Methods of costing by-products
This page provides you a list of methods of costing by-products. It does not have the explanations and computations. To read a particular by-products costing method in detail, you can click the link of that method provided in the list.
The methods used for costing by-products can be divided into following two categories:
- The methods under which no joint production cost is allocated to by products.
- The methods under which a portion of joint production cost is allocated to by products.
The methods under which no joint production cost is allocated to by-products
The methods that fall under this category do no attempt to allocate a joint production cost to the by products. The revenue that results from the sale of by-products is credited to the income or to the cost of the main product.
In some situations, any cost incurred on the by-products after split-off point is offset against the revenue realized from the sale of by-products.
Under these methods, some independent value may be assigned to the by products for the purpose of inventory costing.
The commonly used methods under this category are listed below:
Method 1: Recognition of gross revenue method
Under this method, the by-product revenue is listed on the income statement using one of the following four approaches:
- The sales revenue of the by-product is presented on the income statement as other income.
- The sales revenue of the by-product is shown on the income statement as additional sales revenue.
- The sales revenue of the by-product is shown as a deduction from the cost of goods sold of the main product.
- The sales revenue of the by-product is shown as a deduction from the manufacturing cost of the main product
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Method 2: Recognition of net revenue method of costing by-products
Under net revenue method, revenue from sale of by-products less addition processing cost and marketing and administrative costs is presented on the income statement using one of the four approaches listed under recognition of gross revenue method.
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Method 3: Replacement cost method of costing by-products
The replacement cost method is mostly used by organizations that use by-product somewhere within their own manufacturing processes.
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The methods under which some joint production cost is allocated to the by-products
The methods under this category allocates a portion of joint production cost to the by-products. Under these methods, inventory costs of by products is computed on the basis of joint cost allocated plus any processing cost incurred subsequent to recovery or split-off point. The commonly used method under this category is given below:
Method 4: The market value or reversal cost method of costing by-products
The market value or reversal cost method credits the manufacturing cost of the main product by estimated value of the by-product at the time of recovery. It is somehow identical to the recognition of gross revenue method.
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