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:

  1. The methods under which no joint production cost is allocated to by products.
  2. 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

Click here to read more about recognition of gross revenue method

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 balance sheet using one of the four approaches listed under recognition of gross revenue method.

Click here to read more about recognition of net revenue method.

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 no 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.

Click here to read more about market value or reversal cost method

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