Accounting
ERP
Manufacturing
Process Manufacturing
Co-Product and By-Product Costing in Process Manufacturing
Last updated: October 8, 2026 · Independent guide · We do not sell rankings or coverage.
Co product costing assigns the shared cost of one production run to the two or more valuable products that come out of it. You first subtract the net realizable value of any by-products from the joint cost, then split what is left across the co-products on a physical basis (gallons, pounds, units) or on relative sales value. The method you choose changes product margins, period-end inventory values and what your ERP posts at batch completion.
The formulas and the journal entries
Every method starts from the same base. Net joint cost equals total joint cost up to the split-off point (the point where the products become separately identifiable) minus the net realizable value (NRV) of by-products. By-product NRV is the expected selling price less the costs to complete, haul and sell it.
- Physical units method: cost to product = net joint cost × (product’s output quantity ÷ total co-product output quantity).
- Relative sales value at split-off: cost to product = net joint cost × (product’s sales value at split-off ÷ total sales value at split-off).
- Net realizable value method: used when a co-product has no market at split-off. Cost to product = net joint cost × (final sales value less further processing costs ÷ the same total for all co-products). Costs incurred after split-off are then added only to the product that incurs them.
In the common approach below, the by-product enters inventory at NRV when produced and that amount reduces joint cost.
| Account | Debit | Credit | Note |
|---|---|---|---|
| Work in process, joint process | Joint cost | Costs up to split-off | |
| Raw materials; wages payable; applied overhead | Joint cost | Credited by source | |
| By-product inventory | By-product NRV | The by-product credit | |
| Work in process, joint process | By-product NRV | Reduces the cost left to allocate | |
| Finished goods, each co-product | Allocated share | One line per co-product | |
| Work in process, joint process | Net joint cost | Clears joint WIP |
A simpler alternative records nothing for the by-product at production and recognizes its proceeds when sold, either as a reduction of cost of goods sold or as other income. AccountingTools (no date shown; the site sells accounting courses) describes both presentations. Use it only when by-product volumes are immaterial, because it leaves joint cost overstated in co-product inventory.
Worked example: one batch, two co-products and a by-product
The figures below are an illustration, not data from any company. A plant runs one batch with $80,000 of raw material and $40,000 of labor and applied overhead, for a total joint cost of $120,000. At split-off the batch yields 6,000 gallons of Product A, 4,000 gallons of Product B and 1,000 gallons of by-product C.
Step 1: value the by-product. C sells for $2.00 a gallon, or $2,000, and hauling and selling costs are $500. NRV is $1,500, so net joint cost is $120,000 minus $1,500, or $118,500.
Step 2: allocate on physical units. A is 60% of the 10,000 co-product gallons and B is 40%. A receives $71,100 and B receives $47,400. Both carry the same unit cost of $11.85 a gallon.
Step 3: allocate on relative sales value at split-off. A sells for $15 a gallon ($90,000) and B for $40 a gallon ($160,000), for a total of $250,000. A’s share is 36%, or $42,660 ($7.11 a gallon). B’s share is 64%, or $75,840 ($18.96 a gallon).
| Illustration | Product A | Product B | Total |
|---|---|---|---|
| Sales value at split-off | $90,000 | $160,000 | $250,000 |
| Physical units: allocated cost | $71,100 | $47,400 | $118,500 |
| Physical units: gross margin | $18,900 (21.0%) | $112,600 (70.4%) | $131,500 |
| Relative sales value: allocated cost | $42,660 | $75,840 | $118,500 |
| Relative sales value: gross margin | $47,340 (52.6%) | $84,160 (52.6%) | $131,500 |
Total margin is the same under both methods; only its split changes. The physical method makes A look marginal and B look exceptional, which can push a sales team to drop A even though dropping it saves no joint cost. Relative sales value gives both products the same margin percentage at split-off.
Step 4: the NRV variant. If B instead needed $30,000 of further processing to sell for $200,000, its NRV would be $170,000 against A’s $90,000. A would receive $41,019 and B $77,481, and B’s finished cost would be $107,481.
Step 5: the entries, using relative sales value.
| Account | Debit | Credit | Note |
|---|---|---|---|
| Work in process, joint process | $120,000 | Batch costs to split-off | |
| Raw materials inventory | $80,000 | Material issued | |
| Wages payable and applied overhead | $40,000 | Conversion cost | |
| By-product inventory, C | $1,500 | 1,000 gal at NRV | |
| Work in process, joint process | $1,500 | By-product credit | |
| Finished goods, A | $42,660 | 36% of net joint cost | |
| Finished goods, B | $75,840 | 64% of net joint cost | |
| Work in process, joint process | $118,500 | Joint WIP now zero | |
| Accounts receivable | $2,000 | Later sale of C | |
| By-product inventory, C | $1,500 | Relieves inventory | |
| Cash | $500 | Hauling and selling costs paid |
The accounting and tax rules behind the allocation
IAS 2, paragraph 14, states the principle in the clearest published form: where conversion costs of each product are not separately identifiable, “they are allocated between the products on a rational and consistent basis,” for example on relative sales value at split-off or at completion. It adds that most by-products are immaterial and “are often measured at net realisable value and this value is deducted from the cost of the main product” (IAS 2 as published in Commission Regulation (EU) 2023/1803, August 13, 2023).
For federal income tax, uniform capitalization rules let you use “any other reasonable method to properly allocate direct and indirect costs among units of property produced,” provided the method is applied consistently and total capitalized costs do not differ significantly from a permissible method (26 CFR 1.263A-1(f)(4), eCFR, current as of October 6, 2026). Switching bases can be a change in accounting method for tax purposes, so ask your tax adviser first.
After allocation, each co-product is an ordinary inventory item. Under ASU 2015-11, inventory measured on FIFO or average cost is carried at the lower of cost and net realizable value, while LIFO and retail method inventory are outside that update (Journal of Accountancy, October 1, 2015). A physical-units allocation can push a low-value co-product above its NRV and force a write-down.
Common mistakes
- Allocating costs incurred after split-off. Further processing belongs only to the product that receives it.
- Using stale sales values. If your ERP stores fixed percentages, review them quarterly and keep the source prices.
- Treating a significant output as a by-product. A material output credited at NRV hides its own margin. Reclassify it as a co-product.
- Using the allocation for sell-or-process decisions. Joint cost is incurred either way. Compare only incremental revenue and incremental cost.
How to report it
On the balance sheet, co-products sit in finished goods at their allocated cost plus any further processing, and by-products held at NRV sit in inventory as a separate item or within finished goods. By-product proceeds appear either as a reduction of cost of sales or within other income, the same way every period. Your inventory policy note should state the costing basis, and naming the joint cost method helps auditors follow it.
If you run standard costs, the allocation percentages feed directly into product standards, so the variance review in our article on standard cost vs actual cost applies to yield and mix variances by co-product. The tests used for shared services cost allocation, a documented basis and a fixed review cycle, also help when plant managers dispute product margins.
How ERP and accounting systems automate it
The systems below differ mainly in how allocation weights are set and how by-products are valued. For a wider view of manufacturing ERP selection, see our guide to ERP software for manufacturing and production planning.
SAP S/4HANA. SAP’s course material says co-products carry negative quantities in the BOM and that process costs “are apportioned to co-products using the equivalence numbers” set in an apportionment structure, optionally by cost component. By-products are valued at output quantity times a price, which reduces the primary product’s cost (SAP Learning, no date shown). You maintain the equivalence numbers, so a relative sales value basis needs a process to keep them current.
Microsoft Dynamics 365 Supply Chain Management. Co-product cost allocation can be entered manually per co-product, or the Total Cost Allocation setting allocates costs proportionally based on quantities. By-products “typically have no inventory value” and instead add a cost burden to the batch order through five burden methods, including a recycled method that applies the by-product’s standard cost (Microsoft Learn, co-products unit, updated June 11, 2026; by-products unit, updated June 11, 2026; burden allocation unit, updated June 11, 2026). If you want an NRV credit, test the recycled method during design.
Oracle Fusion Cloud SCM. Oracle added multiple outputs to discrete manufacturing work definitions in update 24C, and release 24D adds analysis of rolled-up costs for co-products, with an example where the co-product receives 50% of the cost incurred up to the operation where it is yielded (Oracle 24D readiness note, no date shown). The note does not cover by-products, so confirm their treatment with Oracle before you commit.
Business Central with a partner app. STAEDEAN, which sells a Food Manufacturing and Distribution app for Business Central, documents a co-product and by-product feature that values each by-product at its defined standard cost, subtracts it from the production cost and splits the remainder among co-products using cost shares that default to equal (STAEDEAN, June 25, 2026). Update by-product standards when market prices change.
How we researched this
We reviewed the pages that rank for this term, including a finance software vendor’s glossary, an ERP user manual, SAP training content and an accounting reference site. We then checked the text of IAS 2, the federal tax regulation on cost allocation and each ERP vendor’s own documentation. All numbers in the worked example are illustrations.
Related guides
- Activity-Based Costing Software: When ABC Pays Off
- Absorption vs Variable Costing: GAAP Rules and ERP Reports
- Inventory Costing Methods: FIFO, Average, Standard, Specific
Frequently asked questions
What is the difference between a co-product and a by-product?
Co-products are the main outputs of a joint process, each with significant sales value, and they share the joint cost. A by-product is a secondary output with low value relative to the co-products. By-products are usually valued at net realizable value, and that value reduces the joint cost before it is allocated.
Should I use physical units or relative sales value?
Physical units are simpler and suit co-products with similar prices. Relative sales value suits products with very different prices, because it keeps margins comparable and lowers the risk of inventory write-downs.
Do the accounting rules require a specific co-product costing method?
No. IAS 2 paragraph 14 requires a rational and consistent basis and gives relative sales value as an example. The federal tax regulation on cost allocation likewise accepts any reasonable method applied consistently.
Do I need a process manufacturing ERP for co-product costing?
A few batches a month with stable outputs can be handled with a spreadsheet and a journal entry. With many formulas, frequent price changes or lot-level inventory, an ERP that posts the allocation at batch completion saves manual work at close.
Sources
- Commission Regulation (EU) 2023/1803, IAS 2 Inventories, paragraph 14, August 13, 2023.
- 26 CFR 1.263A-1, Uniform capitalization of costs, paragraph (f)(4), eCFR, current as of October 6, 2026.
- Journal of Accountancy, FASB simplifies inventory measurement guidance (ASU 2015-11), October 1, 2015.
- SAP Learning, Costing Co-Products (SAP sells S/4HANA), no date shown.
- Microsoft Learn, Coproducts (Microsoft sells Dynamics 365), updated June 11, 2026.
- Microsoft Learn, By-products, updated June 11, 2026.
- Microsoft Learn, Burden allocation, updated June 11, 2026.
- Oracle Fusion Cloud SCM 24D readiness, rolled-up costs for work definitions with multiple outputs (Oracle sells Fusion Cloud), no date shown.
- STAEDEAN, Co-Product/By-Product for Business Central (STAEDEAN sells the app), June 25, 2026.
- AccountingTools, Byproduct definition (the site sells accounting courses), no date shown.
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
