This lesson explores the costing of processes where multiple products are created simultaneously from a single raw material input. It covers the theory and allocation methods for joint products and by-products.

• Joint Products: Joint products are two or more products that are produced simultaneously by a single process, each having a significant sales value. For example, oil refining produces petrol, diesel, and kerosene from a common input.

• By-Products: A by-product is a product that is produced incidentally to the main product, having a relatively low sales value compared to the main output. For instance, sawdust produced when making timber boards.

• The Split-Off Point: The point in the production process at which the joint products become separately identifiable is known as the split-off point. All costs incurred before this point are ‘joint costs’.

• Allocating Joint Costs: Because joint costs are common to all products, they must be allocated to the joint products for inventory valuation and profit determination. Common allocation methods include:

  • Physical Measure Method: Allocates costs based on a physical quantity, like weight or volume.

  • Sales Value at Split-Off Method: Allocates costs based on the proportion of each product’s sales value at the split-off point.

  • Net Realisable Value (NRV) Method: Used when products are processed further after the split-off point. The NRV is the final sales value minus any further processing costs. Costs are allocated based on the proportion of each product’s NRV.

• Accounting for By-Products: By-products are often valued at their net realisable value (NRV) and this amount is credited to the joint costs, effectively reducing the cost of the main joint products.