A to Z Costing Knowledge Glossary — Letter B
Investopedia-style costing concepts explained with formulas, practical examples, comparisons, and exam-focused teaching tips.
1 Backflush Costing
| Category | Costing Methodology (JIT) |
|---|---|
| Best Used In | Lean manufacturing, Just-in-Time environments |
| Key Formula | No standard formula; trigger-point based |
| Exam Importance | Medium |
Backflush Costing is a simplified costing system that delays recording of costs until finished goods are completed, then works backwards to assign costs to inventory and cost of goods sold.
It is a post-production costing method used in JIT environments; costs are “flushed back” after completion, reducing detailed work-in-process tracking.
- Lean manufacturing and JIT systems
- Low inventory environments where WIP is minimal
- Simplifying accounting for high-volume repetitive production
In a JIT plant, raw materials are received and immediately used; there is little WIP. When units are completed, raw material and conversion costs are assigned directly to finished goods and then to COGS, bypassing detailed WIP tracking.
A factory produces 1,000 units. Raw material cost ₹50,000 and conversion cost ₹30,000 are incurred. At completion, the journal entry debits Finished Goods ₹80,000 and credits Raw Materials ₹50,000 and Conversion Costs ₹30,000. No WIP account is used.
- Identify trigger points (e.g., when goods are completed or sold).
- Accumulate all production costs incurred during the period.
- At trigger point, allocate total costs to Finished Goods and COGS based on units.
- No WIP tracking; any difference is expensed or adjusted.
- Simplifies accounting but requires accurate production data.
| Backflush vs. Traditional Job/Process Costing | Traditional tracks costs through WIP continuously; backflush eliminates WIP and assigns costs only at completion. |
|---|---|
| Backflush vs. JIT | JIT is the production philosophy; backflush costing is the accounting method suited to JIT. |
2 Base Stock Method
| Category | Inventory Valuation |
|---|---|
| Best Used In | Industries with stable minimum stock levels |
| Key Formula | Base Stock at Fixed Cost + Excess at Current Cost |
| Exam Importance | Low |
Base Stock Method is an inventory valuation method where a minimum level of inventory (base stock) is always valued at a fixed original cost, and any excess is valued using FIFO or LIFO.
This method treats a base stock as a permanent asset carried at historical cost; only inventory above the base is valued using other methods.
- Industries requiring constant minimum stock (e.g., oil refining, chemicals)
- Valuing stock when prices fluctuate significantly
A company maintains a base stock of 1,000 units as a permanent cushion. This base is always valued at its original purchase cost. Any inventory above 1,000 units is valued using current cost methods (FIFO/LIFO) to reflect recent price changes.
Base stock 1,000 units @ ₹10 = ₹10,000 fixed. Current stock is 1,500 units. The extra 500 units are valued at latest purchase price ₹12 = ₹6,000. Total inventory value = ₹16,000.
- Determine the base stock quantity and its fixed cost.
- Count actual inventory on hand.
- Calculate excess units = actual − base stock.
- Value excess using chosen method (FIFO/LIFO/weighted average).
- Sum base + excess values for total inventory valuation.
| Base Stock vs. FIFO | FIFO values entire inventory at latest costs; Base Stock keeps a fixed portion at original cost and only excess at FIFO. |
|---|---|
| Base Stock vs. LIFO | Similar principle but LIFO values excess at oldest costs, while FIFO uses latest; Base Stock can be combined with either. |
3 Batch Costing
| Category | Costing Method |
|---|---|
| Best Used In | Pharmaceuticals, garments, bakeries, engineering components |
| Key Formula | Batch Cost per Unit = Total Batch Cost / Units in Batch |
| Exam Importance | High |
Batch Costing is a costing method used when products are manufactured in identifiable batches or lots, where costs are accumulated for each batch separately.
It is a variation of job costing applied to groups of identical units produced together as a batch, and cost per unit is obtained by dividing total batch cost by number of units.
- Pharmaceutical industry (tablets, capsules in batches)
- Garment manufacturing (batch of same design)
- Bakery products, footwear, electronic components
A manufacturer produces a batch of 500 identical shirts. All direct materials, labour, and overhead for that batch are accumulated separately. The total cost is divided by 500 to get cost per shirt, which is used for pricing and inventory valuation.
Batch of 500 shirts incurs: Material ₹60,000, Labour ₹30,000, Overheads ₹10,000. Total Batch Cost = ₹1,00,000. Cost per shirt = ₹1,00,000 / 500 = ₹200.
- Identify the batch and its quantity.
- Accumulate all direct materials for the batch.
- Accumulate direct labour and direct expenses.
- Apportion/allocate overheads to the batch.
- Sum total batch cost and divide by batch size for unit cost.
| Batch Costing vs. Job Costing | Job costing is for a single unique order; batch costing groups similar units into a batch and then finds unit cost. |
|---|---|
| Batch Costing vs. Process Costing | Process costing is for continuous mass production; batch costing for discrete batches within a job-order environment. |
4 Bill of Materials (BOM)
| Category | Material Planning Document |
|---|---|
| Best Used In | Production planning, standard costing, material requisitioning |
| Key Formula | No formula — it’s a structured list |
| Exam Importance | Medium |
A Bill of Materials (BOM) is a comprehensive list of all materials, components, and quantities required to manufacture a product.
BOM is a document specifying the exact materials and their quantities needed for a job or product, used for material planning and costing.
- Material requisitioning and procurement
- Standard costing and variance analysis
- Production planning and inventory control
When a company receives an order for 100 chairs, the BOM tells the production planner exactly how much wood, screws, polish, etc., to order and issue from stores.
For one chair: Wood 10 kg, Screws 20 pcs, Polish 0.5 litre, Fabric 1.5 meters. The BOM would list these items and quantities, and for 100 chairs multiply accordingly.
- Identify all components required to make one unit.
- Specify quantity of each component per unit.
- Include sub-assemblies if any (multi-level BOM).
- Use BOM to create standard material cost per unit.
- Extend BOM for actual production quantity to get total material requirement.
| BOM vs. Material Requisition Note | BOM lists all materials for a product; a requisition note is used to draw specific materials from stores for a particular job/batch. |
|---|---|
| BOM vs. Standard Cost Card | Standard cost card includes labor and overhead rates; BOM focuses only on materials and quantities. |
5 Bin Card
| Category | Store Record |
|---|---|
| Best Used In | Inventory control, preventing stockouts |
| Key Formula | Opening + Receipts − Issues = Closing Balance |
| Exam Importance | Medium |
A Bin Card is a store record maintained at the bin or shelf to record quantities of materials received, issued, and balance on hand.
A quantitative record (not values) of stock movements for a specific item of material, kept physically near the stock.
- Tracking physical stock levels in real-time
- Preventing stockouts and overstocking
- Reconciling with stores ledger for accuracy
A storekeeper records every receipt and issue on the bin card attached to the shelf. This gives immediate visible information about how much stock is physically available without checking the ledger.
On a bin card for steel rods: Opening balance 100 units, Receipt 200 units, Issue 150 units. Closing balance = 100 + 200 − 150 = 150 units. The bin card shows only quantities, not values.
- Record opening balance for the period.
- Enter all receipts with quantity.
- Enter all issues with quantity.
- Calculate closing balance after each transaction.
- Periodically reconcile with stores ledger for accuracy.
| Bin Card vs. Stores Ledger | Bin Card records quantities only and is kept at the bin; Stores Ledger records both quantity and value, maintained in the accounts department. |
|---|---|
| Bin Card vs. Perpetual Inventory | Perpetual inventory is a system of continuous stock verification; bin card is a tool within that system. |
6 Bonus Scheme
| Category | Labour Costing / Incentive Plan |
|---|---|
| Best Used In | Motivating workers, improving productivity |
| Key Formula | Varies: Halsey, Rowan, Taylor plans |
| Exam Importance | High |
A Bonus Scheme is a system of paying workers extra compensation based on performance, often over and above basic wages, to incentivize productivity.
Bonus schemes are incentive plans that reward employees for output or time saved, such as Halsey, Rowan, Taylor, etc.
- Labour cost control
- Motivation of workers to achieve higher productivity
- Reducing idle time and increasing efficiency
A factory implements a Halsey 50% plan. A worker completes a job in 8 hours against standard time of 10 hours. The worker gets basic wages for 8 hours plus 50% bonus for the 2 hours saved.
Standard time = 10 hrs, Actual time = 8 hrs, Wage rate = ₹50/hr. Under Halsey 50%: Bonus = 50% of (10-8) × 50 = ₹50. Total earnings = (8 × 50) + 50 = ₹450.
Total Earnings = (Actual Hours × Rate) + (50% × Time Saved × Rate)
Rowan Plan
Bonus = (Time Saved / Standard Time) × Actual Hours × Rate
- Determine standard time for the job.
- Record actual time taken by worker.
- Compute time saved = standard − actual (if positive).
- Apply the scheme’s bonus formula (e.g., Halsey 50% or Rowan).
- Add bonus to actual wages to get total earnings.
| Halsey vs. Rowan Plan | Halsey gives a fixed percentage (usually 50%) of time saved; Rowan gives bonus in proportion to time saved to standard time, resulting in lower bonus for large time savings. |
|---|---|
| Bonus Scheme vs. Piece Rate System | Piece rate pays per unit produced; bonus schemes pay base wage plus bonus for time saved. |
7 Bottleneck
| Category | Throughput Accounting / Constraint Management |
|---|---|
| Best Used In | Capacity planning, process improvement |
| Key Formula | Throughput = Rate of bottleneck resource |
| Exam Importance | Medium |
A Bottleneck is a resource or process step whose capacity is less than the demand placed on it, thereby constraining the overall throughput of the system.
In costing and TOC, bottleneck is the limiting factor that determines the maximum output rate of the entire process.
- Throughput accounting and Theory of Constraints
- Capacity planning and scheduling
- Process improvement and resource allocation
A factory has two machines. Machine A can process 10 units/hour, Machine B 8 units/hour. The entire line cannot produce faster than 8 units/hour because Machine B is the bottleneck. Management focuses on improving Machine B or balancing the line.
Machine A capacity = 10 units/hr, Machine B = 8 units/hr. Bottleneck = Machine B. System output = 8 units/hr. If demand is 12 units/hr, shortage of 4 units/hr exists due to bottleneck.
- Identify all process steps and their capacities.
- Find the step with lowest capacity relative to demand.
- That step is the bottleneck.
- System throughput equals bottleneck capacity.
- Improve bottleneck to increase overall throughput.
| Bottleneck vs. Constraint | Constraint is broader; bottleneck is a physical resource constraint. TOC focuses on managing constraints. |
|---|---|
| Bottleneck vs. Idle Capacity | Idle capacity is unused capacity; bottleneck is fully utilized but insufficient to meet demand. |
8 Break-Even Analysis
| Category | Cost-Volume-Profit Analysis |
|---|---|
| Best Used In | Profit planning, sensitivity analysis |
| Key Formula | Required Sales = (FC + Desired Profit) / Contribution per unit |
| Exam Importance | Very High |
Break-Even Analysis is the study of relationship between cost, volume, and profit to determine the level of activity needed to cover costs and earn target profit.
A broader tool that uses BEP to analyze profit at different activity levels, including target profit, margin of safety, and impact of changes in variables.
- Target profit planning
- Sensitivity analysis for price, cost, volume changes
- Decision making on product mix and expansion
Management wants to earn a profit of ₹1,00,000. Fixed costs ₹2,00,000, selling price ₹50/unit, variable cost ₹30/unit. Contribution per unit = ₹20. Required units = (2,00,000+1,00,000)/20 = 15,000 units. Break-even analysis helps decide feasibility.
Fixed costs ₹2,00,000, SP ₹50, VC ₹30. Desired profit ₹1,00,000. Required sales units = (2,00,000+1,00,000)/(50-30) = 3,00,000/20 = 15,000 units. Required sales value = 15,000 × 50 = ₹7,50,000.
Required Sales (₹) = Fixed Costs + Desired ProfitP/V Ratio
- Compute contribution per unit = Selling price − Variable cost.
- Compute P/V ratio = Contribution / Sales.
- Add desired profit to fixed costs.
- Divide by contribution per unit (or P/V ratio) to get required sales.
- Interpret whether the required volume is achievable given market demand.
| Break-Even Analysis vs. Break-Even Point | BEP is a specific point of zero profit; Break-Even Analysis is the broader technique using BEP and related measures. |
|---|---|
| Break-Even Analysis vs. Cost-Volume-Profit Analysis | Break-even analysis is a subset of CVP; CVP includes multi-product and more complex scenarios. |
9 Break-Even Chart
| Category | Graphical CVP Tool |
|---|---|
| Best Used In | Visual communication, comparing cost structures |
| Key Formula | No formula — graphical representation |
| Exam Importance | Medium |
A Break-Even Chart is a graphical representation of cost-volume-profit relationships showing BEP as intersection of total cost and total sales lines.
A chart plotting sales revenue, total cost, fixed cost lines against volume to visually depict break-even point and profit/loss regions.
- Visual communication to management
- Comparing different cost structures or products
- Teaching and understanding CVP relationships
Management wants to see at a glance how volume affects profit. The chart shows fixed cost line horizontal, total cost line starting at fixed cost, sales line from origin. Where total cost and sales lines intersect is BEP. Profit region is to the right, loss to the left.
Draw chart with volume on X-axis (0 to 15,000 units), cost/revenue on Y-axis. Fixed cost ₹2,00,000 horizontal. Total cost starts at ₹2,00,000 and rises with slope = variable cost per unit ₹30. Sales line starts at 0 with slope = selling price ₹50. Intersection at 10,000 units is BEP.
- Determine fixed cost, variable cost per unit, and selling price.
- Draw X-axis (volume) and Y-axis (costs/revenue).
- Plot fixed cost as horizontal line.
- Plot total cost line: starts at fixed cost, increases by variable cost per unit.
- Plot sales line: starts at origin, slope = selling price. Intersection is BEP.
| Break-Even Chart vs. Profit-Volume Chart | Break-even chart plots costs and revenue; P/V chart plots profit directly against volume. |
|---|---|
| Break-Even Chart vs. Contribution Graph | Contribution graph shows contribution at different volumes; break-even chart shows total cost and revenue. |
10 Break-Even Point (BEP)
| Category | Cost-Volume-Profit Analysis |
|---|---|
| Best Used In | Pricing decisions, risk assessment, target profit planning |
| Key Formula | BEP (units) = Fixed Costs / Contribution per unit |
| Exam Importance | Very High |
Break-Even Point is the level of sales at which total revenue equals total costs, resulting in zero profit or loss.
BEP is the point where a business neither earns profit nor incurs loss; contribution just covers fixed costs.
- Determining minimum sales volume needed to avoid loss
- Pricing decisions and margin of safety calculation
- Risk assessment for new products or ventures
A company with fixed costs ₹2,00,000, selling price ₹50/unit, variable cost ₹30/unit needs to sell at least 10,000 units to break even. If it sells less, it incurs loss; more, profit.
Fixed costs ₹2,00,000, SP ₹50, VC ₹30. Contribution per unit = 50-30 = ₹20. BEP units = 2,00,000/20 = 10,000 units. BEP sales value = 10,000 × 50 = ₹5,00,000.
BEP (₹) = Fixed CostsP/V Ratio
- Compute contribution per unit = Selling price − Variable cost.
- Compute P/V ratio = Contribution / Sales.
- Divide total fixed costs by contribution per unit (or P/V ratio).
- Interpret the result as the volume/value at which profit is zero.
- Use BEP to compute margin of safety = actual sales − BEP sales.
| BEP vs. Margin of Safety | BEP is the break-even level; margin of safety is the excess of actual sales over BEP. |
|---|---|
| BEP vs. Angle of Incidence | BEP is a point; angle of incidence is the angle at that point indicating profit growth rate. |
11 Budget
| Category | Planning & Control Tool |
|---|---|
| Best Used In | Planning, resource allocation, coordination |
| Key Formula | No single formula; budget-specific |
| Exam Importance | High |
A Budget is a quantitative financial plan for a future period, expressed in monetary terms, prepared in advance.
A budget is a predetermined statement of management’s intentions for a future period, covering revenues, expenses, cash, capital, etc.
- Planning future operations
- Coordinating departments
- Resource allocation and control
A company prepares a sales budget projecting 10,000 units at ₹50 each = ₹5,00,000. This drives production, material, and labor budgets.
Sales budget: 10,000 units × ₹50 = ₹5,00,000. Production budget: 10,000 units + desired ending inventory − beginning inventory.
- Set organizational objectives.
- Prepare sales budget first as principal budget factor.
- Prepare supporting budgets (production, materials, labor, overheads).
- Consolidate into master budget.
- Review and approve budget for implementation.
| Budget vs. Forecast | Budget is a plan with commitment; forecast is a prediction of what might happen, without commitment. |
|---|---|
| Budget vs. Standard Cost | Standard cost is per unit; budget is for total activity. Standards are used in budgets. |
12 Budget Centre
| Category | Responsibility Accounting |
|---|---|
| Best Used In | Decentralized control, performance evaluation |
| Key Formula | No formula |
| Exam Importance | Low |
A Budget Centre is a segment of the organization for which a separate budget is prepared and controlled, often corresponding to a responsibility centre.
A department, division, or function that has its own budget and is held accountable for performance against it.
- Responsibility accounting
- Decentralized control and decision making
- Performance evaluation of departments
The marketing department is a budget centre with its own expense budget. The marketing manager is responsible for controlling spending within that budget.
Marketing department budget centre has an annual budget of ₹10,00,000 for advertising, promotions, and salaries. Actual spending is compared each month to this budget to assess performance.
- Identify organizational segments with identifiable costs/revenues.
- Assign a manager responsible for each segment.
- Prepare a separate budget for each segment.
- Track actual performance against budget.
- Hold manager accountable for variances.
| Budget Centre vs. Cost Centre | Cost centre is a responsibility area for costs only; budget centre may include revenues and profits (if profit centre). |
|---|---|
| Budget Centre vs. Responsibility Centre | Budget centre is a specific part of responsibility accounting; responsibility centre is broader (cost, revenue, profit, investment). |
13 Budget Manual
| Category | Budgeting Policy Document |
|---|---|
| Best Used In | Standardizing budgeting process, training staff |
| Key Formula | No formula |
| Exam Importance | Low |
A Budget Manual is a formal document that lays down the policies, procedures, and responsibilities for budget preparation and control.
It is a handbook guiding all personnel involved in budgeting, covering organization, timetable, formats, and responsibility.
- Standardizing budgeting process
- Training new staff on budget preparation
- Clarifying roles and deadlines
A company’s budget manual specifies that sales budget is prepared first, then production, then others, with deadlines. It also includes forms and responsibility charts.
Budget manual states: “Sales budget due by 15th September; Production budget by 30th September; All budgets to be submitted to Budget Committee by 15th October.”
- Define budget period and timetable.
- Assign responsibilities to departments/individuals.
- Specify formats and forms to be used.
- Outline procedures for budget review and approval.
- Distribute to all budget centres and personnel.
| Budget Manual vs. Budget Committee | Budget committee is the body that oversees budgeting; manual is the rulebook that committee follows. |
|---|---|
| Budget Manual vs. Accounting Manual | Budget manual covers budgeting process; accounting manual covers accounting policies and procedures. |
14 Budget Variance
| Category | Budgetary Control |
|---|---|
| Best Used In | Performance measurement, management by exception |
| Key Formula | Actual Amount − Budgeted Amount |
| Exam Importance | High |
Budget Variance is the difference between actual results and budgeted amounts for a period, indicating whether performance is better or worse than planned.
A variance is the quantitative deviation from budget, which is analyzed to identify causes and take corrective actions.
- Performance measurement
- Management by exception reporting
- Identifying areas needing corrective action
A company budgeted sales of ₹5,00,000 but actual sales were ₹4,80,000. Sales variance = 4,80,000 − 5,00,000 = ₹20,000 adverse. Management investigates why sales fell short.
Budgeted material cost ₹2,00,000; actual ₹2,20,000. Variance = 2,20,000 − 2,00,000 = ₹20,000 adverse. Manager must analyze price and quantity causes.
(Positive may be favorable for revenue, unfavorable for cost.)
- Obtain actual results for the period.
- Obtain budgeted amounts for same period.
- Subtract budgeted from actual to get variance.
- Classify as favorable or adverse depending on context.
- Analyze causes and report significant variances.
| Budget Variance vs. Standard Cost Variance | Budget variance is total for a period; standard cost variance is per unit or for actual output using standard rates. |
|---|---|
| Budget Variance vs. Volume Variance | Volume variance is part of budget variance due to output level differences; budget variance includes all causes. |
15 Budgetary Control
| Category | Management Control System |
|---|---|
| Best Used In | Performance evaluation, cost control, responsibility accounting |
| Key Formula | Variance = Actual − Budget |
| Exam Importance | High |
Budgetary Control is the process of comparing actual results with budgeted figures, analyzing variances, and taking corrective action.
A system of management control using budgets as standards to measure performance and ensure that objectives are achieved.
- Performance evaluation of departments
- Cost control and reduction
- Responsibility accounting
A company compares actual sales vs budget monthly, finds variances, investigates causes, and adjusts operations to stay on track.
Budgeted production cost ₹3,00,000; actual ₹3,30,000. Variance adverse ₹30,000. Investigation shows higher raw material prices. Management negotiates with suppliers.
- Set budgets for all responsibility centres.
- Record actual performance continuously.
- Compare actual vs budget at regular intervals.
- Analyze variances (favorable/adverse, causes).
- Take corrective action to align with objectives.
| Budgetary Control vs. Standard Costing | Standard costing sets per-unit standards; budgetary control sets total budget for a period. Both compare actual vs plan. |
|---|---|
| Budgetary Control vs. Forecasting | Forecasting predicts; budgetary control plans and controls using budgets. |
16 Budgeted Cost
| Category | Budgeting |
|---|---|
| Best Used In | Standard setting, variance analysis |
| Key Formula | Budgeted Quantity × Budgeted Rate |
| Exam Importance | Medium |
Budgeted Cost is the estimated cost that is planned or expected for a particular activity, product, or department based on budget assumptions.
A predetermined cost derived from the budget, used as a benchmark for control.
- Standard setting for variance analysis
- Cost control and performance evaluation
- Budget preparation
Budgeted variable cost per unit is ₹30; if actual cost is ₹32, variance is adverse ₹2 per unit. Management investigates why.
Budgeted production 10,000 units, variable cost ₹30/unit. Budgeted variable cost = 10,000 × 30 = ₹3,00,000. Actual variable cost ₹3,20,000 => adverse variance ₹20,000.
- Determine budgeted output/activity level.
- Set budgeted rates per unit of resource.
- Multiply quantity by rate to get budgeted cost.
- Use as benchmark for actual cost comparison.
- Adjust budgets if assumptions change.
| Budgeted Cost vs. Standard Cost | Standard cost is a per-unit target; budgeted cost is total for planned activity. Standards feed into budgets. |
|---|---|
| Budgeted Cost vs. Actual Cost | Actual cost is incurred; budgeted cost is planned. Difference is variance. |
17 Burden (Overhead Burden)
| Category | Overhead Costing |
|---|---|
| Best Used In | Cost estimation, absorption costing |
| Key Formula | Burden Rate = Total Overhead / Total Activity Base |
| Exam Importance | Medium |
Burden is a term sometimes used to refer to overhead costs, especially indirect manufacturing costs that are “burdened” onto products.
Burden represents the total indirect costs (factory overheads) that must be absorbed by products through overhead absorption rates.
- Cost estimation and pricing
- Absorption costing and overhead allocation
- Departmental overhead rate setting
Total overhead burden ₹10,00,000; total labor hours 50,000; burden rate = ₹20 per labor hour. Each product is charged ₹20 for every labor hour it consumes.
Total factory overheads ₹10,00,000. Machine hours 20,000. Burden rate = 10,00,000 / 20,000 = ₹50 per machine hour. A job using 100 machine hours absorbs ₹5,000 overhead.
- Collect total indirect manufacturing costs.
- Choose an appropriate activity base (labor hours, machine hours, units).
- Compute burden rate = total overhead / total base.
- Apply burden rate to each product/job based on its usage of the base.
- Review and adjust rates periodically.
| Burden vs. Overhead Absorption Rate | Burden rate and overhead absorption rate are essentially the same concept; burden is an older term. |
|---|---|
| Burden vs. Direct Cost | Direct costs are traceable; burden is indirect and must be allocated. |
18 By-Product
| Category | Joint Product Costing |
|---|---|
| Best Used In | Chemical, oil refining, sugar, meat processing |
| Key Formula | Main Product Cost = Total Joint Cost − NRV of By-Product |
| Exam Importance | Medium |
A By-Product is a secondary product of relatively minor value that is produced incidentally during the manufacturing of the main product.
By-products emerge unavoidably along with the main product, have lower sales value, and are accounted for by crediting their net realizable value to the process cost.
- Chemical and oil refining industries
- Sugar production (molasses, bagasse)
- Meat processing (hides, bones)
In sugar production, molasses is a by-product. Its sale value is deducted from the total cost of producing sugar, thus reducing the cost of the main product.
Total joint cost of refining sugar = ₹10,00,000. Molasses (by-product) sold for ₹50,000. Net cost allocated to sugar = 10,00,000 − 50,000 = ₹9,50,000.
- Determine total joint cost of the process.
- Estimate net realizable value of by-product (sales value minus further processing cost).
- Deduct NRV of by-product from total joint cost.
- Remaining cost is assigned to main product(s).
- Alternatively, credit by-product sales to process account.
| By-Product vs. Joint Product | Joint products have significant sales value and equal importance; by-product has minor value and is incidental. |
|---|---|
| By-Product vs. Scrap | Scrap has no or very low value and is usually sold as waste; by-product has a recognizable saleable value. |
