Joint Products vs. By-Products: Key Differences Explained

Walk through a sugar mill and you will not leave with sugar alone. The same crushing and boiling process also throws up molasses, bagasse and press mud. A dairy separating milk into cream and skimmed milk faces a similar situation, and so does a refinery turning crude oil into petrol, diesel and kerosene. Whenever one process produces more than one saleable output, a cost accountant has to answer a basic question first: is this a joint product or a by-product? The two get used loosely in everyday conversation, but in cost accounting the label decides how costs are shared, how profit is measured, and how pricing and processing decisions are made.

What are joint products? 🔗

Joint products are two or more products of roughly equal importance that emerge from the same raw material and the same process, and each one carries a significant sale value of its own. Petroleum refining is the textbook case: crude oil is processed to give petrol, diesel, kerosene, lubricants and asphalt, and none of these can really be called the “main” output because each has its own substantial market. The Institute of Chartered Accountants of India defines joint products in almost the same way, stressing that it is the near-equal sale value of the outputs that earns them this label, not just the fact that they share a process.

The split-off point 🔗

Every discussion of joint products revolves around one idea: the split-off point. This is the stage in production where the individual products first become separately identifiable. Everything spent before this point is a joint cost, and because that cost benefits every product equally, it cannot be traced to any single one of them. Anything spent after the split-off point, such as refining kerosene further or bottling lubricants, is a separable cost and can be charged directly to that specific product. Accounting standards require these pre-split-off costs to be allocated across the joint products rather than expensed immediately, which is exactly why methods like the physical units method, the sales value method and the net realisable value method exist. A dairy plant illustrates the same idea on a smaller scale: the cost of procuring and processing raw milk is a joint cost until the point where cream and skimmed milk are separated, after which any further processing, such as churning cream into butter, is a separable cost attached only to butter.

What are by-products? 🔗

A by-product is an output that is recovered incidentally while manufacturing the main product, and its market value is small compared to that of the main product. Molasses recovered while manufacturing sugar, and glycerin recovered while manufacturing soap, are the standard examples used in Indian cost accounting textbooks. Bagasse from sugarcane crushing and sawdust from a sawmill fall in the same category. The defining feature is not that the by-product is worthless. Molasses, for instance, is genuinely useful, since its sale proceeds are typically used to reduce the recorded cost of the main product, sugar. The point is simply that nobody sets up a sugar mill to produce molasses. It falls out of the process almost as a bonus, and the business would keep running the same way even if the by-product did not exist.

Key differences between joint products and by-products 🔗

Once the definitions are clear, the differences line up fairly neatly. The table below captures the ones that matter most for exam answers and for real accounting decisions.

Relative sales value decides the label 🔗

The single biggest differentiator is money. If two outputs from the same process sell for comparable amounts and both matter to the company’s revenue, they are joint products. If one output dwarfs the other in value, the smaller one gets pushed into the by-product category, however useful it might be. This is a purely relative test, so the same physical output can be a by-product in one factory and something closer to a joint product in another, depending on how the numbers stack up locally.

Why the process exists in the first place 🔗

Joint products are the reason the manufacturing plan exists. A refinery is built to produce petrol and diesel together; neither is an afterthought. By-products, in contrast, are more like a fortunate side effect. A soap factory is not designed around glycerin recovery, even though selling that glycerin adds to the bottom line. This distinction matters when management is deciding how much capacity or investment to devote to each output.

How the costs get treated in the books 🔗

Because joint products are all “important,” accountants formally apportion the joint cost among them using methods such as the physical units method, market value at split-off, or net realisable value, so that each product carries a fair share of cost and can be evaluated for its own profitability. By-products usually skip this step entirely. Instead, their net realisable value, meaning what they fetch after deducting any further processing cost, is treated either as a reduction in the cost of the main product or as miscellaneous income in the profit and loss account. This is essentially a question of accounting treatment rather than physics: if a business bothers to work out an equitable cost share for an output, it is being treated as a joint product; if the output is simply netted off against the cost of something more important, it is being treated as a by-product.

The line between the two is not fixed 🔗

Textbook definitions make the split sound permanent, but it rarely is. The same output can shift categories as markets, technology or company priorities change. Bagasse is a good illustration. It used to be treated as a low-value by-product of sugar milling, fit only for burning as fuel. Many Indian sugar mills now sell bagasse to paper manufacturers or use it to generate power that is sold back to the grid, and once its sale value climbs close to that of sugar itself, some mills start accounting for it more like a joint product than an incidental one. Course material from IGNOU makes this point explicitly, noting that the classification of an output as a joint product or a by-product is not rigid, and what counts as a by-product for one company can be a joint product for another. The label depends on the specific circumstances of a manufacturing operation at a point in time, not on some fixed property of the material itself.

Why this classification actually matters 🔗

This is not just a definitional exercise for exam answers. Getting the classification right affects real decisions. Under both joint and by-product costing, the numbers used for cost allocation are essentially formulas for arriving at inventory values and cost of goods sold; they have no real bearing on what a product should be priced at. What actually drives pricing and “sell or process further” decisions is the separable cost incurred after the split-off point, compared against the extra revenue that further processing brings in. Businesses that misclassify a genuinely valuable output as a minor by-product risk underinvesting in it, ignoring further-processing opportunities, or mispricing it altogether. A sugar mill that keeps treating a now-lucrative bagasse-to-power business as a rounding error in its accounts is leaving money, and useful management information, on the table.

For a Bachelor of Commerce student, the practical takeaway is this: do not memorise “joint products are important, by-products are not” as a fixed rule. Learn instead to ask two questions about any output from a shared process. First, how does its sale value compare with the other outputs? Second, does the business treat it as something worth costing independently, or as a deduction from someone else’s cost? The answers to those two questions, not the name of the industry or the textbook example, are what actually determine whether something is a joint product or a by-product.

What do you think? If a company’s by-product starts earning more revenue than its main product, should the accounting system reclassify it as a joint product immediately, or only after the change proves durable over a few years? And can you think of an everyday manufacturing process, outside oil refining and sugar milling, where the same joint cost versus by-product debate would apply?

References

1. https://live.icai.org/bos/vcc/pdf/08032022_CA__Vipin_Bohra_Joint_by_product_1646721363.pdf
2. https://www.accountingtools.com/articles/by-product-costing-and-joint-product-costing
3. https://www.accountingformanagement.org/joint-products-and-by-products/
4. https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=1264&context=jofa
5. https://egyankosh.ac.in/bitstream/123456789/71372/1/Unit-16.pdf