## By-Products: Valuation and Accounting Treatment

### Methods of Valuing By-Products

#### (i) Net Realisable Value (NRV) Method

By-product value = Selling price − Further processing costs − Selling costs

#### (ii) Standard Cost / Technical Estimates

By-product valued at a pre-determined standard cost based on historical cost averages
Technical estimates determine how much original raw material forms the by-product
Used when: By-product is not saleable in its current form, or no comparable market price exists

#### (iii) Comparative Price Method

Value the by-product by comparing it to the market price of a similar/alternative product
Example: Gas produced as a by-product in an automobile plant → valued at the price a gas company would charge for the same quantity

#### (iv) Re-use Basis

When the by-product is reprocessed within the same production process
Valued at the same price as the original material introduced into that process
If returned to an earlier process → valued at the material cost of that specific earlier process

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### Treatment of By-Products in Cost Accounting

#### (a) Small Total Value — Two Options

1. Credit sales value to Costing Profit & Loss Account as miscellaneous income (not touched in cost accounts)

2. Deduct sales proceeds from total production cost or cost of sales

#### (b) Considerable Total Value

Treat by-product as a joint product
Apportion joint costs to it using: relative market values, physical output at split-off, or ultimate selling prices

#### (c) By-Product Requiring Further Processing

1. Compute NRV at split-off = Realisable value − Further processing cost

2. NRV is small → treat as per (a)

3. NRV is considerable → treat as per (b)

---

### Decision Rule

```

By-product value?

├── Small

│ ├── Option 1: Credit to Costing P&L A/c (miscellaneous income)

│ └── Option 2: Deduct from production/sales cost

└── Considerable → Treat as joint product; apportion joint costs to it

Requires further processing?

→ Compute NRV at split-off first, then apply above rule

```

Worked example

### Example 1

Small Value By-Product: Main product — woven cloth. By-product — cotton waste sold for ₹5,000. Total production cost = ₹2,00,000.

Method 1: Credit ₹5,000 to Costing P&L A/c as miscellaneous income. Cost of production = ₹2,00,000 (unchanged in cost accounts).
Method 2: Net production cost = ₹2,00,000 − ₹5,000 = ₹1,95,000.

### Example 2

By-Product Requiring Further Processing: A chemical plant's by-product can be sold after further processing.

Further processing cost = ₹8,000
Final selling price = ₹20,000
NRV at split-off = ₹20,000 − ₹8,000 = ₹12,000
Since ₹12,000 is considered considerable → treat as joint product; apportion joint costs to it.

### Example 3

Comparative Price Method: An automobile plant produces waste gas as a by-product. A gas company charges ₹18 per cubic metre for equivalent gas. Monthly by-product output = 600 cubic metres. By-product value = 600 × ₹18 = ₹10,800 → deducted from total production cost.

⚠️ Common exam mistakes

Treating all by-products identically — the accounting treatment hinges on whether the value is 'small' or 'considerable'; using a single approach for all by-products is incorrect.
Forgetting to deduct further processing costs when computing NRV at split-off — the NRV must be net of all post-split costs.
Using the Re-use Basis incorrectly — if the by-product goes back to an earlier (not the current) process, it is valued at that earlier process's material cost, not the current process's input price.
Confusing the two options under 'small value' treatment — both are acceptable, but they affect cost of production differently; choose one consistently.

Reference:

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By-Product Valuation Methods and Treatment in Cost Accounting

Worked example

⚠️ Common exam mistakes