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  Accounting for By Products

Introduction to Accounting for by-products

By-products are together generated products of minor significance and do not contain separate costs until the split off point. They are not created purposely but are emerging out of the manufacturing process of the main products. The following techniques are employed for accounting of by-products.

The techniques are widely divided into Non-Cost Methods and Cost Methods.

Ø  Non-Cost Methods: The following techniques are involved in this category.

I. Other income or miscellaneous income method:

 Within this method, sales value of by-products is added to the Profit and Loss Account and no credit is provided in the cost accounts. The add to the profit and loss account is termed as other income or miscellaneous income. No attempt is made for determining the cost of the product. No valuation of inventory is prepared and all costs and expenses are charged to the major product. This is the slightest scientific method and is employed in which the sales value of the by-product is negligible.

II. Total sales less total cost:

Within this method, sales value of by-product is credited to the sales value of the main product. Additional the total cost of the main product involving the cost of the by-product is subtracted from the sales revenue of the major product and by-product. Each costs and expenses are charged to the major product.

III. Total cost less sales value of by-product:

Within this method, the total cost of production is decreased through the sales value of the by-product. This technique seems to be more acceptable since such as waste and scrap, by-product revenue decrease the cost of main products.

IV. Total cost less sales value of by-products after setting off selling and distribution overheads of by-products:

Sales value of the by-product minus the selling and distribution overheads of byproduct is subtracted from the total cost. Selling and distribution overheads are charged against by-products that are actually sold.

V. Reverse cost method:

This method is relies on the view that the sales price of the by-product consist of an element of profit. It is decided that this element of profit should not be added to the profit and loss account. The cost of by-product is reached through working backwards. Selling price of the by-product is deflated through an assumed gross profit margin. So within this method, sales value of the by-product is first decreased by, an estimated profit margin, selling and distribution expenses and then the post split off costs and then the cost of the major product is so decreased by this net figure.

Ø   Cost Methods: The following methods are involved in this category.

I. Replacement or opportunity cost method:

 The by-products are valued at the opportunity cost method or replacement cost method if they are consumed captively. The meaning of this is the cost that would have been acquired had the by-product been purchased from outside. For instance, bagasse that is one of the main by-product of sugar industry and that is employed for the factory like a fuel in the boiler is valued at the market value that is the price that would have been paid if it would have been purchased from outside.

II. Standard cost method:

Within this method, the by-product is valued at the standard cost ascertained for each product. The standard cost might be based upon technical assessment. Standard cost of the by-product is added to the process account of the major product. According to the cost control of major product can be exercised efficiently.

III. Joint cost proration:

In which the by-product is of some importance, it is suitable that the joint costs should be apportioned among the main products and by-products on a most appropriate and adequate method. So in this method, no difference is made among the joint product and by product. Industries, in which the by-products are quite significant, use this technique. For instance, in a petroleum refinery, gas was previous referred as a by-product. Now it has supposed the significance like petrol, diesel etc. and is being treated like a joint product. so, the joint cost is prorated among the joint product and the by-product.

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