Effective Methods for Costing By-Products

Walk into any sugar mill in Uttar Pradesh and you will find sugar is the star of the show, but molasses, bagasse, and press mud are quietly generated alongside it. These are by-products: items that emerge incidentally from a process aimed at making something else. The tricky part for a cost accountant is not identifying them, it is deciding how much of the joint production cost, if any, should be pinned on them. Get this wrong and the reported cost of your main product swings unfairly, distorting pricing and profitability decisions. This is where the established methods of costing by-products come in.

Why by-products need their own costing approach 🔗

In a joint production process, a single set of inputs and costs splits into multiple outputs at what is called the split-off point. Costs incurred before this point are joint costs and belong to all the outputs collectively, not to any one of them individually. Once a company has incurred manufacturing costs prior to split-off, it has to choose a method for allocating them to the resulting products, and by-products complicate that choice because their sales value is usually too small to justify the same rigorous treatment given to main products.

The Institute of Chartered Accountants of India frames this clearly in its cost and management accounting curriculum: joint costs are incurred up to the split-off point, while costs incurred after that point can be traced directly to individual products or by-products. So the real question in by-product costing is what to do with the pre-split-off cost, and whether the by-product should carry any share of it at all.

Method 1: Treating the by-product’s value as miscellaneous income 🔗

When a by-product’s sale value is small compared to the main product’s revenue, most companies do not bother apportioning any joint cost to it. Instead, the entire net proceeds from its sale are recorded directly in the profit and loss account as other income or miscellaneous income. No cost is deducted from the main product’s cost sheet, and no separate cost record is maintained for the by-product beyond tracking its sale.

When this approach makes sense 🔗

This method suits situations like sawdust from a furniture factory or scrap metal from a fabrication unit, where the amount realised is too minor to influence pricing decisions. The credit for such proceeds is typically treated either as miscellaneous income or as an addition to sales, keeping the accounting light and avoiding the effort of a formal allocation exercise. Because by-product value is usually insignificant relative to the main product, accounting treatments for it tend to stay flexible rather than rigidly standardised. The obvious limitation is that it slightly overstates the main product’s cost, since the by-product effectively rides free on the joint process.

Method 2: Apportioning joint costs to by-products 🔗

When a by-product’s value is considerable enough to matter, businesses apportion a fair share of the joint cost to it, the same way they would for a genuine joint product. This gives a more accurate cost figure for both the main product and the by-product, which matters when the by-product is sold in meaningful volumes, such as oil cake from an edible oil mill or whey from a dairy plant.

Market value (sales value) method 🔗

Here, joint costs are split between the main product and the by-product in proportion to their respective sales values at the split-off point. A by-product with a higher market value absorbs a proportionally larger share of the joint cost. This mirrors the logic used for joint products, where the sales value method allocates joint costs based on each product’s market price, ensuring the allocation reflects financial contribution.

Physical units method 🔗

Joint costs can also be split based on a common physical measure, such as weight, volume, or number of units. If a rice mill produces 900 kg of rice and 100 kg of husk from the same batch, costs could be split roughly 9:1. This is simple to apply but ignores the fact that different outputs often sell at very different prices, which can make the resulting by-product cost look unrealistic.

Average unit cost method 🔗

Under this approach, the total joint cost is spread evenly across every unit produced, whether it becomes the main product or the by-product, and each is then costed at the same average rate per unit. Apportionment of joint costs to by-products can follow any of the methods used for joint products, including sales value, physical units, average unit cost, or survey-based methods, so the choice generally comes down to what best fits the industry’s production pattern.

Method 3: The reverse cost method 🔗

Some by-products cannot be sold as they emerge from the process. They need further processing before anyone will buy them, the way crude glycerine from soap-making needs refining, or raw press mud from a sugar mill needs treatment before it becomes usable manure. In such cases, the reverse cost method, also called the net realisable value method, works backwards from the eventual selling price.

The calculation starts with the by-product’s final market value and then subtracts everything that stands between that value and the split-off point: further processing costs, selling and distribution expenses, and a normal profit margin. What remains is treated as the estimated value of the by-product at the split-off point, and this figure is credited to the main product’s cost.

This ₹27,500 is then deducted from the joint cost, reducing the cost burden carried by the main product. The net realisable value at split-off point method is widely used across industries precisely because it links the by-product’s book value to what the market will actually pay for it, rather than to an arbitrary formula.

Choosing the right method for your by-product 🔗

There is no single correct method that applies everywhere. The choice depends on how material the by-product’s value is, whether it needs further processing before sale, and how consistently a company wants to apply the same logic period after period.

Since joint cost allocations are ultimately formula-driven rather than a true measure of a product’s inherent worth, the goal is not mathematical perfection. It is picking a method that is defensible, consistent, and simple enough to apply reliably every accounting period, so that both the main product’s cost and the by-product’s contribution are represented fairly on the books.

What do you think? If you were costing a by-product like bagasse from a sugar mill, which method would you lean toward, and would your answer change if the mill started selling bagasse-based board instead of using it as fuel?

References

1. https://www.accountingtools.com/articles/by-product-costing-and-joint-product-costing
2. https://live.icai.org/bos/vcc/pdf/08032022_CA__Vipin_Bohra_Joint_by_product_1646721363.pdf
3. https://www.accountingcoach.com/blog/what-are-byproducts
4. https://www.vaia.com/en-us/explanations/business-studies/accounting/joint-product-costing/
5. https://egyankosh.ac.in/bitstream/123456789/71372/1/Unit-16.pdf