What are some best practices for managing and disposing of by-products?

1 Joint costs and by-product revenue

Joint costs are the costs that are incurred in producing two or more products from a common input, such as raw materials, labor, or overhead. For example, a dairy farm may incur joint costs in producing milk, cheese, and butter from the same milk. By-products are usually considered to be the products that have a relatively low sales value compared to the main products. For example, whey may be a by-product of cheese making. The challenge for cost accounting is how to allocate the joint costs among the main products and the by-products. One common method is to assign the joint costs to the main products based on their relative sales value, and then deduct the by-product revenue from the total joint costs. This reduces the cost of goods sold and increases the gross margin of the main products.

2 Inventory valuation and net realizable value

Another issue for cost accounting is how to value the inventory of by-products. By-products may have different degrees of marketability, depending on their quality, demand, and availability. Some by-products may be sold as they are, while others may require further processing or packaging. The inventory valuation method should reflect the net realizable value of the by-products, which is the estimated selling price minus the estimated costs of completion and disposal. For example, if a by-product can be sold for $10 per unit, but it costs $2 per unit to process and $1 per unit to dispose, then its net realizable value is $7 per unit. The inventory valuation method should also be consistent with the revenue recognition method. For example, if the by-product revenue is recognized at the time of production, then the inventory should be valued at zero. If the by-product revenue is recognized at the time of sale, then the inventory should be valued at net realizable value.

3 Disposal methods and environmental compliance

The final aspect of managing and disposing of by-products is to consider the environmental and legal implications. By-products may pose various risks to the environment and public health, such as pollution, contamination, or toxicity. Therefore, manufacturers should comply with the relevant regulations and standards for disposing of their by-products safely and responsibly. Some disposal methods include recycling, reusing, donating, selling, or incinerating the by-products. Each method has its own advantages and disadvantages, depending on the type, quantity, and quality of the by-products. For example, recycling may reduce waste and save resources, but it may also incur additional costs and require specialized facilities. Manufacturers should weigh the costs and benefits of each disposal method and choose the one that best suits their needs and goals.