How a Co-Product Differs from a By-Product
- by Jawad Akhtar, Head of SAP Delivery, AbacusConsulting
- February 24, 2012
Understand the difference between a co-product and a by-product in production processes. Walk through both options and see the pros and cons of each.
In addition to the main material made during the production process of semi-finished or finished goods, additional products often are produced. These additionally produced materials can either be used internally in other production processes or sold. They hold commercial value and add positively to the cost of goods manufactured.
Some companies are faced with the scenario that in addition to their main product range, they produce additional products, some of which hold significant financial value. These additional products are either classified as a co-product or a by-product.
While co-products are desirable due to the fact they can be used in other production processes or even sold as standalone offerings, by-products are of significantly lower financial value. For example, in the petrochemical industry when a company produces its main input, which is crude oil, it can also generate co-products including petrol, diesel, kerosene, and naphthalene. A co-product entails joint production and the cost of production can apportioned between the main product and co-products. Examples of a by-product are the metal strips produced during the re-rolling mill process in the steel industry or ethanol as a by-product of the sugar industry, both of which have insignificant commercial value.
Table 1 shows some of the key differentiators between a co-product and a by-product to help you decide how to treat these additional products in your SAP system.
Key differentiators of a co-product with by-product
Usually a company’s Managerial Accounting-Product Costing (CO-PC) team declares a material as a co-product or by-product. The primary responsibility of implementing it ends up with production planning and materials management teams in coordination with the CO-PC team. Co-products and by-products are each handled differently in an SAP system.
Side-by-side descriptions of a co-product and a by-product show the similarities and differences so that you can see which option would best suit your business requirements. The descriptions include details such as the required material master and BOM master data. Sample process orders show the impact and behavior, including costing when there is a co-product or by-product. Subsequent production transactions include goods issuance against the production order, confirmation, and finally goods receipt against a production order. I also cover some of the standard material document information available in a process order along with planned versus actual costs in analyses and itemized forms.
Generally the co-product option offers better controls. Therefore, if the material is financially significant, declaring the material a co-product offers more checks and balances as compared to the by-product option. I now cover the master data needed to set up co-products and by-products.
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