A joint product requires two or more departments for production. When this occurs, a company may experience the concept of a joint cost. This cost arises when a single raw material requires at least two departments to transform the item into a usable good. Utilities are a common example of a joint cost. A company often needs electricity to run multiple machines in the production process, and in this case, a joint cost would be an item or items the company requires in order to produce a single product.
The process costing allocation system is a common source of joint cost analysis. Under the process costing method, a company produces homogeneous goods on a continuous basis. The costs incurred to produce these items are therefore joint costs in nature. For example, producing a carbonated beverage can require syrup, malt, sweeteners, liquid flavorings, and multiple pieces of refining equipment. Each of these items represents a joint cost as they are necessary to produce multiple products, including different flavored beverages.
When a company allocates costs relating to their products, they typically do so by allocating them according to each production process. This allows for an accurate allocation of each joint cost. The batch of goods going through each process allows for companies to accurately track the portion of joint costs to each batch. For example, 100 units of cherry cola receive a certain portion of a process’s costs. The 200 units of root beer then receive a portion of costs relating to their batch production.
Joint costs are also possible when a company produces by-products. By-products result when a company using a production process allows for refining wasted materials into usable goods. For example, a timber manufacturer can use the small portions removed from standard timber as sawdust. This allows the company to use its equipment for the production of two goods from the same raw material. In some cases, the timber manufacturer can produce wood chips and sawdust, essentially tripling its produced goods from the same production process.
Not all companies experience a joint cost in their production processes. Construction companies, for example, use a job order costing method. All items for each project relate only to that construction process. It is almost impossible to have a joint cost as any unused items for a project will typically go to the waste pile. The remainder of unused materials is typically not safe to use on other projects.