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Unit 14: Equivalent Production in Process Costing

(iv) Market Value Method: This method of apportioning joint costs to products on the basis of Notes
relative value is the most popular and convenient method. The joint costs are split in the
ratio of selling price of individual products.
The term by-product is also known as “Minor Product.” It refers to any product of comparatively
less value that is incidentally manufactured along with the main products. In other words, if the
products produced are not as of equal importance, then the products of significantly low value
are known as “by products.” Accordingly, they are jointly produced with other main products
and remain inseparable up to the point of split off or point of separation. Accounting Treatment
or Method of Valuation of By-products The object of valuation of by-products cost accounting
is to assign a portion of the total costs to each by-products. This is important to calculate the
unit product cost and prepare the profit and loss account and balance sheet. Following are the
important methods employed in this connection:
(1) Non-cost Method: This method is also known as “Sales Value Method.” While in valuation
of the by-products only sales value of by-products is taken in to account in accounting
treatment of by-products they use anyone of the following non-cost methods:
(a) Other Income Method: Under this method, when the sales value of the by-products is
very low or negligible, it is treated as other income and same is credited to the profit
and loss account.
(b) Adding Sales Value to Total Cost Method: Under this method all the cost of joint
products deducted from the combined sales proceeds of both joint products and
main products.

(c) Crediting to Sales Value Loss Selling and Distribution Expenses: Under this method, costs
incurred relating to selling and distribution expenses of by-products are deducted
from the sales value of by-product and the net sales value credited to the process
account.
(d) Reverse Cost Method: In this method, cost of by-product is determined by sales of the
by-product deducted from the estimated profit and all costs incurred on by-products
after split off point. This method also known as “crediting sales value less profit.”
(2) Cost Methods: Cost methods are useful to determine the cost of by-products when the
apportion of the portion of joint costs incurred to by-products. The following are the
important methods included under this categories.
(a) Replacement Cost Method: This method is also called as “Opportunity Cost Method.”
In this method, by-products are determined where by-products are used as raw
material in some other process. Here the by-products are value at the opportunity
lost of purchasing or replacing them. The opportunity cost of by-product refers to
the cost which could have been incurred had the by-product being used as material
could have been purchased from the market. The process account is credited with
the value of by-product so ascertained.

(b) Standard Cost Method: In this method, a standard cost is fixed for each by-product and
the process account is credited with this standard cost.
(c) Apportionment on Suitable Basis: Under this method, if the value of by products is
considerably significant, the actual cost of by-product is ascertained by apportioning
the joint costs up to the point of physical separation by way of suitable basis used for
costing of joint products.

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