 Hello and welcome to this session. This is Professor Farhad in which we will discuss joint product and we're going to learn to determine whether we need to sell the product as is, as at the split-off point or process further. To learn about this concept we need to learn about few terms up front to understand how this work. In some industries a number of end product are produced from a single raw material. A classic example will be crude oil. From crude oil we can produce gasoline, we can produce kerosene, we can produce home heating oil, we can produce asphalt, as well as other chemicals and other products as well. All these products they are called joint product in which one or more product are produced, these products are produced from one single input and that's crude oil. Now joint cost, joint cost means what? It means all these products are generated from the crude oil. So there's a cost here. How do we allocate this cost to the various products? Well at the split-off point when we produce different products we can use something called a relative sales value. What does that mean? It means, let's assume for the sake of illustration, gasoline sales was 40 000, kerosene sales was 20 000, home heating oil was 10 000, that's 40 20 60 70, asphalt was 20 000 and other chemicals was 10 000. Those are the sales amount. What we do is we add up all the sales and I'm trying to make the number equal to 100 000 40 plus 20 60 70 90 100 100 000. What we do is we say gasoline should absorb 40 out of 100 000, so gasoline should absorb 40 percent, kerosene should absorb 20 percent, home heating oil 10 percent, so on and so forth. So this is what we mean by the relative sales value. So whatever cost we incur, let's assume you know the cost was you know 30 000, we would allocate the cost to various products this way. Now we need to learn about the split-off point. What is the split-off point? The split-off point is the manufacturing, is the point in the manufacturing process where each joint product, each one of these products can be recognized as a separate product. So gasoline stop a separate product, that's the split-off point, kerosene stop, home heating oil stop, asphalt, so on and so forth. So the question becomes from our perspective is do we need to sell the product as is? For example we can sell the crude oil as is, we can sell the crude oil as is or we can process into gasoline then sell or we can process further into kerosene and sell. Maybe the kerosene comes before the gasoline but it doesn't really matter. We can process into home heating oil, sell it or process further so on and so forth. Well under those decision joint costs are irrelevant in the decision so the cost of the crude oil we don't take it into account. What we look into account is to see if the incremental revenue, if the additional revenue is greater than the incremental cost. If the answer is yes, we we process. Now we're going to work an example to see how this work but I'll give you a simple example. Let's assume you're selling your house. Actually I'm in the process of selling my house and let's assume the selling price is for the sake of illustration 300 000. This is the current selling price and my real estate agent told me, let's assume that's the case, if I put a new roof if I incur an additional 7 000 on a new roof that's the incremental cost we can sell the house for 310. Should we do it? Well so if I add 7 000 in cost my revenue will go up by 10 000. My revenue is greater than my incremental revenue is greater than my incremental cost I will do it. Otherwise if I put a new roof and my revenue goes up to 305 then from a mathematical perspective it does not make any sense I should not improve my home by installing a new roof I should sell as is. Now the best way to illustrate this is to look at an example to see how this works. Now before we look at the example most likely you are a student or a CPA candidate this is how you end up on this recording that's great go a step further farhatlectures.com where you will have additional resources such as multiple choice, true false lectures that's going to help you with your CPA exam, CMA exam and your accounting courses. If you have not connected with me on LinkedIn please do so like this recording if you're watching it's helpful to you please like it share it connect with me on Instagram Facebook Twitter and Reddit. Let's take a look at this example add them ink cut slog from which unfinished lumber and wood dust are the immediate drone product basically they cut trees not a good idea but that's the business they are in. The unfinished lumber can be sold as is or they can be processed further into finished lumber the wood dust the wood dust can be sold as is as well to carding whole sailor or it can be processed into mulch and sold as mulch so we need to collect more information to determine whether it's a good idea to process further or sell as is. Sales value at the split-off point for the lumber is 150 for the wood dust is 50 the sales after further processing so a few if you turn the lumber into a finished lumber you can sell it for 280 if you can turn the wood dust into mulch you can sell it for 60 per log allocated joint cost joint product cost 186 and 34 again that's not relevant for us cost of further processing so if you want to process the further if you want to process the lumber further from unfinished to finished it's going to cost you 60 dollar if you want to process the wood dust from wood dust to mulch it's going to cost you 30 dollars so let's see if we should process further or sell as is the sales value for the lumber after we process further is 280 dollars the sales value for the wood dust is 60 the increment the sales at the split-off 150 and the sales as split-off for the dust is 50 therefore we have an incremental revenue of 130 for the lumber and 10 dollars for the dust now to process further we need to incur an additional 60 dollars for the lumber and additional 30 dollars for the dust what does that mean it means for the lumber it's worth it because we're going to be increasing revenue the incremental revenue is 160 the the incremental cost the one the incremental revenue is 130 the incremental cost is 60 we should go for it for the dust or for the wood dust we're going to get an additional 10 dollars but to do so we're going to be incurring 30 dollars therefore we don't process further and we sell it as sawdust as is so this is how we make this sell or sell as is or process further what should you do now to learn this concept okay explain it that's great but you need to practice multiple choice through false additional exercises to help you learn this concept go to farhatlectures.com and do so good luck study hard and of course stay safe