by By-Products are secondary outputs that are incidentally produced during the manufacturing process of a main product. They emerge from the same raw material and production operation as the main product but have relatively lower commercial value. While they are not the primary focus of production, by-products can still generate additional revenue or be reused in production, helping reduce waste and improve overall efficiency.
By-products are often not planned or intended as primary outputs, but their occurrence is inevitable due to the nature of the process. The economic value of a by-product is generally too low to consider it a joint product. In accounting, the treatment of by-products varies — they may be deducted from the total cost of the main product or their income may be recorded separately as other income.
Definitions of By-Products:
General Definition
“By-products are secondary products that are incidentally produced during the manufacturing of a main product and usually have comparatively lower commercial value.”
ICMA (Institute of Cost and Management Accountants, UK)
“A by-product is a product that is recovered incidentally in the course of manufacturing the main product, which has either small commercial value or is used for internal consumption or waste reduction.”
CIMA (Chartered Institute of Management Accountants)
“By-products are outputs from a joint production process that are minor in quantity and/or value when compared with the main products.”
W.M. Harper
“By-products are the secondary or subsidiary products that are derived in the course of manufacturing the main product and are not separately processed until the split-off point.”
Examples of By-Products:
- Sugar Industry – Bagasse (used as fuel) and molasses (used in alcohol production).
- Oil Mills – Oil cakes used as animal feed.
- Timber Industry – Sawdust and wood shavings.
- Meat Processing – Bones or fat used for tallow or glue.
Features of By Product:
- Incidental Nature of Production
By-products are produced incidentally or unintentionally during the manufacture of the main product. They are not the objective of the production process but are inevitable outputs that occur due to the nature of the materials and the methods used. For example, in the production of sugar, molasses and bagasse are generated as secondary outcomes. These products do not influence production planning but are simply recovered because they have some use or value.
- Lower Commercial Value
The most distinguishing feature of by-products is their low market value compared to the main product. While they may be useful or even profitable, they do not have enough commercial significance to be classified as joint products. Their sale or usage generates marginal revenue or cost savings, but they are not central to the business’s economic objectives. For instance, sawdust from timber production holds value but much less than planks or beams.
- Shared Production Process
By-products are produced through the same process and raw materials as the main product, at no additional or separate processing cost up to the split-off point. They are typically derived from the leftovers, residues, or surplus generated while manufacturing the principal goods. This shared production process means their costs are not independently traceable, making it challenging to allocate exact costs to them in standard cost accounting methods.
- Minimal or No Additional Processing
In most cases, by-products can be used or sold with little to no further processing. If some minor processing is required, it is usually low-cost and not resource-intensive. For example, oil cakes produced during oil extraction can be directly used as cattle feed without significant modification. This feature allows businesses to either sell by-products quickly or reuse them internally, increasing efficiency and reducing waste.
- Helps in Cost Recovery or Reduction
By-products help offset the cost of production by contributing to revenue or reducing waste disposal costs. When sold, the income from by-products can be treated as other income or deducted from the cost of the main product, thereby improving profit margins. If reused internally (e.g., bagasse for fuel), they help reduce operating costs. This makes by-products valuable in terms of cost control and process efficiency, even though they aren’t the focus.
- Common in Certain Industries
By-products are particularly common in industries involving chemical processes, food production, metal processing, and agriculture. These industries produce large volumes of material, and as a result, create multiple outputs—some of which qualify as by-products. Examples include molasses in sugar mills, glycerin in soap production, and fish oil from seafood processing. Their existence is often unavoidable due to the nature of the raw materials and production techniques.
- Accounting Treatment Varies
The accounting of by-products differs from that of main or joint products. They may be treated as miscellaneous income, deducted from total production cost, or assigned a nominal value in inventory. The choice depends on the materiality and value of the by-product. If the by-product’s value is insignificant, it may not even be recorded separately, while higher-value by-products may have a more detailed accounting treatment.
- Supports Sustainable Production
By-products promote eco-friendly and sustainable practices by encouraging the reuse, recycling, or sale of leftover materials that would otherwise be discarded. This helps reduce waste, minimize environmental impact, and create opportunities for secondary revenue streams. For example, breweries use spent grain as animal feed. Such practices enhance a company’s green credentials and are increasingly important in modern corporate and environmental strategies.
Types of By Product:
By-products are categorized based on the industry they originate from, the purpose they serve, and the stage of processing involved. While the nature of by-products varies by sector, they generally fall under the following broad types:
1. Agricultural By-Products
These are generated during the processing of crops or livestock. They are typically residues, husks, or animal remains that can be reused for fuel, feed, or compost.
Examples:
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Bagasse from sugarcane (used as biofuel)
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Rice husk from rice milling (used for insulation or burning)
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Cottonseed from cotton processing (used for oil extraction or fodder)
2. Chemical and Pharmaceutical By-Products
These arise from chemical reactions or drug formulations, often used as secondary chemicals or recycled into further production processes.
Examples:
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Glycerin from soap manufacturing (used in cosmetics)
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Hydrochloric acid from chlorination reactions (used in cleaning agents)
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Spent solvents in pharmaceutical processing (recovered for reuse)
3. Petroleum Industry By-Products
Derived from the refining of crude oil, these products have lower value compared to petrol or diesel but are used in other industries.
Examples:
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Tar from crude oil distillation (used in roads)
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Petroleum coke (used in cement and steel industries)
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Sulfur (used in fertilizers and chemical production)
4. Food Processing By-Products
Food industries produce various by-products during canning, brewing, or baking. These may be edible, recyclable, or disposed of responsibly.
Examples:
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Molasses from sugar manufacturing (used in alcohol and animal feed)
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Whey from cheese production (used in protein supplements)
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Spent grain from brewing (used as livestock feed)
5. Metal and Mining By-Products
These are by-products produced during ore extraction and metal refining. Though not the target metals, they have industrial value.
Examples:
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Slag from steel production (used in road construction)
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Sulfur dioxide from copper smelting (used to make sulfuric acid)
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Zinc dust from zinc refining (used in galvanizing)
6. Textile and Timber Industry By-Products
Produced during fabric or wood processing, these are often used in fuel, pulp, or low-grade manufacturing.
Examples:
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Sawdust from wood cutting (used in particle boards or briquettes)
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Lint from cotton processing (used in stuffing)
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Wool grease from wool scouring (used in lanolin production)
7. Animal By-Products
These result from the meat processing industry and are used in various non-food or secondary food products.
Examples:
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Tallow from fat (used in soap or candles)
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Bones (used in gelatin or bone meal)
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Blood (used as fertilizer or in pet food)
8. Industrial and Manufacturing By-Products
Produced during heavy industrial production, these include materials that are reusable or recyclable.
Examples:
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Ash from power plants (used in bricks or cement)
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Waste heat (used in cogeneration systems)
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Metal scraps (recycled into new metal products)
Methods of By-Product Costing / Accounting:
By-products are secondary outputs with relatively low commercial value. Since they are not the main focus of production, their accounting is simpler and varies based on materiality, usability, and management policy. Below are the main methods used to account for by-products:
1. Miscellaneous Income Method
Under this method, no cost is allocated to the by-product. Instead, any income generated from selling the by-product is shown as miscellaneous or other income in the Profit and Loss Account.
When to Use:
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When the by-product has insignificant value
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When it does not impact the cost structure of the main product
Example: Sale of sawdust from furniture production is treated as other income.
2. Credit to Main Product Cost Method
In this method, the sale value of the by-product is deducted from the total cost of the main product. This reduces the overall cost of producing the main product.
When to Use:
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When the by-product is incidental and minor
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To simplify cost sheets
Effect: Reduces cost per unit of main product.
3. By-Product Value Deducted from Total Cost Method
Here, the estimated value of the by-product at the time of production (not sale) is deducted from the total joint cost, and the remaining cost is allocated to the main product(s).
When to Use:
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When by-product has realizable market value
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When it is sold regularly and not stored for long
Example: Molasses in sugar production valued at ₹10,000 is deducted from total cost.
4. Reverse Cost Method (Net Realizable Value Method)
Under this method, we work backwards from the selling price of the by-product by subtracting:
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Selling and distribution expenses, and
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Post-split-off processing cost
to arrive at the net realizable value. This NRV is then deducted from joint cost or treated as income.
When to Use:
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When further processing is required before sale
5. Separate Costing Method
In this method, by-products are treated as separate products, and costs directly traceable to them (like further processing, packaging, etc.) are accounted for individually. The final cost is compared with the revenue to assess profitability.
When to Use:
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When the by-product has significant value
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Requires processing or selling efforts
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Is stored in inventory
6. Standard Cost Method
Here, the by-product is assigned a predetermined or standard value irrespective of market price fluctuations. This method simplifies accounting and is often used in budgeting and variance analysis.
When to Use:
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In large manufacturing setups
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Where standardized costing systems are used
Advantages of By Product:
- Enhances Overall Profitability
By-products add to a firm’s total revenue without significant additional cost, thereby increasing overall profitability. Since by-products are usually sold in their existing form or with minimal processing, the income generated contributes directly to the bottom line. This additional income, when treated as other revenue or used to reduce main product cost, helps improve the financial performance of the company without requiring new investments or processes.
- Reduces Production Waste
By-products allow companies to minimize production waste by turning what would otherwise be discarded material into useful products. This improves efficiency and aligns with waste reduction practices. For example, sawdust from timber mills can be used to make particle boards or fuel briquettes. Utilizing these leftovers not only reduces disposal costs but also supports environmentally sustainable manufacturing processes, which is increasingly valued in modern industries.
- Lowers Cost of Main Product
Income earned from selling by-products can be credited against the cost of the main product, thus reducing the overall production cost per unit. This results in better pricing flexibility and competitive advantage. Businesses can either pass this benefit on to customers through lower prices or retain it as profit. It is especially useful in industries with high-volume manufacturing and narrow margins, such as sugar, paper, and metal refining.
- Encourages Sustainable Practices
By-product utilization supports sustainability and circular economy initiatives. When companies find productive use for by-products, they reduce landfill waste, conserve resources, and enhance their environmental image. This not only helps in complying with environmental regulations but also boosts brand reputation. Sustainability-focused companies may even receive incentives or certifications, making their operations more appealing to eco-conscious investors, partners, and consumers.
- Supports Ancillary Industries
The sale of by-products often fuels small-scale and ancillary industries. For instance, molasses from sugar production is used by distilleries, and oil cakes support livestock feed businesses. These linkages create employment and economic value beyond the main production line. Thus, by-products contribute to industry diversification and regional development while allowing producers to engage in long-term partnerships with downstream users or manufacturers.
- Improves Process Efficiency
A focus on by-product recovery can lead to improved process design and operational efficiency. Companies may invest in better systems to separate, capture, and utilize by-products, which can also optimize main product yield. This drive for maximizing resource use encourages continuous improvement, waste minimization, and technological innovation—especially in industries such as chemical processing, oil refining, and agriculture.
- Provides Competitive Advantage
Businesses that effectively manage and market their by-products can gain a competitive edge. By lowering the net cost of production and diversifying revenue sources, they can offer more competitive pricing or invest in further product development. Additionally, efficient by-product management can differentiate a company in terms of quality, innovation, or environmental responsibility, appealing to a broader customer base and stakeholders.
- Facilitates Cost Recovery
When a by-product is sold or reused internally, it helps the firm recover part of the production cost that would otherwise be sunk. This is especially beneficial in high-capital or resource-intensive industries. Even when by-products are not sold, using them as raw materials or energy sources internally (e.g., bagasse for steam) reduces reliance on external inputs, thus enabling indirect savings and better utilization of company resources.
Disadvantages of By Product:
- Low Commercial Value
By-products often have insignificant market value, which limits their contribution to overall profitability. Unlike joint products, their revenue generation is minimal and can fluctuate depending on demand and availability. In some cases, the cost of collecting, storing, or transporting the by-product may even exceed the income earned, making their recovery economically unjustifiable. As a result, companies may choose to discard them instead of utilizing or selling them.
- Uncertain Market Demand
The market for by-products is usually unstable and highly dependent on external industries or niche uses. If demand for the by-product drops or if buyers shift preferences, the producer may be left with unsold inventory. Unlike the main product, which is produced and marketed strategically, by-products often lack dedicated marketing efforts, resulting in limited scalability and long-term sales predictability.
- Difficult Cost Allocation
It is often challenging to allocate costs to by-products accurately. Since by-products share the same production process as the main product and are not separately identifiable until the split-off point, their cost share is hard to determine. Most accounting methods either ignore by-product costs or assign arbitrary values. This can lead to distorted costing, especially in complex multi-output processes, affecting product pricing and profitability analysis.
- Lack of Control Over Quantity Produced
The quantity of by-products produced is not controllable, as it depends entirely on the production of the main product. A company cannot scale or reduce by-product output based on market demand or profitability. This lack of control can lead to excess supply or shortages, affecting storage, sales, and processing. It also limits the company’s ability to respond to business opportunities in secondary product markets.
- Storage and Disposal Challenges
Many by-products are bulky, perishable, or hazardous, requiring proper storage or disposal systems. This creates additional overheads, including warehousing, transportation, and compliance with safety and environmental regulations. When by-products cannot be sold or reused economically, they may become waste liabilities instead of assets. Poor management of such materials can lead to penalties, environmental damage, or brand reputation risks.
- May Require Further Processing
Some by-products need further processing before they can be sold or reused, which increases cost and time. If the additional investment is not justified by their commercial value, the firm may incur losses. Further, the infrastructure and workforce needed for processing by-products may not align with the core business operations, making it an inefficient or non-core activity that diverts focus and resources.
- Complex Accounting Treatment
The accounting treatment for by-products can be inconsistent and complex, especially when they involve minor revenue, variable output, or different types of processing. Choosing the right method (such as NRV, other income, or credit to main product) depends on judgment and assumptions, which can affect cost sheet accuracy and financial statements. Misrepresentation or oversimplification can mislead stakeholders and affect financial analysis.
- Limited Strategic Value
By-products are generally considered operational leftovers rather than strategic business offerings. They rarely receive dedicated marketing, R&D, or product development focus. As a result, their potential is often underutilized. Companies may miss opportunities to develop innovative uses or create value-added products because of this limited attention. Moreover, over-reliance on by-product revenue can be risky if it diverts focus from the main product line.
