Accounting for By-products
By-products are sometimes classified as :
(a) those requiring no further processing after separation from the main product, and
(b) those requiring additional processing after separation from the main product.
Costs incurred after the point of separation can be directly allocated to individual products without any difficulty. But the main problem is to apportion joint costs of processing to main products and byproducts. By – products are considered to be minor importance and apportionment of joint costs is mainly designed for the correct cost ascertainment of the joint products or main products.
Accounting Methods :
The methods of accounting for by-products can be grouped under two broad types :
I. Non cost Methods / SalesMethods, that is, those which do not attempt to cost the by-products or its inventory ; and
II. Cost methods, that is those which attempt to apportion some portion of the joint costs to byproducts.
I. Non – Cost / Sales Methods : Included in this group arise :
1. Miscellaneous Income or other income method
Under thismethod, by-products do not bear any portion of joint costs. On the other hand, income from the sale of by-products is treated as other income or miscellaneous income. This method of accounting is suitable where –
a) The market value of by-products is negligible as compared to main products ;
b) The use of other detailedmethods will result in toomuch costs in comparison with the resulting benefits,
c) The cost of joint or main products does not vary appreciably as a result of non-costing of byproducts and there is no clearly defined basis of apportionment.
This method results in certain drawbacks distorts cost of main product, vitiates comparisons of
product profitability, indicates a wrong picture of financial profits especially when a product is
manufactured during one period and by-product is sold during the next period.
2. By – product sales added to the main product sales :
Under this method all costs incurred
onmain and by – products are deducted from the combined sales of themain product and by-products.
This method is adopted where by – products are of small value and they are sold without any further
3. By-products Sales Deducted from Total cost
Under this method the sale proceeds of the by-products are treated as deductions from total
costs. The sales value is deducted either from the production costs or cost of sales.
Other variations of the method are :
(i) Main product account is credited by the sales value of by-product less selling and distribution
expenses on by-products sale.
(ii) Main product accountmay be credited by sales value of by-product less selling and distribution
expenses on also all post separation costs incurred on by-products.
4. Reverse cost methods :
Under this method, an estimated profit from the sales of by –
products, selling and distribution expenses and further, processing costs after the split off points are
deducted from the sale value of by – products and the net amount is credited to the main product.