When a factory runs a production process, sometimes you get more than one output — and not all of them are equally important. The main product is the star of the show. By-products are the supporting cast — they emerge incidentally, have relatively small commercial value, but are still saleable. Think molasses from a sugar mill, sawdust from a timber yard, or glycerine from soap manufacturing. The core question in exams: how do you treat the sale proceeds (or value) of that by-product when calculating the cost of the main product?
The ICAI curriculum gives you two broad approaches. The first is the Non-Cost Method — you don't assign any process cost to the by-product at all. Within this, the most exam-relevant treatment is the Net Realisable Value (NRV) deduction method: you calculate the NRV of the by-product (selling price minus any further processing/selling costs after the split-off point) and deduct it from the total process cost before computing the main product's cost. Alternatively, sale proceeds can be shown as Other Income (miscellaneous income) in the P&L — simpler, but less common in numerical questions. The second approach is the Cost Method, where a share of joint/process cost is actually allocated to the by-product using standard cost or reversal cost techniques — rarely tested at CA Inter level, so don't panic about it.
For exam purposes, the NRV deduction method is the default. Remember the logic: the by-product is helping 'subsidise' the process — its recoverable value reduces the burden on the main product. The split-off point (the stage where the by-product separates from the main product) is critical — costs after split-off (like refining or packing the by-product) are subtracted when computing NRV, not before. This topic pairs naturally with Joint Product Costing; the only practical difference is that by-products get the NRV treatment while joint products need a proper apportionment method (physical units, sales value, etc.). This concept is asked frequently as a 5–8 mark numerical in the Process Costing section — usually embedded inside a full process account.