Some processes make more than one product at once and cannot make one without the other. Refining crude oil gives petrol, kerosene and fuel oil. Rearing cattle gives meat and hides. Until the process splits them, the products cannot be told apart, so the cost of the common process cannot be traced to any one of them.
It has to be shared out, and the way it is shared decides what each product appears to cost and earn.
This topic defines joint products and by-products, shows the three methods of sharing the common costs, explains the ways of accounting for the sale of by-products, and works through the effects on stock and profit. It also says when you should not rely on a cost split at all. Joint product questions combine a short theory part with a calculation, so both are covered.
In 30 seconds
Joint products are two or more products of similar importance that come from the same process and are not separate until the split-off point. By-products are minor outputs of low value. Joint (common) costs are shared by one of three bases: units (physical quantity), sales value at split-off, or net realisable value (final sales value less further processing costs).
The most common treatment of by-product sales is to deduct the proceeds from the joint process costs before sharing them. Alternatively they can be shown as revenue or other income, with no cost given to the by-product.
Joint products
Joint products are two or more products made at the same time by a single process from common inputs, each with a significant sales value compared with the others. They cannot be distinguished from one another until they emerge from the process. The point at which they become separate products is the split-off point (also called the separation point).
Examples: refining crude oil (fuel oil, petrol and kerosene) and rearing animals for meat and hides for leather.
Common costs
The costs of the common process are common (joint) costs. To value each joint product, they must be shared on a fair basis, much as overhead is apportioned between cost centres. Costs incurred after the split-off point, such as further processing or packing of one product, belong to that product alone and are not shared.
Three bases of apportionment
| Basis | How it works | Effect |
|---|---|---|
| Units (physical quantities) | Common costs are shared in proportion to the number of units (or kilograms, litres) of each product | Every product has the same cost per unit, whatever it is worth |
| Sales value at split-off | Shared in proportion to the sales value of each product at the split-off point | Products with higher values bear more cost. Each product earns the same percentage profit margin at that point |
| Net realisable value (final sales value less further processing costs) | Shared in proportion to the eventual sales value after further processing, less the costs of that processing | Used when products need further processing and have no market value at split-off |
A worked comparison
A process costs ₦302,000. It also produces a by-product BP, which sells for ₦6,000 (1,000 units at ₦6). The process makes 5,000 units of JP1 and 3,000 units of JP2. At split-off, JP1 has a sales value of ₦50 per unit and JP2 ₦40 per unit. After further processing, JP1 sells for ₦90 (further cost ₦20 per unit) and JP2 for ₦65 (further cost ₦15 per unit).
First, deduct the by-product proceeds (see below): ₦302,000 − ₦6,000 = ₦296,000 of joint costs to share.
| Basis | Working | JP1 (₦) | JP2 (₦) |
|---|---|---|---|
| Units | 5,000 : 3,000 = 5 : 3 of ₦296,000 | 185,000 | 111,000 |
| Sales value at split-off | JP1 5,000 × ₦50 = ₦250,000; JP2 3,000 × ₦40 = ₦120,000; total ₦370,000. Shares 250 : 120 | 200,000 | 96,000 |
| Net realisable value | JP1 5,000 × (₦90 − ₦20) = ₦350,000; JP2 3,000 × (₦65 − ₦15) = ₦150,000; total ₦500,000. Shares 350 : 150 | 207,200 | 88,800 |
Checking each line: ₦185,000 + ₦111,000 = ₦296,000; ₦200,000 + ₦96,000 = ₦296,000; ₦207,200 + ₦88,800 = ₦296,000. ✓ The cost per unit of JP1 is ₦37.00 on the units basis, ₦40.00 on sales value and ₦41.44 on net realisable value (NRV). For JP2 it is ₦37.00, ₦32.00 and ₦29.60. The basis changes which product looks profitable. On a units basis, JP2 (worth ₦40 at split-off) bears a cost of ₦37 a unit, which makes it look much less profitable than JP1.
The process account then looks like this (units basis): debit materials and conversion ₦302,000; credit JP1 5,000 units ₦185,000; JP2 3,000 units ₦111,000; by-product 1,000 units ₦6,000.
Choosing a basis
- Units is simple, and suits products of similar nature and value. But it ignores what each product is worth, so a cheap product can be charged as much per unit as a valuable one.
- Sales value at split-off reflects ability to bear cost, and each product earns the same margin. It needs a market price at split-off.
- NRV is the choice when products cannot be sold at split-off and need further work.
By-products
By-products are outputs of a joint process that are minor in quantity or value compared with the joint products. They may have some value, but it is too small to justify charging them with a share of the common costs.
Treating the proceeds of a by-product
| Treatment of sale proceeds | Cost given to the by-product in the process account |
|---|---|
| As revenue, added to the sales of other products | None |
| As other income | None |
| As a deduction from joint process costs (the most common method) | The by-product is valued at its sales (scrap) value, in much the same way as normal loss |
Where there are joint products, deduct the by-product’s sales value from the total cost of the process before sharing the common costs between the joint products.
Effect on profit and stock
Suppose joint costs are ₦302,000 and the by-product brings ₦6,000. 80% of production is sold in the month.
| Deduct proceeds from costs | Treat as other income | |
|---|---|---|
| Production cost | ₦296,000 | ₦302,000 |
| Closing inventory (20%) | ₦59,200 | ₦60,400 |
| Cost of sales (80%) | ₦236,800 | ₦241,600 |
| Other income | nil | ₦6,000 |
| Net charge against profit | ₦236,800 | ₦241,600 − ₦6,000 = ₦235,600 |
Profit is ₦1,200 higher when the proceeds are treated as other income. The reason is that deducting the proceeds from cost carries 20% of that deduction (₦1,200) into closing inventory, to be recognised next period. Treating it as other income recognises all of the ₦6,000 now. Over time, the totals are the same.
The ideas in more depth
Is the split meaningful?
The sharing of joint costs is arbitrary. No method can say what “really” caused the cost of one product, because a single process makes them together. The split is needed to value stock and measure profit by product. But it should not be used to decide whether to stop making a product or to sell it at split-off or process it further.
For those decisions, only the costs and revenues that change with the decision are relevant.
Further processing: a background note
Background: further processing decisions are covered under relevant costing in a later topic, but they arise naturally here. Once a product has reached the split-off point, the joint costs are sunk. The decision to process it further depends only on the extra revenue compared with the extra cost. Suppose Product Y sells at ₦10 at split-off or at ₦15 after further processing costing ₦4 per kg.
Extra revenue = ₦5 per kg and extra cost = ₦4, so further processing adds ₦1 per kg. For 3,000 kg, that is a gain of ₦3,000. The share of joint cost charged to Y is irrelevant.
Joint products and by-products compared
| Joint products | By-products | |
|---|---|---|
| Value | Significant, relative to each other | Small |
| Share of common costs | Yes, on units, sales value or NRV | No. Proceeds deducted from costs, or shown as income |
| Examples | Petrol, kerosene, fuel oil | Sawdust from timber, molasses from sugar |
Dividing the cost: a useful check
Under the sales value method, the profit as a percentage of the sales value at split-off is the same for all products. In the example, the net joint cost is ₦296,000 against split-off sales of ₦370,000. Each product carries 80% of its sales value (JP1 ₦200,000 of ₦250,000; JP2 ₦96,000 of ₦120,000), so each makes the same 20% margin at the split-off point.
Worked example: a full question
Scenario. Ado Chemicals Ltd runs a process costing ₦512,000. It yields 6,000 units of P, 4,000 units of Q and 1,500 units of by-product Z, which brings in ₦8,000 in total. P sells for ₦48 and Q for ₦36 at split-off. After further processing, P sells for ₦80 (extra cost ₦20) and Q for ₦64 (extra cost ₦10). Apportion the joint costs using (a) units, (b) sales value at split-off and (c) NRV, after deducting the by-product proceeds.
- Net joint costs.
₦512,000 − ₦8,000 = ₦504,000. - (a) Units. P 6,000 : Q 4,000 = 60% : 40%. P = ₦302,400; Q = ₦201,600.
- (b) Sales value at split-off.
P 6,000 × ₦48 = ₦288,000; Q 4,000 × ₦36 = ₦144,000; total ₦432,000.
P = 2/3 × ₦504,000 = ₦336,000
Q = 1/3 × ₦504,000 = ₦168,000. - (c) NRV.
P 6,000 × (₦80 − ₦20) = ₦360,000; Q 4,000 × (₦64 − ₦10) = ₦216,000; total ₦576,000.
P = 62.5% × ₦504,000 = ₦315,000
Q = 37.5% × ₦504,000 = ₦189,000. - Checks. Each pair sums to ₦504,000. ✓ The by-product is credited to the process account at ₦8,000, so the process account balances at ₦512,000.
Profit by product under each basis
The basis chosen changes the profit shown for each product, but not the total. Using the earlier data, suppose all output is further processed and sold, and the by-product proceeds have already been deducted from joint costs. Sales: JP1 5,000 × ₦90 = ₦450,000. JP2 3,000 × ₦65 = ₦195,000. Further processing costs: JP1 5,000 × ₦20 = ₦100,000. JP2 3,000 × ₦15 = ₦45,000.
| ₦ | Units basis | Sales value at split-off | NRV basis | |||
|---|---|---|---|---|---|---|
| JP1 | JP2 | JP1 | JP2 | JP1 | JP2 | |
| Sales | 450,000 | 195,000 | 450,000 | 195,000 | 450,000 | 195,000 |
| Joint cost shared | (185,000) | (111,000) | (200,000) | (96,000) | (207,200) | (88,800) |
| Further processing | (100,000) | (45,000) | (100,000) | (45,000) | (100,000) | (45,000) |
| Profit | 165,000 | 39,000 | 150,000 | 54,000 | 142,800 | 61,200 |
| Total profit | 204,000 | 204,000 | 204,000 | |||
JP2 looks weak on the units basis (profit ₦39,000) and strong on NRV (₦61,200). The total is ₦204,000 under every basis. A manager who judged JP2 on the units-basis figure might wrongly think about dropping it, which shows why joint cost splits must be used with caution.
Process account with a by-product
The process account for the earlier data shows, on the debit side, materials and conversion costs of ₦302,000 in total. On the credit side it shows the by-product at its sales value of ₦6,000 and the joint products at their shares of the remaining ₦296,000. The credit total is again ₦302,000, so the account balances. The by-product is valued like a normal loss with scrap value.
The proceeds of its sale (₦6,000) are received in cash when it is sold, and nothing more is done with it in the income statement.
Valuing closing stock of joint products
The method of apportioning joint costs also decides the value of unsold stock. Using the earlier example, suppose 1,000 of the 5,000 units of JP1 remain unsold at the year end, and JP2 and the by-product were all sold.
| Basis | Cost of JP1 (₦) | Cost per unit (₦) | Closing stock of 1,000 units (₦) | Cost of sales of 4,000 units (₦) |
|---|---|---|---|---|
| Units | 185,000 | 37.00 | 37,000 | 148,000 |
| Sales value at split-off | 200,000 | 40.00 | 40,000 | 160,000 |
| Net realisable value | 207,200 | 41.44 | 41,440 | 165,760 |
The profit for the year differs by the amount of cost held in stock. Using the units basis, ₦37,000 is carried forward, but on the NRV basis ₦41,440 is, so the NRV basis reports a profit that is ₦4,440 higher for the same activity.
For the financial statements the stock must be valued at the lower of cost and net realisable value, so whichever basis is chosen should be applied consistently from year to year.
A palm oil mill example
A Nigerian palm oil mill is a good illustration. Fresh fruit bunches are processed in a common process costing ₦90 million. The mill produces crude palm oil (200 tonnes, selling at ₦360,000 a tonne), palm kernel (60 tonnes at ₦400,000 a tonne) and shells and fibre, which are sold as fuel for ₦6 million in total (a by-product).
- Net joint cost.
₦90m − ₦6m = ₦84m. - Sales values at split-off.
crude palm oil 200 × ₦360,000 = ₦72m; kernel 60 × ₦400,000 = ₦24m; total ₦96m. - Sales value basis:
palm oil 72/96 × ₦84m = ₦63m
kernel 24/96 × ₦84m = ₦21m.
Each product makes a gross margin of 12.5% (₦12m of ₦96m) at split-off. - Units (tonnes) basis:
200 + 60 = 260 tonnes.
Palm oil 200/260 × ₦84m = ₦64.6m
kernel 60/260 × ₦84m = ₦19.4m.
The weight basis would charge kernel ₦323,000 a tonne against its selling price of ₦400,000, and palm oil ₦323,000 a tonne against a price of ₦360,000, making kernel look much more profitable than oil for no good reason. The sales value basis gives both the same margin and is generally the better guide when the products have very different values per tonne.
More than one split-off point
Some processes split in stages. After a first split, one product may be processed further and then split again into new products. The common cost of the first process is shared at the first split-off point. The cost carried forward by the product that goes on to the second process (its share of joint costs plus any further processing cost) is then shared again at the second split-off point.
Questions at this level usually give separate costs for each stage, and the same apportionment rules apply at each stage.
By-products that need further processing
Sometimes a by-product can be sold as it is, or after extra processing. The decision is again incremental: further process if the extra revenue exceeds the extra cost. If the by-product sells for ₦20 a kg at split-off and ₦35 after processing at a cost of ₦9 a kg, the gain is ₦35 − ₦20 − ₦9 = ₦6 a kg.
When further processing is done, the net proceeds (sales less processing cost) are deducted from joint costs in the usual way.
The accounts for a joint process
The process account is debited with all costs and credited with the output at the apportioned values. In the main example, using sales value:
| Debit | ₦ | Credit | ₦ |
|---|---|---|---|
| Materials and conversion costs | 302,000 | By-product BP (sales value) | 6,000 |
| Joint product JP1 | 200,000 | ||
| Joint product JP2 | 96,000 | ||
| Total | 302,000 | Total | 302,000 |
Each product then has its own account, which is debited with its apportioned cost and any further processing cost, and credited with the cost of units sold or transferred to stock. This keeps the cost of each product separate after the split.
Questions to ask before choosing a basis
- Do the products have a market value at split-off? If so, the sales value basis is available.
- Are they similar in nature (all litres of fuel)? Then units are easier, but check whether it is fair.
- Do they need further processing before sale? If so, use net realisable value.
- Is the information to be used only for stock valuation? Then the basis only changes timing of profit, not total profit.
- Will it be used for decisions? Then it should not be used at all for the decision, because the joint cost is sunk at the split-off point.
Common mistakes in the exam
- Sharing the total joint cost without first deducting the by-product proceeds.
- Charging a share of joint costs to a by-product.
- Using the NRV method but forgetting to deduct further processing costs.
- Sharing costs incurred after the split-off point. They belong to the product that incurs them.
- Using the sales value at the end of processing when the question asks for sales value at split-off.
- Using the allocated joint cost to decide whether to process further. It is irrelevant.
- Mixing up joint products and by-products. The test is significance of value.
Quick revision
- Joint products: same process, significant value, separate at the split-off point. By-products: minor value.
- Bases: units; sales value at split-off; NRV (final sales value less further processing cost).
- By-product: deduct proceeds from joint costs (most common), or show as revenue or other income.
- Deducting proceeds carries part of the deduction into closing inventory; other income recognises all now.
- Joint cost split is arbitrary; do not use it for further processing or shutdown decisions.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer.
Section A style: multiple choice
Question 1. The point at which joint products become separate products is the:
- Split-off point
- Break-even point
- Re-order level
- Cut-off point
Show the answer
A. Also called the separation point.
Question 2. A by-product is:
- A product with significant value
- A minor output of low value from a joint process
- A product made in a separate factory
- Always sold at a loss
Show the answer
B. Its value is small relative to the joint products.
Question 3. Joint costs of ₦90,000 are shared on a units basis between 2,000 kg of X and 3,000 kg of Y. X receives:
- ₦36,000
- ₦45,000
- ₦54,000
- ₦60,000
Show the answer
A. ₦90,000 × 2,000 ÷ 5,000 = ₦36,000.
Question 4. The most common treatment of by-product sales is to:
- Deduct them from joint process costs
- Ignore them
- Add them to the joint costs
- Charge them with half the joint costs
Show the answer
A. The by-product is valued at its sales value.
Question 5. Under the sales value at split-off method, each joint product earns:
- The same cost per unit
- The same percentage margin at split-off
- No profit
- A loss
Show the answer
B. Costs are shared in proportion to sales values.
Question 6. The NRV method of apportioning joint costs uses:
- Final sales value less further processing costs
- Units only
- Cost only
- Opening stock
Show the answer
A. It reflects eventual value after further processing.
Question 7. Joint costs after deducting by-product proceeds are ₦120,000. The sales values at split-off are A ₦90,000 and B ₦30,000. A receives:
- ₦60,000
- ₦90,000
- ₦100,000
- ₦30,000
Show the answer
B. A has 75% of the sales value: 75% × ₦120,000 = ₦90,000.
Question 8. Which is an example of joint products?
- Petrol and kerosene from refining crude oil
- Two cars made on different lines
- A shirt and its box
- Cement and bricks made in two factories
Show the answer
A. They come from one process and one input.
Question 9. Costs incurred after the split-off point on one product are:
- Shared among all joint products
- Charged to that product only
- Ignored
- Charged to the by-product
Show the answer
B. They belong to the product that incurs them.
Question 10. The allocated joint cost should NOT be used to decide:
- Stock valuation
- Whether to process a product further
- Profit reporting by product
- Cost of sales
Show the answer
B. Joint costs are sunk once the split-off point has been reached.
Section B style: written questions
Question 11 (10 marks). Distinguish between joint products and by-products. Explain three methods of apportioning joint costs and two ways of treating the proceeds of a by-product.
Question 12 (20 marks). Ado Chemicals Ltd runs a process costing ₦512,000. It yields 6,000 units of P, 4,000 units of Q and 1,500 units of by-product Z, which sells for ₦8,000 in total. At split-off P sells for ₦48 and Q for ₦36. After further processing, P sells for ₦80 (extra cost ₦20 a unit) and Q for ₦64 (extra cost ₦10 a unit).
(a) Define joint products and by-products. (4 marks)
(b) After deducting the by-product proceeds, apportion the joint costs using units, sales value at split-off and net realisable value. (12 marks)
(c) Explain two other ways in which the by-product sale could be treated. (4 marks)
A further written question
Question 13 (10 marks). Joint costs are ₦90,000. The process makes 2,000 kg of X, which sells for ₦30 at split-off, and 3,000 kg of Y, which sells for ₦10. (a) Apportion the costs on the units basis and the sales value basis. (6 marks) (b) State which basis is more appropriate and why. (2 marks) (c) Y can be processed further at ₦4 a kg and then sold at ₦15 a kg. State whether this should be done. (2 marks)
Model answers
Show the model answer to Question 11
Joint products are two or more products of significant value made at the same time by one process from common inputs and not separable until the split-off point. By-products are outputs of the same process that are minor in quantity or value.
Methods of apportioning joint costs. (1) Units basis: costs are shared in proportion to the number of units of each product, giving the same cost per unit. (2) Sales value at split-off: costs are shared in proportion to the sales value of each product at split-off, so each earns the same margin at that point.
(3) Net realisable value: costs are shared in proportion to the final sales value less further processing costs, used when products need further work before sale.
By-product proceeds. They may be deducted from the joint process costs before apportionment (the most common method; the by-product is then valued at its sales value), or shown as other income or added to revenue, in which case no cost is given to the by-product.
Show the model answer to Question 12
(a) Joint products are two or more products produced simultaneously by a single process from common inputs, each with a substantial sales value relative to the others. By-products are outputs of the joint process that are relatively minor in quantity or value.
(b)
- Net joint costs.
₦512,000 − ₦8,000 = ₦504,000. - Units: P 6,000/10,000 × ₦504,000 = ₦302,400
- Q 4,000/10,000 × ₦504,000 = ₦201,600.
- Sales value at split-off: P 6,000 × ₦48 = ₦288,000; Q 4,000 × ₦36 = ₦144,000; total ₦432,000.
- P = 288/432 × ₦504,000 = ₦336,000
- Q = ₦168,000.
- NRV: P 6,000 × (₦80 − ₦20) = ₦360,000; Q 4,000 × (₦64 − ₦10) = ₦216,000; total ₦576,000.
- P = 360/576 × ₦504,000 = ₦315,000
- Q = 216/576 × ₦504,000 = ₦189,000.
(c) The proceeds could be shown as other income in the income statement, in which case no cost is allocated to the by-product and the full joint cost of ₦512,000 is shared. Or they could be added to the revenue from the sale of other products, again with no cost allocated to the by-product. In both cases profit is recognised on the sale rather than partly deferred in closing stock.
Show the model answer to Question 13
(a)
- Units: X 2,000/5,000 × ₦90,000 = ₦36,000
- Y 3,000/5,000 × ₦90,000 = ₦54,000.
- Sales value: X 2,000 × ₦30 = ₦60,000; Y 3,000 × ₦10 = ₦30,000; total ₦90,000.
- X = 60/90 × ₦90,000 = ₦60,000
- Y = ₦30,000.
(b) The sales value basis is more appropriate because the products are very different in value. On the units basis, Y would bear ₦18 per kg of cost although it sells for only ₦10 per kg, making it look loss-making. The sales value basis charges cost according to ability to bear it.
(c) Further processing adds ₦5 per kg of revenue (₦15 − ₦10) at an extra cost of ₦4 per kg, a gain of ₦1 per kg, or ₦3,000 on 3,000 kg. It should be done, since only the extra revenue and extra cost are relevant. The joint cost already shared to Y is irrelevant.
Pathfinder on Joint products and by-products
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
A written question that tabulates product sales values, process costs, profit or loss and percentages, testing how joint costs are shared between products.
Revise first: Joint products
From the previous syllabus. Asks for the name of the point at which joint products are separated: the split-off point.
Revise first: Joint products
From the previous syllabus. Asks for the point of manufacture where joint products become individually identifiable: the split-off point.
Revise first: Joint products
Multiple-choice items can test joint product and by-product definitions, the bases of apportionment and by-product treatment. Check Section A of every diet you practise.
Revise first: By-products
Source: ICAN Pathfinder, Management Accounting. Diets covered: November Diet, 2020, November Diet, 2016 and May Diet, 2019 (previous syllabus). May Diet, 2025 and November Diet, 2024 are not covered here.
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