Cost Allocation Мethods for Joint Products and By-products

Abstract

The purpose of this paper is to look into the problems of costing of joint products and by-products in industrial organizations. The paper starts with an introduction to the problem of allocating joint costs (common costs up to the split-off stage) to products. The author defines the basic terms of joint products, by-products, common and joint costs and analyses how the problems of costing can be approached. Two approaches are discussed for joint products cost allocation and two approaches for by-products cost allocation. The author presents adapted methods for costing within those approaches and discusses the situations in which those will be most appropriate to apply. The paper concludes with a note on the importance of using proper methods for cost allocation of joint products and by-products as part of the broader management process of ensuring long-term profitability of the industrial organizations.