THE PROBLEM OF JOINT PRODUCTS
FROM A SINGLE ENTERPRISE
Financial analysis of a farm enterprise often involves the issue of joint products. The definition of joint
products is when a single enterprise produces more than one saleable product. For example a dairy
sells not only milk, but also cull cows and calves. Sheep produce lambs, wool, cull animals, possibly
breeding stock and in the past a government payment. Analysis of costs and returns from an
enterprise producing joint products is more complicated than analysis of a single product enterprise.
There are three ways that joint products can be addressed. They are 1) allocation to each product by
revenue percent, 2)using the main product as a proxy for all production, or 3)careful measurement
of the actual costs and returns for each product.
The first possibility is to use some arbitrary method of allocating to the products. A common method
would be to analyze each products contribution to the total revenue of the enterprise and allocate
costs to the products in the same proportion as revenue. This method is relatively simple, fairly easy
to calculate and probably fairly accurate. The downside is that we don't know for sure if the
allocation is accurate.
As an alternative we can transform all products mathematically into the principle product of the
enterprise and analyze the results as if the principle product was the only product. This method is also
simple to calculate, in essence the total gross revenue of the enterprise is divided by the unit price of
the principle product and reported as if all sales were of that product. A shortfall of this method is
that fluctuations in the market price can affect the calculation of the physical product produced.
Finally we can accurately measure the inputs and outputs of each product along with the associated
costs and returns for each activity and analyze using this data. While this is the most accurate method
it is very difficult and prohibitively expensive.
For the analysis reported here all products were analyzed using the single product method. In this
case all income and costs from the sheep enterprise were treated as if the only product was market
lambs. A single product called hundred weight (CWT) equivalents of slaughter lamb was analyzed.
Because for the farms in this research, over 70 percent of the income was from sales of lambs, this
is the correct approach.