Byproduct definition
/What is a Byproduct?
A byproduct is an incidental product that is created by a manufacturing process that creates multiple products. The other products created by the process are considered to be the primary output of the system. It may be possible to sell byproducts; alternatively, any revenues to be gained from byproducts are so minor that they are simply discarded as waste. A byproduct is discarded as waste when its net realizable value (the sale price less selling costs) is a negative value or zero.
When there are multiple products created from a production process, the byproducts can be discerned by seeing which ones have a minor resale value in comparison to the value of the other products. If there is no clear differentiation between primary products and byproducts, treat them all as primary products.
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Examples of Byproducts
Examples of byproducts are manure from a feedlot operation, sawdust at a sawmill, salt from a desalination plant, and straw from a grain harvesting operation.
Accounting for Byproducts
The typical accounting for any revenues generated from byproducts is to offset them against the cost of goods sold for the primary products that are generated from the manufacturing system. It is also acceptable to record these revenues as miscellaneous revenue. Either approach will result in the same net profit figure. However, recording the sale of byproducts as miscellaneous revenue will result in a minor increase in the amount of reported sales. You do not need to assign any material cost or overhead cost to byproducts; instead, it is easier to assign all production costs to the primary products that are being manufactured.
There are other, more complicated methods available for accounting for the cost of byproducts, such as the sales value at split-off method and the net realizable value method, but they introduce considerable complexity to the accounting process, and so should generally be avoided.