Discuss the allocation of costs, including the accounting for joint products and byproducts

There are many production processes that begin with a single raw material and end up with two or more final products and byproducts. A prime example involves the many final products that come from a barrel of crude oil that ends up being kerosene, regular and unleaded gasoline, and other petroleum products.

The raw material is treated as a single product up until a point in production called the split-off point. At this point the single product divides into two or more products called joint products. The joint products are not individually identifiable until the split-off point.

The costs of producing the single product up to the split-off point are the joint product costs. These costs are common to all the units produced and cannot be associated directly with the units once they split into the individual products. However, sometimes we can sell a joint product immediately after the split-off point. In other situations we may have to process the joint product beyond the split-off before it can be sold.

For the orange juice manufacturing process, the operations manager would like to propose a use for the orange peel waste?an essence of orange room-deodorant spray. The advantages of by-product processing are the increase in the value of the byproducts that have been considered as not having any value and the increase in the profit for the company. For the disadvantages, SSOG will have to further process the orange peel waste, which will incur an additional costs and additional requirements for labor. SSOG will need to consider as to whether the expected profit from further processing the orange peel waste would worth it.

Smith, Jack L., Keith, Robert M., and Stephens, William L. 2005). Managerial Accounting. McGraw-Hill (International Ed.).