10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
Community
Ask a Question
Write a Blog Post
Login
Sarvottam Darshan
February 1, 2018 | 7 minute read
Co-product and by-product costing
in process industry
Follow
 1  4  7,165
Executive Summary
 Like
 RSS Feed
Product costing is the process of recording and allocating expenses, which are
incurred in the
process of producing and selling a product, to the respective products. It is done
to enable the
company to valuate the inventory and for various internal and external reporting
requirements.
Product costing in process industry is typical and challenging due to the
simultaneous production
of more than one product from common inputs using common initial process. It
is an intensely
debated issue in global accounting and economists’ forums. This white paper
gives a perspective
on product costing in process industry and the SAP features available to enable
the same. The
initial section of the paper discusses the standard methods of cost
apportionment. A typical
process industry scenario with a possible costing model is discussed to exemplify
the process.
We use cookies and similar technologies to give you a better experience, improve performance, analyze traffic, and to personalize
The discussion is then followed by an approach that can be taken to map the
content. By continuing to browse this website you agree to the use of cookies. For more information on how this website uses
costing
modelofincookies, please select “More Information.”
cookies, please select “Privacy Policy.”
To opt-out
SAP.
Accept Cookies
Privacy Policy | Powered by:
More Information
Product Costing in Process Industry –SAP Perspective
Process industry across the globe is faced with the challenge of costing jointproducts (Co-products) which are getting produced simultaneously in the
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
1/8
10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
process using the same inputs. The processing plant in such cases is like a black
box and there are usually no fixed formulae to represent the changes happening
inside. There may be multiple outputs that the plant produces; a couple of them
may be the main revenue generating products (Joint-products/Co-products)
while there may be others which are incidental to the process(by-products)
and may not be significant revenue generators. The model of costing the byproducts and apportioning cost among the joint products varies from
organization to organization based on the governing principles and standards of
costing.
I.Standard Cost Apportionment Practices
The practice of product costing is governed by a set of principles and standards
which need due revisit before any discussion on the subject. These standards and
principles give us the perspective and the battery limits within which the costing
model has to be designed. Briefly, the practices involved are as mentioned below:
· By-products can be cost at their net realization value i.e the cost of by-products
is equal to their selling price.
· The practices of cost apportionment among the joint-products are as
summarized below:
a) Market Value Bases: Cost allocations are made based on the individual
product’s ability
to absorb, as indicated by the sales prices. Higher the selling price higher will be
the cost
apportioned to it.
Ex: If Rs.100 has to be apportioned between two joint products and the selling
price ratio for the products is 6:4 then the cost apportioned to the first joint
product is Rs.60 and that of the other is Rs.40 as per their selling price ratio.
b) Physical Unit Bases: costs are allocated to individual products on some
physical measurement basis, viz. weight, volume, or some other common unit
used to measure output. This is applicable only when the physical units of
measurements are same or inter-convertible.
Ex: If Rs.100 has to be apportioned between two joint products and the volume
ratios for the two products is 3:7 then the cost apportioned to the first joint
product is Rs.30 and that of the other is Rs.70 as per their weight ratio.
c) Techno Commercial factor evaluation Base: More than one factor may play a
role in the incurrence of joint costs. In such case, the weighted average of the key
evaluators can be taken as a base.
Ex: In the caustic soda industry, the primary process, where the three products
occur: Caustic, Chlorine and Hydrogen, a stoichiometric ratio of the two products
is used for separating the costs
We use cookies and similar technologies to give you a better experience, improve performance, analyze traffic, and to personalize
content. By continuing to browse this website you agree to the use of cookies. For more information on how this website uses
d) Cost Drivers as a Base: Cost drivers used in activity based costing can be used
cookies, please select “Privacy Policy.” To opt-out of cookies, please select “More Information.”
as a logical basis for cost allocation.
Ex: : If two products A and B are produced using a total of 25 Kw of energy and as
Accept Cookies
More Information
per standards the energy consumption per unit of output for A and B are 20 Kw
Privacy Policy | Powered by:
and 5Kw respectively then the cost is allocated as per the calculations shown
below (assuming 1 unit each of products A and B are produced)
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
2/8
10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
III. Process Industry Scenario
A typical process industry consists of a mother plant which takes in the raw
material (Raw Mat A) along with some chemicals and utilities and processes it to
produce two or more joint/co-products (Co-prod B, Co-prod C). The co-products
are further processed in respective processing plants to produce finished goods
(FG B,FG C). The mother plant also produces some incidental/by-products (Byprod D, By-prod E) along with the coproducts. These by-products can be further
processed in their respective processing units to produce finished goods, further
by-products (By-prod D2) and Recyclable materials. The figure below represents
a typical scenario.
IV. Proposed Costing Model
The process industry scenario discussed above puts up a couple of challenging
We use cookies and similar technologies
you a better experience,
improvewith
performance,
traffic,
to personalize
issues to
togive
be addressed.
The key issues
regards analyze
to costing
inand
a process
content. By continuing to browse this
website
you
agree
to
the
use
of
cookies.
For
more
information
on
how
this
website
uses
industry are:
cookies, please select “Privacy Policy.” To opt-out of cookies, please select “More Information.”
Privacy Policy | Powered by:
· Fluctuating raw material costs · Apportioning cost between Co-products ‘B’ and
‘C’
Cookies
More
Information
· Costing by-products · Costing RecycledAccept
materials
In light of the
practices
discussed above, a possible costing model for such a scenario can be as
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
3/8
10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
discussed below. The cost calculations are done as a back flush i.e the last item
gets cost first and then the calculations move backwards:
All costs must be calculated per unit of the product.
Recyclable materials cost can be a logical equation. In the scenario discussed
above let’s
assume that the calorific value of the recyclable material is same as that of
Raw material ‘A’. In
such a situation the cost of the recyclable material is treated same as that of
raw material A.
Saleable By-products cost = Net realization Value of the by-product = Selling
price of byproduct-( further processing cost administrative expenses + selling
and distribution expenses)
Cost of by-product E1 = NR. of E1 = Rs.20/Kg (Say)
Cost of by-product D3 = NR. of D3 = Rs.20/Kg (Say)
Cost of by-product D1 = NR. of D1 = Rs.10/Kg (Say)
Intermediary by-products cost = (Cost of the saleable by-product from the
respective plant –
processing cost of the plant ) / units of intermediary by –product consumed
Cost of by-product D2 = (Cost of producing D3- processing cost of plant D2)/
Quantity of D2 used =
(10-5)/0.5 = Rs. 10/Kg
In a similar fashion the cost of other intermediary by-products can be
calculated as shown in the figure below.
Cost of by-product D = Rs.20/Kg
Cost of by-product E = Rs.16/Kg
The cost of by-products coming out of the mother plant is subtracted
(credited) from the total cost of production at the mother plant. This gives the
cost to be apportioned between the co-products. Thus,Cost to be apportioned
between Co-products B and C = {(150+8)-(10+8)}= Rs. 140
The total cost after crediting by-product cost is apportioned between B and C
in the ratio of their selling price.
Assuming the selling price ratio B:C = 1.3:1.5. Thus the cost apportioned is as
follows:
Cost of Co-product B = 65
Cost of Co-product C = 75
Assuming 2 kg of B and 1 kg of C are produced the unit cost then becomes
Cost of Co-product B = Rs.32.5/Kg
Cost of Co-product C = Rs.75/Kg
Cost of FG B= cost of Co-product B+ further processing cost = 32.5+1=
Rs.33.5/kg
and Cost of FG C= cost of Co-product C+ further processing cost = 75+2=
We use cookies and similar technologies to give you a better experience, improve performance, analyze traffic, and to personalize
Rs.77/kg
content. By continuing to browse this website you agree to the use of cookies. For more information on how this website uses
cookies, please select “Privacy Policy.” To opt-out of cookies, please select “More Information.”
Accept Cookies
More Information
Privacy Policy | Powered by:
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
4/8
10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
V. SAP Perspective
SAP provides features to map such complex models. The pre-requisite is to have
a very clear
understanding of the business process. The relevant SAP features applicable to
map the above scenario are discussed briefly as follows:
Define Costing Variant: It is a pre-requisite for product costing. The rules
governing the costing process have to be defined in the costing variant. It
includes the strategy for material valuation, activity valuation, overhead
calculations etc. The cost component structure maintained in the costing
variant helps to generate the result of the costing as per the desired format.
The costing sheet helps in determining the overhead for the product.
We use cookies and similar technologies to give you a better experience, improve performance, analyze traffic, and to personalize
By-product costing and Recyclable materials: SAP provides the feature of
content. By continuing to browse this website you agree to the use of cookies. For more information on how this website uses
“Without
structure”
calculations
to do a costing of products for
cookies, please select “Privacy Policy.”
To opt-outquantity
of cookies,
please select
“More Information.”
Privacy Policy | Powered by:
which no BOM exists. Such materials are cost based on equations as
discussed in the costing model section above. The “without
Accept Cookies
More Information
quantity structure” feature in SAP works like a worksheet where the
respective calculations can be done based on the SAP standards. The cost
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
5/8
10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
thus calculated can be then updated to the respective products. The cost of
by-products and recyclable costs should credit back to the cost of leading coproduct. These are maintained as negative quantities in BOM for leading coproduct.
Co-product costing: SAP provides the following features to cost co-products
a) Equivalence numbers for Co-products have to be maintained in material
master of the coproducts to help distribute the cost between the coproducts (Ex:S.P. Ratio B:C:1.3:1.5).
b) “With quantity structure” calculations feature of SAP is used to do the
cost calculations.
The “with quantity structure” process uses the BOM
and routing of the material as per the
rules of costing variant to do cost
calculations. Joint product is also maintained as negative
quantity
in BOM of leading co-product to credit back its cost to the leading co-product.
Each cost calculation is followed by a cost update process in SAP. The update
process assures that the latest cost gets updated in the respective material
masters. The latest costs are then used to valuate inventory.
SAP provided numerous reports with extensive details on the costing process.
This assures further analysis and audit trails
Conclusion / Summary
Product costing in SAP demands a detailed understanding of the business
process and a strong integration with other modules. SAP provides elaborate
process to map complex costing models. The key therefore is to understand the
business process.
References
1) http://help.sap.com
2) Monograph on Joint and By-products Costing-ICAI Publications-2005
3) http://www.iasplus.com
We use cookies and similar technologies to give you a better experience, improve performance, analyze traffic, and to personalize
content. By continuing to browse this website you agree to the use of cookies. For more information on how this website uses
cookies, please select “Privacy Policy.” To opt-out of cookies, please select “More Information.”
Accept Cookies
Privacy Policy | Powered by:
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
More Information
Alert Moderator
6/8
10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
Assigned tags
FIN Product Cost Planning
FIN Controlling
Co-product costing
Equivalence numbers
Joint product costing
process industry

Similar Blog Posts
Accelerators of SAP Product costing (CO-PC) design
By Donatas Ratkevicius Feb 13, 2019
Auxiliary Cost Component Structure with Primary Cost Component Split (Material Cost-Dlv Cost+ Processing
Cost) in Product Cost Estimate- Part 1
By Mansoor Khan Jun 22, 2020
Yearly Standard Cost Roll for Multiple Plants
By Meena Godavari Apr 23, 2018

Related Questions
"Co-Product" in std cost estimate and "Co-Product" in production order
By Saad Sarwar Husain Oct 19, 2018
co-product in many boms, How system pick up a bom for costing in CK11N?
By RONALD CAPCHA MILLA Mar 12, 2018
Costing of stock transfer product
By Sundar Krishna Silla Nov 28, 2019
We use cookies and similar technologies to give you a better experience, improve performance, analyze traffic, and to personalize
content. By continuing to browse this website you agree to the use of cookies. For more information on how this website uses
cookies, please select “Privacy Policy.” To opt-out of cookies, please select “More Information.”
1 Comment
Accept Cookies
You
Privacy Policy | Powered by:
More Information
must be Logged on to comment or reply to a post.
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
7/8
10/6/21, 3:03 PM
Co-product and by-product costing in process industry | SAP Blogs
dhaval GALA
April 4, 2019 at 5:42 am
Thankyou so much Sarvottam Darshan
Like 0 | Share
Find us on
Privacy
Terms of Use
Legal Disclosure
Copyright
Trademark
Cookie Preferences
Newsletter
Support
We use cookies and similar technologies to give you a better experience, improve performance, analyze traffic, and to personalize
content. By continuing to browse this website you agree to the use of cookies. For more information on how this website uses
cookies, please select “Privacy Policy.” To opt-out of cookies, please select “More Information.”
Accept Cookies
More Information
Privacy Policy | Powered by:
https://blogs.sap.com/2018/02/01/co-product-and-by-product-costing-in-process-industry/
8/8