BY- PRODUCTS
The by products is a secondary product, which incidentally results from the manufacture of a main product.
By products are also produced from the same raw material and same process operations but they are secondary results of operation. The main difference between the joint product and byproduct is that there is no intention to produce the by-product while the joint products are produced intentionally. The relationship between the by-product and the main product changes with changes in economic or industrial conditions or with advancement of science. The by-product of an industry may become a main product and main product may become a by-product subsequently.
EXAMPLE OF BY PRODUCTS
(a) In sugar industry, sugar is a main product and molasses is a by product
(b) In coke ovens, gas and tar are incidentally produced in addition to the main product coke. Gas and tar are, therefore, treated as by-products. These minor secondary products have saleable or usable value and are incidentally produced in addition to the main product.
ACCORDING TO CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON
“By-product is a product which is recovered incidentally from the material used in the manufacture of recognized main products such as having either a net realizable value or a usable value which is relatively low in comparison with the saleable value of the main products. By products may further be processed to increase their realizable value”.
Thus the term ‘by-product’ is generally used by businessmen and accountants to denote one or more products of relatively small value that are produced simultaneously with a product of greater value.
CLASSIFICATION OF BY PRODUCTS
By-products can be classified into two groups according to marketable conditions at the split off point:
(a) Those sold in the same form as originally produced, and
(b) Those which may undergo further processing before sale.
ACCOUNTING TREATMENT OF BY PRODUCTS
By-products are jointly produced products of minor importance and do not have separate costs until the split off point. They are not produced intentionally but are emerging out of the manufacturing process of the main products. The following methods are used for accounting of by-products. The methods are broadly divided into Non-Cost Methods and Cost Methods.
NON-COST METHODS
The following methods are included in this category:
(I) OTHER INCOME OR MISCELLANEOUS INCOME METHOD: Under this method, sales value of by-products is credited to the Profit and Loss Account and no credit is given in the Cost Accounts. The credit to the Profit and Loss Account is treated as other income or miscellaneous income. No effort is made for ascertaining the cost of the product. No valuation of inventory is made and all costs and expenses are charged to the main product. This is the least scientific method and is used where the sales value of the by-product is negligible.
(II) TOTAL SALES LESS TOTAL COST: Under this method, sales value of by-product is added to the sales value of the main product. Further the total cost of the main product including the cost of the by-product is deducted from the sales revenue of the main product and by-product. All costs and expenses are charged to the main product.
(III) TOTAL COST LESS SALES VALUE OF BY-PRODUCT: In this method, the total cost of production is reduced by the sales value of the by-product. This method seems to be more acceptable because like waste and scrap, by-product revenue reduces the cost of major 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 deducted from the total cost. Selling and distribution overheads are charged against by-products actually sold.
(V) REVERSE COST METHOD: This method is based on the view that the sales value of the by-product contains an element of profit. It is agreed that this element of profit should not be credited to the Profit and Loss Account. The cost of by-product is arrived at by working backwards. Selling price of the by-product is deflated by an assumed gross profit margin. Thus under this method, sales value of the by-product is first reduced by, an estimated profit margin, selling and distribution expenses and then the post split off costs and then the cost of the main product is thus reduced by this net figure.
COST METHODS
The following methods are included in this category.
(I) REPLACEMENT OR OPPORTUNITY COST METHOD: If the by-products are consumed captively, they are valued at the opportunity cost method or replacement cost method. This means the cost which would have been incurred had the by-product been purchased from outside. For example, bagasse, which is one of the main by-product of sugar industry and which is used for the factory as a fuel in the boiler is valued at the market value, i.e. the price that would have been paid if it would have been purchased from outside.
(II) STANDARD COST METHOD: Under this method, the by-product is valued at the standard cost determined for each product. The standard cost may be based on technical assessment. Standard cost of the by-product is credited to the process account of the main product. Accordingly, the cost control of main product can be exercised effectively.
(III) JOINT COST PRORATION: Where the by-product is of some significance, it is appropriate that the joint costs should be apportioned between the main products and by-products on a most suitable and acceptable method. Thus in this method, no distinction is made between the joint product and byproduct. Industries, where the by-products are quite important, use this method. For example, in a petroleum refinery, gas was earlier considered as a by-product. Now it has assumed the importance like petrol, diesel etc. and is being treated as joint product. Accordingly, the joint cost is prorated between the joint product and the by-product.