In many processing industries, more than one product may be produced in a particular manufacturing process. They may be classified as joint products and by-products. In this blog, we discuss the differences between a joint product and a by-product.
What are joint products?
Joints products are two or more products that are produced simultaneously from the same input and in the course of the same manufacturing process. They are of equal importance and each one of them has a significant relative sales value.
For example, in the oil industry, fuel oil, lubricants, gasoline and kerosene are all produced simultaneously from crude petroleum. These are examples of joint products. Similarly, butter, cream and cheese made from milk can also be joint products.
Hence, joint products are multiple products that are produced at the same time from a single production process. They can’t be produced separately.
These products bear undifferentiated joint costs until a split-off point is reached, after which each one of them incurs separate processing. Thus, before the arrival of the split-off point, costs can only be allocated to joint products. They can’t be incurred and identified separately.
What is a by-product?
By-products are those products that emerge as a result of processing operations of another product or that are incidentally produced from the scrap or waste materials of a manufacturing process. Thus, a by-product is a subsidiary or secondary product which comes out as a result of the manufacture of the main product.
Some examples of by-products are molasses in the manufacture of sugar and glycerine obtained in the manufacture of soaps.
Like in the case of joint products, the point at which a by-product is separated from the main product is called the split-off point. All costs of processing are combined until the split-off point is reached.
Are joint products the same as co-products?
In common parlance, joint products and co-products are used interchangeably. However, a distinction can be made between the two.
Unlike joint products, co-products need not necessarily be produced from the same material and in the same manufacturing process. They may be produced differently requiring a different type of material and a different type of processing.
For example, wheat and gram are co-products. They are produced on separate farms with separate processes of cultivation. Similarly, a company specializing in furniture may produce tables, chairs, desks and benches. These shall be treated as co-products.
Points of difference between Joint product and By-product
More or less, it depends upon the decision of a company’s management to treat a product as a joint product or a by-product. It may either treat all products as joint products or may alternatively treat a particular product as the main product and the other products as by-products.
Nevertheless, the following factors help to draw a line of distinction between a joint product and a by-product:
|Importance||Joint products are of equal importance.||A by-product is of small economic value when compared to the main product.|
|Production||Joint products are produced simultaneously under a common process.||A by-product is produced out of scrap when producing the main product.|
|Example||Butter, cream and cheese made from milk||Glycerine obtained in the manufacture of soaps|
|Nature of product||By and large, joint products are the main products that are produced as part of the manufacturing plan.||By-products are unwanted and incidentally produced in the process of the manufacture of another product.|
|Objective||If the objective of manufacturing is Product A and B, they can be treated as joint products provided, they need a common material and a common process.||If the objective of manufacturing is Product A, then unwanted products C and D shall be treated as by-products.|
|Intention||They are intentionally produced.||They are incidentally produced as a consequence.|
After separation, both joint products and by-products may be saleable in their original form. Or else they may be further processed by incurring additional costs to make them saleable.
The management of a business entity requires reliable cost information related to the joint products and by-products. This information is needed to make managerial decisions such as whether to further process these products or not, whether to sell at the split-off point or not, etc.
For this purpose, it is necessary to know the share of joint costs to be apportioned to the joint products/by-products. Joint costs are those costs that are incurred up to the point of separation (split-off point). The apportionment of this joint cost to the joint products/by-products is a major concern. For costs incurred after the split-off point, there is no problem as they can be directly allocated to the individual joint products/by-products.
For the allocation of joint costs, several methods are employed by entities. Some of these include:
- Physical unit method (costs are apportioned on the basis of some base, e.g., weight, numbers, etc.)
- Net realizable value at split-off point method
- Using technical estimates
- Market value at the point of separation (costs are apportioned in the proportion of sales value of products)
- Contribution margin method, etc.
Takeaway: The distinguishing factor between Joint product & By-product
The most important factor to distinguish between a joint product and a by-product is the relative sales value. Where the sales value of the products is more or less equal, they are regarded as joint products. But if there are wide differences in the relative sales values, the product with greater value is treated as the main product, and the product(s) of smaller value is treated as the by-product.
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