Make the Most of Byproducts in Cost Accounting
In cost accounting, byproducts are produced during the joint production of other products. The byproduct’s sales value is usually less than that of the “real” products in joint production; however, don’t underestimate the value of a byproduct, because the revenue from byproduct sales may be used to reduce total joint costs.
When you consider byproducts, visualize a garage sale. The money you make from the garage sale isn’t (hopefully) your primary source of income. However, that revenue can be used to cover other costs — maybe the month’s air conditioning bill.
There are two methods to account for joint costs that include a byproduct:
The production method recognizes the byproduct in the financial statements when it’s produced. The production method deducts the byproduct revenue from cost of sales at the time of production.
The sales method delays recognition of the byproduct until it’s sold. The sales method adds the byproduct revenue to the main product revenue. Revenue is slightly higher using the sales method. The net cost of sales, however, is also higher. In fact, the higher revenue is offset by the higher cost of sales.
Gross margin is defined as sales less cost of sales. The total gross margin in dollars is the same using both methods. Using the sales method, the slightly higher revenue is offset by an equally higher increase in cost of sales.