Many industries, chiefly chemical and nutrient industry face a batch of jobs in delegating cost to the joint and the byproducts that get at the same time produced from a common initial procedure. But in order to hold maximal profitableness from that merchandise, we need to hold a right rating of it cost. Proper costing of the merchandises will supply the company with proper stock rating and aid in appraisal of excise responsibility.
Joint merchandises are produced as a direct consequence of the strategic planning procedure of the company. These merchandises are of major importance to the company and, hence, stand for a important focal point for direction, accounting, and fiscal coverage.
By-products emerge from a common procedure along with primary merchandises but are non considered to be of import or valuable adequate to be a major focal point of direction. In other words, a merchandise, which is secondary to the chief merchandise and obtained during the class of industry of recognized chief merchandise is called a byproduct because of the comparatively lower importance it has every bit compared with the chief merchandise or merchandises. By-product cost is hard to find. The gross, if any, from its sale is by and large credited to the operation concerned or to the net income and loss history. By-product is normally subjected to further processing after separation from the chief merchandise.
The nature of Joint Product Output
Fixed and variable proportions:
Although joint merchandises have a definite quantitative relationship to each other, this relationship may take different signifiers. The nature of the joint merchandises end product can either be in fixed or variable proportions. The relationship between the merchandises is fixed if an addition in the end product of one merchandise of a group consequences in a proportionate addition in the end product of the other merchandises. In contrast, if the addition in end product of one merchandise consequences in either a lessening or has no consequence on the end product of one or more of the staying merchandises so the relationship between the end products is one of variable proportions. This fluctuation in end product proportions may merely be controlled within certain bounds and lone arises in certain procedures.
Intermediate and concluding merchandises:
Joint merchandises arise from a common procedure or series of procedures, the latter giving rise to intercede merchandises. Intermediate merchandises can be defined as those merchandises to be farther treated and processed to bring forth chief merchandise, where the chief merchandises in a multi-purpose operation may take the signifier of intermediate merchandises at a certain phases of production and finished merchandises at the concluding phase of production.
Joint and Separation costs:
The cardinal characteristic of joint merchandise is that they incur joint cost up to a certain phase of production, known as the split off point, where they become recognizable as separate merchandises. The costs incurred in the joint procedure can non be individually traced to the single merchandise end products.
Subsequent to the split-off point any cost incurred e.g. the extra processing costs, can be identified with specific merchandises and may be termed dissociable or attributable cost. For a cost to be dissociable, it must be possible to follow it with sensible certainty to a individual merchandise.
Designation of Joint and By-products:
Recognition of joint merchandises and byproducts, is strictly by comparative commercial values. Further, such comparative values are non lasting as their comparative importance of joint and byproducts is evanescent in nature, as can be seen by the undermentioned two illustrations.
In the sugar industry, till about four decennaries back, imperativeness clay was merely a waste merchandise of nuisance value, that needed figured bass disposal at extra costs or else it will make taint. Subsequently, through research, it was found that the imperativeness clay contained rich foods which stimulate works growing, as a consequence of which it became a commercially valuable merchandise.
In acerb sodium carbonate industry, the primary procedure outputs three merchandises: acerb sodium carbonate, Cl and H. The demand for merchandises, were non commensurate with the end product. Out of the three Chlorine was a toxic waste and had to be disposed off in conformity with the environmental ordinances, at a high cost. Hence, Chlorine was deemed as a load on the chief merchandises. A major transmutation took topographic point due to technological promotion, due to which Cl became a staple merchandise for the full scope of PVC merchandises. Overnight the acerb sodium carbonate industry itself became “ Acerb Chlor industry ” , bespeaking the close commercial equality of the merchandises. ( Joint merchandise ) Due to subsequent farther developments, the “ Acerb Chlor industry ” transformed into “ Chlor Alkalic ” industry, therefore finishing the transmutation from a waste to high value chief merchandise.
Methods of Apportionment of Joint Costss:
The bing methods for allotment of joint merchandises in the industry are:
Market value footing: Under this method, joint costs are allocated on the footing of their comparative gross revenues value. The deduction of this method is that joint merchandises should absorb articulation costs harmonizing to their ability to pay as reflected by the market values of the single merchandises.
Four differing application of the gross revenues value method are as follows-
Market value after farther processing i.e. the concluding gross revenues value.
While allocating the cost on the footing of concluding gross revenues value the costs are ascertained in the proportion of concluding gross revenues value after farther processing beyond the split off point. When there is a broad para in selling monetary values of concluding merchandises, this method is to be adopted. While taking a merchandising monetary value, it is of import to take a representative period sing the normal rhythm of fluctuations. Such a representative figure may be the day-to-day norm of the past month or quarterly norm as may be appropriate. In instance the merchandises are sold to different markets, the adjusted market value, extinguishing cargo and securities firm or committee elements or any other cost is to be taken.
Internet Realisable value: It is the concluding gross revenues value after subtracting the farther processing costs. In instances when the procedure watercourse require farther processing after the split-off point, so the costs incurred ( a step of the value added ) after split off points are determined and deducted from the concluding cyberspace gross revenues value to infer the footing for allotment of joint cost among the merchandises.
Gross Margin Percentage: When the merchandises have same profitableness on gross revenues, Joint costs shall be allocated on the footing of Gross Margin Percentage.
Market value at the point of separation: Joint costs apportionment on the footing of gross revenues value of the merchandises is followed when no other rational footing for allotment of articulation cost is available and joint merchandises are sold without farther processing at split off point.
Restrictions: If costs are assigned on the footing of gross revenues value so merchandises which are produced in lesser sums or have lesser value than the other articulation merchandises, so the cost absorbed by them would be well lesser than the other joint merchandises. Whereas, there are many instances in which the costs incurred by a merchandise of lesser gross revenues value ( quantity x selling monetary value ) are much higher than the costs incurred by merchandises of higher gross revenues value. For illustration, allow us see the air separation industry where, although Ar is produced in the least sum, the energy required in order to divide Ar is highest. Furthermore in the air separation industry energy costs form a big part of the entire costs. Hence we can reason from the above that Ar should absorb the highest cost but if we assign the cost on the footing of gross revenues value, its cost would be the least.
Physical Measurement Footing: Sometimes when the merchandises obtained have a common beginning stuff and none of these merchandises can be classified as byproduct, in such state of affairss the ingestion of the stuffs ( public-service corporations, natural stuffs, etc. ) by single merchandises from common input, is measured by physical units such as weight, volume, etc. The joint costs are to be allocated to single merchandises on the footing of this measuring.
This method is suited under fortunes where the units of measuring of the concluding merchandises are the same or capable of being measured in similar units.
In industries where joint merchandises emerge in different physical province and are hence measured in differing physical units, a job arise in set uping a common denominator. However, even in instance where the end products emerges as solids, liquids and gases, a common unit or physical co-efficient such as weight, can usually be found as a transition factor ( the weight of a gas is calculated given the volume, temperature and force per unit area ) .
Allotment on the footing of volume of production of joint merchandises:
Joint cost can be allocated to single units on the footing of volume merely when the units of measuring of the merchandises are same or similar in nature and all the merchandises have about equal importance.
Allotment on the footing of Physical Volume and Physical Co-efficient: When physical co-efficient of merchandises is important in finding the value of the joint merchandises, the same may be taken as a factor for allotment of joint cost. For illustration, calorific value per unit volume for joint merchandises in instance of crude oil industry, nutrient ingredients in nutrient processing industry etc. may be the footing of allotment.
If the physical co-efficient under consideration varies with the alteration of natural stuff and other procedure parametric quantities, so in such instances the physical co-efficient should be measured for the end product produced within a limited clip in a controlled conditions so that footing of allotment does non stand for incorrect footing.
For an industry, particularly Chemical Industry, where inputs used follow rigorous norm and procedure conditions are streamlined harmonizing to the demand of standard processing environment, the standard indices of co-efficient arrived at un-biased trying technique may be used.
Techno Commercial Factor rating base:
When the joint costs are affected by more than one factor so delegating costs entirely on the footing of merely one factor may take to inappropriate cost allotment. Therefore, in such state of affairss the leaden norm of the cardinal judges can be taken as a base.
Footing of allotment can non be entirely market based or strictly physical based. So a combination of both should be used, taking into history the multiple forces that have impact on production and sale and so punctually delegating weights to each of the several factors.
For illustration, in the acerb sodium carbonate industry, the primary procedure, where the three merchandises occur: Acerb, Chlorine and Hydrogen, a stoichiometric ratio of the three merchandises is used for dividing the costs.
For Instance of the two merchandises A and B jointly produced, A may be more hard to bring forth but B comparatively easy. From the selling angle the contrary is the instance. Hence direction may delegate points state, on a graduated table of 10 as below.
Hence, joint cost to be distributed between A and B on the footing of 12/22 and 10/22 severally.
One drawback of this method could be that the evaluation is done by the direction and hence, it is chiefly based on the direction ‘s perceptual experience which might take to certain disagreements in the system.
Input based cost drivers for allotment of joint cost:
There may be one or more cost drivers that impact the production cost significantly. For illustration, cost of energy is the chief cost in the compaction of air for bring forthing O, N and Argon and there is no other natural stuff cost. Hence a just footing for distribution of the joint cost over the assorted merchandises could be the cost driver of energy.
It can be seen that there is an reverse relationship between the end product proportion yielded and the energy required to divide a merchandise. Hence Argon stand foring the smallest end product of 1 % bears the bulk of cost.
In oil refinery, a figure of single merchandises are obtained from the petroleum oil.
By and large, more importance is given to the net income originating out of a barrel of rough oil and hence, joint costs are normally non allocated. J.J.Butler suggested a method in which he proposed that direction should place all the executable alternate combination of the input and rank them as follows:
Rank Number = Total Net income of the combination
Number of units of base input required
He treats the basic input as a scarce resource and believes that the aim of the house should be to give the greatest return from the scarce resources. The advantage of this method over the market value method is that the value add-on becomes a cardinal factor in allotment of joint costs.
The byproducts are usually extra end product in the production of chief merchandises. The costing of by merchandises is non really of import with regard to gain optimisation due to comparatively low gross revenues value. However, the standardisation of intervention of byproduct costs is of import from the point of cost accounting.
A unvarying system of intervention of cost accounting for byproduct is by and large followed. Gross saless value of byproducts less farther processing cost administrative disbursals and merchandising and distribution disbursals is credited to the entire cost of chief merchandise.
In instance realisation from the byproduct is non important, the sum realized may be treated as other income and straight credited to P & A ; L Account.
In oil/ petrochemical industry on fractional distillment of oil, several fractions are obtained at different temperatures. Allocating the costs in such an environment is really hard. One method that could be used to apportion assorted costs could be as follows:
The major repeating costs incurred in an oil industry would be that of fuel, natural stuff and public-service corporations ( such as steam ) . As we know different fractions are obtained at different temperatures, if we assume that a peculiar fraction A is obtained at 40 deg C and other fractions B and C, are obtained at 180 and 250 deg C severally. The sum of fuel required to raise the temperature of oil to 40 deg C ( say Ten ) can be obtained cognizing the calorific value of the fuel used. Now since there are three fractions in our illustration we divide X/3 and apportion this sum to all the three fractions. Similarly in order to raise the temperature farther from 40 deg C to 180 deg C can be found out ( state Y ) and Y/2 would be allocated to B and C. Further the fuel required to raise temperature to 250 deg C ( say Z ) can be allocated entirely to C. This manner the sum of fuel used is:
A – & gt ; X/3
B- & gt ; X/3 + Y/2
C- & gt ; X/3 + Y/2 + Z
Now we can specify a factor
a•’ = ( Revenue per unit base input* ) / ( Amount of fuel used )
*Base input in this peculiar instance would be oil.
For farther lucidity we assume arbitrary numerical values. The entire sum of fuel used is 6 kilogram.
X = 3 kilogram
Y= 2 kilogram
Z= 1 kilogram
Therefore the fuel allocated to the three merchandises would be:
A = 1 kilogram
B= 2 kilogram
C= 3 kilogram
Assuming that 1lit input produces 0.2 lit A, 0.4 lit B, 0.3 lit C and the costs per lit are Rs. 110, 115 and 120 severally, so the gross per lit earned by the three merchandises would be as follows:
A = ( 0.2 * 110 ) = 22
B = ( 0.2 * 115 ) = 23
C = ( 0.3 * 120 ) = 36
Therefore a•’A = ( 22 ) / ( 1 ) = 22
a•’B = ( 23 ) / ( 2 ) = 11.5
a•’C = ( 36 ) / ( 3 ) = 12 Total = 45.5
Now presuming for 1 lit of input the entire cost of fuel required and steam required is Rs. 30, so the cost apportioned would be as follows:
A = ( 22 * 30 ) / ( 45.5 ) = Rs. 14
B = ( 11.5 * 30 ) / ( 45.5 ) = Rs. 8
C = ( 12 * 30 ) / ( 45.5 ) = Rs. 8
In this method we have allocated the costs on the footing that whichever merchandise earns the maximal gross, the maximal cost would be borne by that peculiar merchandise.
Another method to apportion the cost could be apportioning on the footing that whichever merchandise uses the least resources the least sum of cost would be borne by it. In this instance we would take ( 1/a•’ ) to apportion the cost.
Mentioning the old illustration:
( 1/a•’A ) = 0.045, ( 1/ a•’B ) = 0.087, ( 1/a•’C ) = 0.083
A = 6, B = 12, C = 12
The method of apportioning cost for joint merchandises may change from company to company. The method suggested by us tries to take into history the value of the merchandise every bit good as the resources consumed in order to bring forth that value. Whereas, other methods discussed above return merely one of the factors into history for apportioning the costs.
Generalization of the above expression:
Number of fractions = Ns
Temperatures = T1 to Tn
Fuel Consumed = x1 to xn
Where, x1 = x1/n
x2 = x1/n + x2/n-1,
x3 = x1/n + x2/n-1 + x3/n-2
xn = x1/n + x2/n-1aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦xn-1/2 + xn
The values assumed are arbitrary values and non existent values. So the pertinence of this method after presuming existent values remains to be seen.
Further research and analysis is required in order to more accurately apportion the costs.
Cost Accounting for a procedure industry is really hard. Allotment of costs is wholly a managerial determination and varies from industry to industry. There could be better methods to apportion costs but by and large for the interest of brevity and due to the inconsequential costs incurred by joint merchandises before dividing off, these issues are ignored. Although turn toing to such issues can take to better cost allotment thereby leting companies to monetary value their merchandises more competitively.