Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year. The replacement cost method is usually applied by firms whose by-products are used within the plant. However, it is necessary to report accumulated manufacturing costs applicable to by-product inventory on the balance sheet. Certain firms carry an account called the by-product account, to which all additional expenses are debited and all income statements are credited.
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However, during milling, several by-products are also produced, such as wheat bran, wheat germ, and wheat shorts. These by-products are not the main focus of wheat milling but are valuable in their own right. Wheat bran and germ, for instance, can be used as ingredients in animal feed or as a nutritious addition to human foods, adding fiber and vitamins. Actions, processes, and behaviors have an initial result, but many also have a secondary reaction called a byproduct. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. The scrap value is credited to the appropriate production overhead account; however some companies will also record the scrap value as a separate line item.
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The proceeds from sales of the by-product are credited to the by-product account. The reversal cost method is similar to the last technique illustrated in Method 1. The waste heat from the open hearths is reused to generate the steam required by the various production departments. Entries in the journal for Method 2 involve charges to by-product revenue for the additional work required, and potentially also for factory overhead.
Non-cost or Sales Value Method
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- Likewise, leftover scrap metal from making cars might have some resale value as it could be sold for recycling.
- For instance, the demand for biofuel components, derived as by-products in certain agricultural or industrial processes, might outpace the primary products due to changes in energy policy or consumer preferences.
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Marketing and administrative expenses may also be allocated to the by-product on some equitable basis. The balance of this account is shown in the income statement using one of the procedures outlined in Method 1. Method 1 is a typical non-cost procedure in which the final inventory cost of the main product is overstated to the extent that some of the cost belongs to the by-product. The product with the greater value, commonly called the main product, is usually produced in greater quantities than the by-product. A by-product is a product with a relatively small total value that is produced simultaneously with a product of greater total value.
Word History and Origins
In the first three cases, income from by-product sales is credited, while in the fourth case, the main product’s production cost is credited. In this case, the $1,500 revenue from by-product sales is deducted from the $16,500 total production cost, yielding a revised production cost of $15,000. For example, a company that regularly disposes of waste materials from its production process may find that the waste has utility has a fertilizer. In some industries, the economic value derived from by-products can be substantial, influencing the profitability and operational strategies of businesses. For instance, in the agro-industry, by-products like molasses from sugar production or bagasse from sugarcane can be critical in the financial planning of the operations.
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Any revenue resulting from the sale of the by-product is credited either to income or to the cost of the main product. By-products play a crucial role in maximizing resource efficiency and economic viability within various industries. Their significance lies in the ability to add value to the primary production process by finding uses for materials that would otherwise be considered waste. This not only contributes to environmental sustainability by minimizing waste but also helps companies to generate additional revenue streams, decreasing the overall cost of production for the main product. The by-product should be recorded as inventory until its intended marketability has been established. The cost of a by-product is attributed to individual products manufactured using it if those products are finished and ready for sale, or if there is a market for the by-products.
The revenue received from by-product sales is debited to cash (or accounts receivable). By-products are a testament to the innovative and efficient use of resources in industrial processes. Their management, when done correctly, not only supports economic growth but also promotes sustainability and environmental stewardship by reducing waste and finding value in what was once considered unusable. A byproduct may be an unintended, but not necessarily unwelcome, result of an initial process. For instance, the grape seed oil is a byproduct of the winemaking process, and molasses is a byproduct of the refining of sugar.
For example, if your company makes tires it might also produce sawdust as a by-product. But if your company runs a wood shop, the sawdust may be useful for flooring or other products. Likewise, leftover scrap metal from making cars might have some resale value as it could be sold for recycling. In addition, the production (manufacturing) cost of the main product is credited. Inventory costs are based on the allocated cost, plus any subsequent processing cost. A by-product or byproduct is a secondary product derived from a production process, manufacturing process or chemical reaction; it is not the primary product or service being produced.
Product is a classical Latin word from productum, meaning “something produced.” The English use, to mean “anything produced,” is from the late 16th century. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘by-product.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Take self-paced courses to master the fundamentals of finance and connect with like-minded individuals. Ask a question about your financial situation providing as much detail as possible. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos.
11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. 11 Financial’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. The reversal cost method is based on the theory that the cost of a by-product is related to its sales value. The cost assigned to the by-product is the purchase or replacement cost existing in the market.
We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Dollar recognition depends on the stability of the market (in terms of price) and the stability of the by-product; however, control over quantities is important. Marketing and administrative expense might also be allocated to the by-product on some predetermined basis. However, it does not attempt to allocate any of the main product’s cost to the by-product.
It is also possible to use the total market values of the main product and the by-product at the split-off point as a basis for assigning a share of the cost prior to split-off to the by-product. It is a step toward recognizing a by-product’s cost prior to the split-off from the main product. In this case, the $1,500 revenue from the by-product would be deducted from the $15,000 cost of goods sold figure, thereby lowering the cost and increasing the gross profit and operating income.
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Any expenses involved in further processing or marketing the by-product are recorded in separate accounts. Companies typically assess the potential value and applicability of by-products through market research, feasibility studies, and cost-benefit analyses. Collaboration with other industries that can use the by-products more effectively is also common. A byproduct is usually unintended initially, but that doesn’t mean it is unwelcome. Many byproducts are used, such as bran and germ from flour processes, lanolin oil from wool processing, and buttermilk from butter processing. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
However, this shortcoming is removed to a certain degree in Method 1 (d), although a sales value rather than a cost is deducted from the production cost of the main product. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional. Environmental regulations can also impact how by-products must be handled, especially if they are considered hazardous.
All costs not reasonably attributable to any one product are considered period costs, and should be recorded on the income statement as sg&a (selling, general and administrative expenses). Any additional costs in terms of materials, labor, or factory overheads that are incurred after the split-off from the main product are charged to the by-product. However, it reduces the manufacturing cost of the main product not by the actual revenue received, but by an estimate of the by-product’s value at the time of recovery.
For some reason altogether beyond our conception—and man may have been a mere accident, a by-product evolved in the process. The carbonic acid used is (p. 142) a by-product, hitherto wasted, from the fermenting tuns of breweries. The hyphenated version, by-product, is slightly more popular than the unhyphenated spelling, but both are considered correct.