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Joint Project and by-product Pricing : An Overview

Answer the following question:

1. Explain joint and by-product focusing on the criteria that are used to differentiate between them with an example to show the accounting methods that used to treat by-product.

2. Explain the main common product pricing methods with focusing on the following

     a. Advantages and disadvantages of each method

     b. Which method would you support to be used in each of the following sectors and why

             1. Meat processing industry

             2. contracting companies

Answer

Introduction

Business ventures are typically classified in terms of the governing traits that they are prone to exhibit in terms of the pricing methods. Each venture urges for a unique pricing method of the deliverables they deal with in order to make the exchange seamless. This study is supposed to recommend the proper pricing method that might facilitate the pursuits of meat processing industry and construction industry respectively backed by the apprehensions extracted from the evaluation of the prevalent pricing methods in terms of advantages and drawbacks. In this course of study, in order to fathom the accounting principles and the prevalent pricing methods, Almasa (Diamond meat processing L.L.C) has been chosen as the representative of the meat processing industries whereas Al Naboodah has been chosen as the representative of the Construction Industry that chiefly operates from UAE.   

Factors to differentiate between Joint and by product

The backdrop of the recurring study can be illustrated from the practice in which some of the major industries (such as Chemical industries, Industries of Agricultural Products) used to manufacture more than singular products of identical or differential significance. On that note, it needs to be mentioned some of the industries used to manufacture concurrently while a few industries manufacture while processing the main products. Thus, Joint Products are the deliverables that have been concurrently manufactured along with the production of the main product with the assistance of same raw materials and other tangible resources (Cao, 2016). On the other hand, By Products can be defined as the auxiliary or subsidiary product that inherently emerges out while processing the main product attached with a substantial saleable and purposive value.

A comparative analysis can be conducted in order to derive the potential parameters that might shape the enquiry of comparison among the joint product and the By product. 

Economic Value: The essence of both of the product evaluation can be evaluated in terms of economic value that further governs the decision regarding pricing methods. On that note, it can be admitted that Joint Products typically comes with identical value status whereas by products are destined to emerge with a less value than the prototypal component that is the main product (Li, 2015).

Production: In terms of the mode of production, the entire practice exhibits the fact that Joint products are produced consciously within the course of manufacturing the main product whereas by-products are consequently produced since the raw materials are supposed to be the mother product.

Input: Since joint productions enjoy a unique mode of manufacturing, it usually urges for specific raw materials and several other tangible resources whereas the development of by products is strictly dependant on the wastes and other scraps of the prototypal product.

Further Processing: It is an exaggeration to admit that it is an imperative requisite for the joint products to be processed further in order to accomplish the finished product with the desired properties whereas further processing is not a prime requirement for the by-products since its creation is solely dependent on the main product.      

Accounting principles of Joint and by-product

The pricing methods that are typically intensive to each of the product classification system are extensively named as Joint Product Pricing and By-product pricing. The notion of Split-off point appear imperative to be elaborated over here that is supposed to be an imaginary point that initiates the segmentation and the identification of the products. To discern this point is an essential criterion since it governs the entire process of product classification (Liu, 2015). Furthermore, the term joint cost owes a lot from the appropriate identification of the split-off point since it is conditioned to indicate the amount of capital incurred on that respective point. 

Joint Cost:

  • On an empirical note, this notion refers to all of the costs that have been incurred before the split-off point. 
  • The subsequent processes that require further investment in order to transform the raw deliverable into a finished one with the desired properties after the split-off is typically called sub-sequence costs.

Accounting Principle:

  • The essence of the accounting principle is to ensure the percolation of the joint cost across each of the segments of Joint Products.
  • The costs have been segmented afterwards in accordance with the subsequence costs.
  • Improper percolation of the costs can adversely affect the actual inventory value and the profit characteristics of the respective product (Qin, 2014).

Example of Accounting Treatment: Joint products such as diesel, paraffin and several lubricants have typically been processed from Crude oil.

  • As most of the Joint process costs are likely to appear before the split-off point, the joint costs required to be apportioned between the finished products and the split-off point to acquire the costs of each of the products. This facilitates the prime pursuit of joint cost pricing that is to evaluate cost of sales and closing inventory.

Fig: Overview of the accounting treatment for Joint Products

Source: (Smeets, 2013)

  • The essence of apportionment has been majorly framed upon sales value of production, net realizable value and production units. 

By product Accounting Principles:

The essence of accounting principles can be classified into two cost methods such as Sales value (or Non-Cost) method and Cost method. 


Fig: Overview of the accounting principles in case of By-product pricing

Source: (Qin, 2014)

Example of Accounting Treatments: Molasses is typically acquired as a by-product while producing sugar.

The treatment of accounting considerable differs due to the dimension of insignificance of by-products.

  • The net incurred cost of the entire process is typically distributed solely among the joint products and the by-products are usually considered as normal loss
  • The absolute sales value of the respective by-product and the split-off is typically considered as a reduction cost 

The governing equation of this sort of accounting;

Net Income (or net realizable value)= Final sales value-Further processing costs

Brief explanation of the product pricing methods

Average Unit cost method: 

In this case, the average unit cost has been derived as a ratio of Total Joint cost and Total Output Units. This calculation is followed by the multiplication of three respective average costs and the respective units. This method is typically employed where the outputs are considered as an identical unit.

Physical Unit Method:

 In this case, costs are allocated in terms of the physical measures (such as volume, relative weight etc) of the products that must have to be equivalent in terms of the state. This method is supposed to be composed of several subsets such as Survey Method, Contribution Margin Ratio Method and Market Value Method.

Non-cost or Sales Method:

 The governing trait of this approach is to consider costs as the analogue of income. Moreover, the diverse costs are treated as a origin of miscellaneous incomes. These multilayered processes are composed of with incorporation of sales with main product and simultaneously a considerable deduction from the total cost.  

Cost Method: 

This method is typically comprised of Opportunity or replacement cost method and standard cost method followed by the apportionment of the cost in accordance with an appropriate basis. 


Advantages and Disadvantages of each of the pricing methods

Advantages: 

  • The means that drive the essence of cost allocations are very robust and rational
  • The absence of transparent attributable cost
  • Proper valuation of inventory and several other reporting purposes

Disadvantages:

  • The employment is somehow restricted to solely evaluate the inventory as every desire to change in costs is vulnerable to fail (Smeets, 2013). 

Individual suggestions

Recommended pricing method for meat processing industries:

Evaluating the outputs of inventory and the profit characteristics of Almasa which is a meat processing unit operates across UAE, it can be recommended that they might employ any of the pricing methods intensive to by-product pricing since the immediate outputs of the mother resource is something which is of equal state of the main product and the potential wastes can be further used to develop several other identical items.

Recommended pricing method for Construction Industries:

 On the other hand, Al Naboodah, which is a construction company that mainly operates from UAE, might employ any pricing method associated with the Joint Products since after the initial processing; it requires a substantial amount of investment to derive the desired deliverables from the waste of the prototypal resources. Furthermore, the binding ingredients that are dependent to find its origin from the scrapes of the prototypal resources can be manufactured simultaneously if proper investment can be introduced. 

Conclusion

In the light of the above study it appears that, the study is potent enough to recommend certain business concerns about their pricing methods. Furthermore, it has been also established that proper insight regarding the pricing method can enable a certain unit to anticipate their mode of business venture.

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