Production Interrelations

Whereas many products are related to one another through demand relationships, others are related in terms of the production process. A by-product is any output that is customarily produced as a direct result of an increase in the production of some other output. Although it is common to think of by-products as resulting only from physical production processes, they are also generated in the process of providing services. One of the primary reasons why top accounting firms have become such a leading force in the management information systems (MIS) consulting business is that information generated in the auditing process has natural MIS implications, and vice versa. In this way, auditing and consulting services are joint products produced in variable proportions. The cost of providing each service depends greatly on the extent to which the other is also provided. Given the efficiencies of joint production, it is common for an accounting firm's auditing clients to also become MIS consulting clients.

Multiple products are produced in variable proportions for a wide range of goods and services. In the refining process for crude oil, gasoline, diesel fuel, heating oil, and other products are produced in variable proportions. The cost and availability of any single by-product depends on the demand for others. By-products are also sometimes the unintended or unavoidable consequence of producing certain goods. When lumber is produced, scrap bark and sawdust are also created for use in gardening and paper production. When paper is produced, residual chemicals and polluted water are created that must be treated and recycled. Indeed, pollution can be thought of as the necessary by-product of many production processes. Because pollution is, by definition, a "bad" with harmful social consequences rather than a "good" with socially redeeming value, production processes must often be altered to minimize this type of negative joint product.

Production interrelations are sometimes so strong that the degree of jointness in production is relatively constant. For example, many agricultural products are jointly produced in a fixed ratio. Wheat and straw, beef and hides, milk and butter are all produced in relatively fixed proportions. In mining, gold and copper, silver and lead, and other precious metals and minerals are often produced jointly in fixed proportions. Appropriate pricing and production decisions are possible only when such interrelations are accurately reflected.

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