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Describing the Joint Production scenario

Objective

After completing this lesson, you will be able to describe the joint production scenario

Make-to-stock Production in Process Manufacturing

Unit Overview

In this unit, you will explore make-to-stock production in process manufacturing, with a particular focus on the use of process orders in a joint production scenario. From a management accounting perspective, you will analyze key production events.

Unlike discrete manufacturing, which produces distinct items such as electronics or furniture, process manufacturing involves batch-based production, commonly found in industries like oil refining or chemicals. Often, process manufacturing simultaneously outputs multiple products, a concept known as joint production.

This unit will delve into process manufacturing and process orders using a joint production scenario as a practical example. Following a brief introduction to the topic, we will first explain the joint production scenario and then review the necessary master data and process orders settings. Next, we will examine the typical production steps using a process order, analyzing each step from a management accounting perspective.

Let’s begin with a quick introduction to joint production.

Co-Products

This figure outlines co-products with important settings from a management accounting perspective.

The joint production process involves the output of two or more products. The figure above outlines how these products differ:

The leading co-product (Co-Product A) is the main product that is primarily intended to be produced. One or more non-leading co-products (Co-Product B) are simultaneously created during the production process of the main product. In some production scenarios, by-products may occur that are incidental or unplanned production outcomes.
All co-products are flagged as co-products in the material master.
Cost analysis focuses mainly on the leading and non-leading co-products, whereas controlling is not necessarily required for by-products. This is why this course focuses on two co-products and by-products are not further detailed.
Since the production focus is on the leading co-product, a process order and a master recipe are only created for this product.
Consequently, only the leading-product material includes an apportionment structure, which determines how the costs incurred during production are distributed among the individual co-products.
In the materials list of the leading co-product's master recipe, all produced products are listed with a negative sign. This indicates that they are outputs of the production process. When viewing the BOM of the leading co-product, you also see the non-leading co-product with a negative quantity.

So, what differentiates the leading co-product from other co-products regarding the required master data? You only create a process order, master recipe, and apportionment structure for the leading co-product. These elements will be explored in more detail in the following lessons and exercises.

Joint Production Process

This figure shows an example of a joint production process including different materials.

The image above illustrates a simplified example of a joint production process in the process industry with a typical material flow:

The production process in this example outputs two co-products: a paint (co-product A) and a solvent (co-product B).
Different input materials are needed for production (for example, raw materials or semi-finished products like different mixtures). These input materials are mixed together in the first phase (Phase 10: Mixing) using the resource of a mixing vessel.
In this phase, remaining materials, referred to as by-products (for example, further liquids or gases) might occur that are not controlled and are of no further use.
In the next phase (Phase 20: Reaction), a chemical reaction is initiated in a separate reaction vessel that outputs co-products A and B.
To catalyze this chemical reaction, a circulating material is added during the manufacturing process and withdrawn later. Controlling this material is optional; The circulating material can be flagged as relevant to costing in the material list.
Intra materials are materials that are temporary and exist only between production phases within the production process. Intra materials appear in the material list as items of category 'M' (Material) but are not costed.

To simplify the joint production process in this course, the exercises focus only on the production of two sample co-products (paint and solvent), and the withdrawal of two raw materials (paint mix and solvent mix).

Co-product Material Master and Master Recipe

This figure explains master recipe and the link between order header, operations, phases and components.

In most cases, co-products are manufactured on the basis of process orders. When manufacturing is done using process orders, a master recipe is required to specify the activities and materials needed to produce the co-products. As outlined, a master recipe serves as a detailed guide, similar to a cooking recipe, providing information on ingredients and steps.

In the context of master recipes in process manufacturing, the activities are referred to as operations. These operations comprise multiple phases, which are self-contained work steps that provide a detailed description of the production process. They contain standard values for activities, which are used to determine dates, capacity requirements, and costs.

Each operation in the recipe is assigned to a resource that defines the physical location where the operation and its corresponding phases are performed. Phases are assigned to the resource as the overall operation.

Referring to the paint production example, a resource could be a reaction vessel where a production operator follows several substeps (phases) in order to mix the paint. Typically, resources like reaction vessels are capable of performing multiple activities simultaneously, such as mixing, heating, and weighing.

For each operation or phase, you plan one or more material components that are required for executing that particular step. The materials list shows all relevant input materials for production. In this list, you can add additional co-products. However, you cannot delete co-products from the list once the production process has started.

Let’s have another brief look at the costing side: similar to work centers, resources like reaction vessels are linked to cost centers and use their activity types.

In process manufacturing, only the phases are relevant for costing, not the operations. Typically, material components are also marked as relevant for costing in the master recipe.

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