Salable or usable products having a relatively low value incidentally realized in the course of manufacturing the main product is called by-product. In many instances, there may be several joint products and several by-products depending upon the nature of the input raw materials being processed. A by-product is an outcome that does not make tangible contribution to the sales revenue. The economic value of by-product, comparing it with the main product, is comparatively low.
By-product in the course of sugar production are Bagasse of solid waste and molasses of sweet semi-liquid product. Poultry farm in delivering chicken meat to the market gets poultry leftover parts such as poultry fathers, bones, beaks, feet and poultry fat as by-product. The fibers and outer shell of coconut are the by-products residue of coconut oil and product.
Accounting Treatment of By-Product
By-product accounting depends on the circumstances under which it is realized. The following could be the possible circumstances of a by-product realization.
- At the separation point
- After further processing
Based on the possible circumstances for the by-product realization, the following are the main types of by-product accounting.
1. Non-cost or sales value method – Existence of sales value method focuses more on sharing joint costs by by-products realized determining cost of by-product.These methods are the followings:
- Other income or miscellaneous income method.
- By-product sales added to the main product sales.
- By-product sales value deducted from total cost.
- Credit of by-product sales value less selling and distribution expenses.
- Credit of by-product sales value less selling and distribution expenses as well as cost incurred after split off.
- Credit of by-product sales value less selling and distribution expenses costs incurred after split off and estimated profit or reverse cost method.
2. Costs Methods – The existence of a cost method provides opportunities to ascertain the cost of by-products. It takes a closer look on the cost front and seeks to allocate joint cost to the by-product realized incidentally in the process of producing the main product. The types of the techniques available under cost method are following:
- Opportunity or replacement cost method.
- Standard cost method.
- Apportionment on suitable basis.