Cost and Management Accounting · Joint Products and By Products
Accounting Treatment of By-Products in Cost Accounting
Updated 4 October 2026 · Fact-checked
A by-product is a secondary output of low value that arises along with the main product. Its value is either credited to profit and loss, or deducted from the main product's cost. When it needs further processing, you use the reversal cost (NRV) method to find the value to credit.
Understand Accounting Treatment of By-Products
A by-product is a minor output that comes out of the same process as the main product. It has a small sales value compared with the main product. Think of molasses from sugar. The firm does not run the process for it, but it still sells it.
Because by-products are small, the aim is simple. Do not burden them with joint cost. Instead, take whatever they earn and use it to reduce the cost of the main product, or show it as other income.
There are two broad treatments. In the first, the by-product income is credited to Profit and Loss Account as other income. The main product then carries its full cost. In the second, the by-product value is deducted from the total cost of the main product, so the main product's cost per unit falls.
When the by-product can be sold as it is, the value is the sale proceeds, less any selling and distribution costs if they are separately incurred. When it needs extra processing, you cannot just credit the sale price. You must first remove the extra costs and, where the question gives one, a normal profit as well. The result is the amount credited to the main product.
The reversal cost method is the net realisable value (NRV) method of valuing a by-product that needs further processing. It works backwards from the selling price to a value at the split-off point. Start from the selling price. Deduct the post-split-off processing cost and the selling and distribution cost. Deduct a normal profit only where the question gives one. What is left is the credit given to the main product's cost.
Reversal cost and NRV are not two separate methods. They are the same working under two names. Whether a normal profit is also deducted depends only on what the question states.
Key rules to remember
- By-product credit when sold as it is
- Credit = Sales value of by-product − Selling and distribution cost of by-product (if separately incurred)
- If no separate cost is given, credit the full sales value.
- Reversal cost (NRV) method
- Credit to main product = Sales value of by-product − Post-split-off processing cost − Selling and distribution cost − Normal profit (if given)
- This is the NRV-based method. Deduct profit only when the question gives a profit margin.
- Net realisable value (NRV) when no profit is given
- NRV = Sales value of by-product − Post-split-off processing cost − Selling and distribution cost
- This is the same reversal cost working. When the question gives no normal profit, there is no profit to deduct.
- Cost of main product after by-product credit
- Net cost of main product = Total joint cost − By-product credit
- Use this when the question asks for the by-product to be adjusted against main product cost.
- Cost per unit of main product
- Cost per unit = Net cost of main product ÷ Units of main product
- Divide by main product units only, never by the by-product units.
- By-product credited to Profit and Loss
- Profit = Sales of main product − Full cost of main product + By-product income
- The by-product income is shown below the cost sheet as other income, so it does not change the main product cost.
How to solve Accounting Treatment of By-Products questions
Use this order for any by-product question in the exam. Read the instruction on treatment before you calculate anything.
- 1Identify the main product and the by-product. Note their units and the total joint cost incurred up to the split-off point.
- 2Read how the question wants the by-product treated: credit to profit and loss, or deduct from main product cost.
- 3Check whether the by-product needs further processing. If yes, list the extra processing cost, selling cost and any profit margin.
- 4Compute the by-product value. If sold as it is, it is sales value less selling cost. If processed further, use the reversal cost (NRV) method and deduct a normal profit only if one is given.
- 5Apply the value. Either deduct it from the joint cost, or carry it to profit and loss as other income.
- 6Divide the net cost by units of the main product to get cost per unit.
- 7Compute profit or selling price if asked, and state the answer with units and rupee sign.
Quickest way: Work backwards from the by-product's selling price
When to use it: Use this in MCQs and in written answers where the by-product needs further processing or a profit margin is given.
- MCQs: write the by-product sales value, subtract the costs after split-off, and subtract the profit if given. That is the credit.
- Subtract the credit from the joint cost. Divide by main product units only.
- Eliminate options that divide by total units or that ignore the extra processing cost.
- Written answer: use a small statement. Show total joint cost, less by-product credit, net cost, units, cost per unit. Show the by-product working as a separate note so you earn step marks.
- Always state the treatment you followed in one line, for example 'By-product income credited to cost of main product'.
Common mistakes in Accounting Treatment of By-Products
Crediting the full selling price of a by-product that needs further processing.
Students see 'sales value' and stop there.
Fix: Deduct post-split-off processing cost, selling cost and any profit margin before crediting.
Dividing the net cost by total units, including by-product units.
Students treat all outputs as one pool.
Fix: Divide only by main product units, because the by-product value is already deducted.
Deducting normal profit when the question gives none.
Students memorise the reversal formula with profit and apply it blindly.
Fix: Deduct profit only if a margin is stated. Otherwise use sales value less costs.
Adding the by-product income to sales and also deducting it from cost.
Confusion between the two treatments.
Fix: Choose one. Either cost reduction or other income, never both.
Allocating joint cost to the by-product when the question says it is a by-product.
Students mix it up with joint products.
Fix: Do not apportion joint cost to a by-product. Only costs after split-off belong to it.
Worked examples
Example 1
A process produces 2,000 units of main product at a total cost of ₹1,60,000. It also yields 400 units of a by-product that sells at ₹20 per unit, with no further processing. Selling cost of the by-product is ₹1,000. Find the cost per unit of the main product if the by-product value is deducted from the main product cost.
Show the solution
- By-product sales = 400 × ₹20 = ₹8,000.
- Less selling cost = ₹1,000, so credit = ₹7,000.
- Net cost of main product = ₹1,60,000 − ₹7,000 = ₹1,53,000.
- Cost per unit = ₹1,53,000 ÷ 2,000 = ₹76.50.
Answer: Cost per unit of the main product is ₹76.50.
Example 2
A process incurs joint cost of ₹2,40,000 and gives 3,000 units of main product and 500 units of a by-product. The by-product is processed further at ₹4 per unit, and selling expenses are ₹2 per unit. It sells at ₹30 per unit. A normal profit of ₹5 per unit is required on the by-product. Find the cost per unit of the main product using the reversal cost method.
Show the solution
- Credit per unit of by-product = ₹30 − ₹4 − ₹2 − ₹5 = ₹19.
- Total credit = 500 × ₹19 = ₹9,500.
- Net cost of main product = ₹2,40,000 − ₹9,500 = ₹2,30,500.
- Cost per unit = ₹2,30,500 ÷ 3,000 = ₹76.83 (rounded to two decimals).
Answer: Cost per unit of the main product is about ₹76.83.
Exam tips
- Underline the words 'credited to profit and loss' or 'deducted from cost'. The whole answer depends on them.
- If a profit margin or further processing cost is given, the question is testing the reversal cost method.
- Show the by-product working separately. Even if the final figure is wrong, you can earn step marks.
- In cost sheet questions, write the by-product credit as a separate line before the cost per unit.
Practice questions from Joint Products and By Products
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- In a joint-product process, costs incurred on a product after the split-off point, for example to refine or finish it, are known as:
- In a chemical plant, a single process yields joint products P and Q. At the split-off point, the joint cost is apportioned using the net rea…
- Kaveri Foods processes a joint process costing ₹5,00,000 and yields 10,000 kg of main product M and a by-product B of 1,000 kg. By-product B…
Accounting Treatment of By-Products in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Accounting Treatment of By-Products: frequently asked questions
What is the difference between a by-product and a joint product?
A joint product has significant sales value and is a main aim of the process. A by-product has small value and arises incidentally. Joint cost is apportioned to joint products but not to by-products.
When is the reversal cost method used?
It is used when the by-product needs further processing after split-off. You start from its selling price and subtract the later costs and any normal profit. The balance is credited to the main product.
Is the reversal cost method the same as NRV?
Yes. The reversal cost method is the NRV-based method of valuing a by-product. Both work back from the selling price by deducting further processing and selling and distribution costs. Deduct a normal profit as well only where the question gives one.
Should by-product income be shown in the cost sheet?
Yes, if the question asks for it to reduce cost, show it as a deduction before arriving at the net cost. Otherwise show it as other income in profit and loss.
Do I deduct selling expenses of the by-product?
Deduct them when they are given as separate costs of the by-product. This gives the net value that actually benefits the main product.