approach is to assign costs based on the relative use value of the products. This means that the costs are allocated based on the estimated utility of each product. In summary, there are four main approaches to allocating joint product costs: relative sales value, physical output, market value, and use value.


Joint productrecommended articles
Operational gearingAbsorbed costsBatch costIsoquantSegment marginIrrelevant costVariable Cost RatioInventory valueABC method

References

  1. Needles B.E.,Powers M.,Crosson S.V., 2010, p.1199
  2. Bhar B.K, 2008, p.12.1
  3. Needles B.E.,Powers M.,Crosson S.V., 2010, p.1199
  4. Arora M. N., 2013, p.9.26
  5. Bhar B.K, 2008, p.12.1
  6. Needles B.E.,Powers M.,Crosson S.V., 2010, p.1999-1200
  7. Drury C., 2004, p.198
  8. Dutta M., 2004, p.12.6
  9. Drury C., 2004, p.198
  10. Dutta M., 2004, p.12.6-12.10

Footnotes

Author: Kinga Dudek