Definition
A by-product is a secondary product that is generated incidentally during the production of the main product. Despite not being the primary focus of the production process, by-products often have some economic value and can be utilized or sold to add operational efficiency and profitability.
Examples
- Oil Refining: In the process of refining crude oil to produce petrol (main product), by-products such as lubricants, paraffin, and fuel oil are also produced.
- Meat Processing: During the processing of meat, by-products such as animal hides (used for leather), bones (for bone meal), and fats (for making soap) are created.
- Sugar Production: During the production of sugar from sugarcane, molasses is generated as a by-product.
Frequently Asked Questions (FAQs)
Q: What is the difference between a by-product and a joint product?
A: A joint product is one of two or more products that are of equal importance within a specific production process. In contrast, a by-product has secondary importance and is derived incidentally.
Q: How are by-products accounted for in financial statements?
A: By-products can be accounted for using several methods, such as the market value method, where they are valued at their net realizable value, or the cost allocation method, where the costs are allocated between main products and by-products based on a set criterion.
Q: How can by-products contribute to sustainability?
A: By-products can enhance sustainability by minimizing waste and allowing industries to make use of all inputs, thereby improving resource efficiency and reducing environmental impact.
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Main Product: The primary product of a manufacturing process, typically the product that drives the economic reason for the processing.
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Joint Products: Two or more products that are produced through a single production process that are of relatively equal importance and that cannot be produced separately.
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Process Costing: An accounting method used when there is mass production of similar products in a continuous flow of operations.
Online References
Suggested Books for Further Study
- “Cost Accounting: Planning and Control” by Adolph Matz, Milton F. Usry
- “Management and Cost Accounting” by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Accounting Basics: “By-Product” Fundamentals Quiz
### Which term defines a product that is generated incidentally during the production of another product?
- [x] By-Product
- [ ] Joint Product
- [ ] Main Product
- [ ] Process Product
> **Explanation:** A by-product is a secondary product generated incidentally during the production of the main product.
### What characterizes a joint product in a production process?
- [ ] It is less important than the main product.
- [x] It is one of several products of equal importance.
- [ ] It has no economic value.
- [ ] It is produced separately from the main product.
> **Explanation:** Joint products are produced simultaneously at their initial phase and have similar economic importance.
### How are by-products typically treated in cost accounting?
- [ ] They are ignored in cost calculations.
- [ ] They are treated as waste.
- [x] They are evaluated and often assigned a portion of the production costs.
- [ ] They are considered as part of overhead costs only.
> **Explanation:** By-products are evaluated and some cost allocation or recovery methods are often applied to account for their economic values.
### In the oil refining process, which is considered a by-product?
- [ ] Petrol
- [x] Lubricants
- [ ] Crude Oil
- [ ] Diesel
> **Explanation:** Lubricants are considered by-products in the refining process where petrol is the main product.
### What is a typical use of molasses, a by-product in sugar production?
- [ ] It is the main product.
- [x] It can be used as a sweetening agent and in the production of ethanol.
- [ ] It is discarded as waste.
- [ ] It is used to manufacture sugar directly.
> **Explanation:** Molasses, a by-product in sugar production, is often used in sweetening and producing ethanol.
### Which of these can be a by-product in meat processing?
- [ ] Processed meat
- [ ] Canned meat
- [ x] Animal hides
- [ ] Veterinary products
> **Explanation:** Animal hides are by-products in the process of meat production.
### What advantage do by-products offer in terms of sustainability?
- [ ] They have no specific advantage regarding sustainability.
- [ ] They contribute to operational waste.
- [x] They help in minimising waste and maximizing resource efficiency.
- [ ] They are reused within the main product cycle.
> **Explanation:** By-products contribute to sustainability by maximizing resource efficiency and reducing waste.
### Which method can be used to value by-products?
- [ ] Mixed-cost method
- [ ] Fixed-cost valuation
- [x] Market value method
- [ ] Zero-cost method
> **Explanation:** The market value method values by-products at their net realizable value.
### What consideration must be taken for a product to be classified as a by-product?
- [ ] Its utility for the main product.
- [ ] Exclusive production for profit.
- [x] It is an incidental result of the main production process.
- [ ] Its comparability with the main product.
> **Explanation:** A by-product is an incidental result of the main production process.
### Which entity benefits from the efficient utilization of by-products?
- [x] The production business
- [ ] Exclusively the end consumers
- [ ] Only the suppliers
- [ ] The waste management companies
> **Explanation:** The production business benefits from efficient utilization of by-products through increased resource efficiency and added profitability.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
