The primary product is flour, which is the main goal of the milling process. However, during milling, several by-products are also produced, such as wheat bran, wheat germ, and wheat shorts. These by-products are not the main focus of wheat milling but are valuable in their own right.
This not only contributes to environmental sustainability by minimizing waste but also helps companies to generate additional revenue streams, decreasing the overall cost of production for the main product. A by-product is a secondary product derived from a manufacturing process or chemical reaction, which is not the primary product or service being produced. In other words, it is an incidental or additional output generated during the production of a main product. By-products can be of value and utilized in other applications, or sometimes they may require proper disposal if they cannot be effectively used. The by-product production and sales methods both fail to comply with GAAP as production costs are not properly allocated to the by-product. The proper method would be to treat the by-product equally with understanding current assets on the balance sheet the main products from the process i.e as a joint product.
What Is a Byproduct? – Definition and Examples
A byproduct is usually unintended initially, but that doesn’t mean it is unwelcome. Many byproducts are used, such as bran and germ from flour processes, lanolin oil from wool processing, and buttermilk from butter processing. The double entry bookkeeping journals used to post the transactions relating to byproducts are shown below for each of the two methods. The production method of accounting for byproducts has the following features. By-products are a testament to the innovative and efficient use of resources in industrial processes.
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In some industries, the economic value derived from by-products can be substantial, influencing the profitability and operational strategies of businesses. For instance, in the agro-industry, by-products like molasses from sugar production or bagasse from sugarcane can be critical in the financial planning of the operations. Actions, processes, and behaviors have an initial result, but many also have a secondary reaction called a byproduct.
Common Product Mix Pricing Strategies
As discussed in the example above, Ethylene is very valuable and it can be sold at premium prices and the profits earned can be used for capacity building for the mainstream business. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Unfortunately not all by-products have the same salability and value as the dairy farmers’ and loggers’ operations.
- Dairy farmers breed and raise cows to produce milk in order to sell it to grocery stores, restaurants, and distributors.
- He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies.
- He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
- Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about.
- A by-product is a secondary product derived from a manufacturing process or chemical reaction, which is not the primary product or service being produced.
A by-product or byproduct is a secondary product derived from a production process, manufacturing process or chemical reaction; it is not the primary product or service being produced. The number of units of the main product and by-product produced and sold during the accounting period are shown in the table below. The revenue generated from the sale of this product can be used to meet some expenses of the business or bring down the costing of the main product. This gives a much needed competitive advantage to the business in the market.
E.g. A crude oil refinery extracts at the end of its refining process. That substance is Ethylene – a vital ingredient in manufacturing all the plastic products like polythene shopping bags, PVS pipes, etc. Thus, knowing the commercial importance, the company can actually sell it at lucrative prices. Companies typically assess the potential value and applicability of by-products through market research, feasibility studies, and cost-benefit analyses. Collaboration with other industries that can use the by-products more effectively is also common.
What is a By-Product? By-Products Examples and Pricing Strategies
There are two methods of accounting for a byproduct known as the production method and the sales method. The production method recognizes the value of the by-product when it is produced, and the sales method recognizes the value when the by-product is sold. This income is too insignificant to be accounted for under a separate head. Since the accounting impact of the byproduct is minimal the question arises as to how to account for any value the product has and any disposal value generated when the product is sold.
Due to the minimal value of the by-product, an analysis would show that the costs of complying with GAAP would far outweigh the benefits of doing so. There aren’t any different raw materials or processes used for the same. To sell it in the market, some processing may be done on it, if required. A manufacturing process will nearly always result in an unintended ancillary byproduct being produced. These byproducts may be regarded as waste and have zero value or might be useful products in themselves, but having a minimal value relative to the main or joint products generated by the process. Many times, the production process results in the creation of Leftover products.
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
To maintain the performance of the printer, it is advisable that the customer uses the printing ink from the same manufacturer. Hence, here the customer doesn’t have much choice but to buy the ink from the manufacturer only. So, the manufacturer can afford to price the ink at premium levels as his customer base is almost guaranteed. E.g. A car manufacturer also sells other decorative accessories like car mats, seat covers, navigation system etc. There is no compulsion on the customer to purchase these but buying them from the manufacturer provides one excellent, seamless product package. Thus, the company has to price these accessories at attractive, competitive prices so that the customer can’t resist the offer.
Byproduct, or by-product, is a compound word and is never written as two separate words. And it should never be spelled as bi-product since by- is the accepted English prefix spelling. This is a well-used and recognized word in the English language, and knowing its proper use and spelling is essential.
Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. The ending inventory of the main what is a schedule e product is calculated as follows. Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies.
Thus, a sale of a By-Product can be beneficial to the business if that is priced correctly and at optimum levels by the business. There are numerous other processes that create useful by products. The main products of this industry are whole logs, but every tree has branches and smaller sections that can’t be used as full logs. These sections are typically ground up in a wood chipper to make wood chips. These are then sold to professional landscapers and home garden enthusiasts. The total costs of production are allocated to the main product resulting in a unit price calculated as follows.
