Page 284 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes Costing of By-products: By-products are relatively considered less important. For example,
molasses obtained from production of sugar or ash available when boilers are run would be by-
products.
Accounting Treatment when By-products have Market Value

Did u know? If the by-products have relatively unimportant market value, it is neither
feasible nor practicable to attempt to apportion to the by-products any part of the joint
costs of production upto the point of split off.
The possible treatments in this condition may be as follows:
z z All income received from the sale of by-products may be considered as income and credited
to the Profit and Loss Account. The major product bears the whole cost of production and
its sales are considered while determining operating income.

z z The sale proceeds of by-products may be credited to the account of main product and thus
it can be deducted from the cost of production of main product.
z z The income realised from the sale of by-products is reduced by the selling costs incurred on
the sale and manufacturing costs applied to the by-products after they achieve a separate
existence. The remaining amount is deducted from the cost of production of the major
product.

Accounting Treatment when By-products Need Further Processing
In this case, obviously the by-product is of some importance and it would be necessary to
determine the cost of by-product at the point it is separated from the main product. This cost
should be determined on the basis of physical management or the market value at the separation
point. After having ascertained the share of joint costs on the by-product, it will be necessary to
have a separate account for it in which the expenses for further processing will be charged. The
total of this account will be the cost of raw materials for the other products.

Example: A particular brand of cough syrup passed through three processes for
production. During the month ended August, 2007. 600 gross of bottles were produced. The
following information is obtained.

processes
I (`) II (`) III (`)
Materials 4,000 2,000 1,500
Labour 3,000 2,500 2,500
Direct expenses 600 200 500
Cost of bottles — 2,030 —
Cost of casks and spoons — — 325
The indirect expenses were ` 1,600 to be apportioned as ` 600 in I process, ` 500 in II process, and
` 500 in III process. The by-products were sold for ` 240 in process II and the residue sold ` 125
in process III.
prepare process accounts.

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