## Treatment of By-Products
The accounting treatment of a by-product depends on its significance. The decision is binary: treat it like a joint product, or net its value against joint cost.
### Two Scenarios
| If By-product is IMPORTANT | If By-product is NOT IMPORTANT |
|---|---|
| The by-product earns substantial profit, OR the question instructs to allocate joint cost to it. | All other cases — minor by-products with negligible value. |
| Treatment: Treat it the same as a joint product. Allocate joint cost using a method (sales value, physical units, NRV, etc.). | Treatment: Reduce the NRV (Net Realisable Value) of the by-product from the total joint cost, then allocate the remaining joint cost only to the main joint products. |
### Net Realisable Value (NRV) of By-Product
```
NRV of By-product = Selling Price − Further Processing Cost − Selling Expenses
```
### When By-product is NOT Important — Steps
1. Compute total joint cost.
2. Compute NRV of by-product (sales − further processing − selling expenses).
3. Reduced Joint Cost = Total Joint Cost − NRV of by-product.
4. Allocate this reduced joint cost only among the main joint products.
### When By-product IS Important — Steps
Treat it as a joint product and use any standard allocation method (physical units, sales value at split-off, NRV method, average unit cost, etc.) to allocate the full joint cost across all products (main + by-product).