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Cost Accounting

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By Products

By-products mean secondary products arising in the course of manufacturing the main products. For example, while manufacturing gas, coke and tar are also necessarily produced. Similarly crude oil when refined gives products like coke, tar, sulphur, bitumen which are of less relative importance than the others i.e. gas and refined oil. The former are, therefore, known as by products and the latter as main products. By products may or may not require further processing after being separated from the main product. The point at which they are separated from the main product or products is known as split off point. The expenses of processing are joint till split-off point.

By products can be dealt with in cost accounts in any of the two ways:

(a) Where by-products are of small sales value: In such a case it is considered uneconomical and impracticable to attempt to apportion to the by-products any part of the joint costs of production upto the point of split off. The amount realized by the sale of the by product may be dealt in any of the following two ways:

(i) It may be taken as pure profit and credited to the costing profit and loss account (thus treating as additional sales revenue or miscellaneous income).

(ii) It may be credited to the process in which the by product has arisen. Due allowance, of course, will be made for any handling charges or expense incurred in affecting the sale of the by-product.

The second method is preferred to the first method because it attempts to confine the cost of the process to that relating to the main products.

In case a by product requires further processing before it can be disposed of, such cost should be deducted from the saleable value of the by-product and the balance should be credited to the profit and loss account or the relevant process account, as the case may be.

(b) Where by-products are of considerable sales value: Where by-products are of considerable total value, it will be proper to find out the exact cost of the by-products (thus treating them as join products). This will require apportionment of the joint cost of the products upto the split-off point. The cost of the by-product upto the split-off point. The cost of the by-product upto the ‘spilt-off’ point will be debited to a by-product account and credited to the main product or the relevant process account. This account will be credited with the sale proceeds of the by-product, and any profit or loss will be transferred to the costing profit and loss account.

The methods to be adopted for apportionment of joint cost upto the point of split-off are being discussed with joint products.

Co-products: Joint products are different from co-products. Both joint products and co-products are common in sense that both are multiple products. However, in case of joint products, the production of one or more products has to proceed simultaneously while in case of co-products the production of one or more co-products can proceed without the production of other products. They need not arise out of the same manufacturing operations or materials. For example in a dairy industry butter and ghee are joint products since they arise from the same input. However, in an automobile industry, different products like jeeps, cars, trucks etc. may be manufactured. They are co-products and not joint products.