A byproduct is a secondary output of limited value that comes out of a process alongside the main product, unavoidably and not by separate design. The process is run to make something else, the byproduct appears anyway, and it can usually be sold or reused rather than discarded.
The closest formal wording in federal rules comes from the hazardous waste rules, which for the purposes of sections 261.2 and 261.6 define a by-product as a material that is not one of the primary products of a production process and is not solely or separately produced by the production process (EPA hazardous waste regulation 261.1(c)(3)). Those rules also exclude from their own term a co-product that is produced for the general public’s use and is ordinarily used in the form it is produced by the process. That wording turns on what the process was run to make rather than on relative value, so it reaches only part of what the accounting term carries.
Byproduct in Cost Accounting
When one process yields several outputs at once, everything spent up to the split-off point, where those outputs first become separately identifiable, belongs to all of them and to none alone. Relative value at split-off sorts them. An output worth enough to matter is a joint product and takes a share of that common cost, while one whose value is minor beside the main product is a byproduct, normally left out of the sharing.
The tax rule for pricing inventories addresses the first case, since it reaches a single process, or uniform series of processes, that derives kinds, sizes or grades whose unit cost is substantially alike. A miner or manufacturer who in conformity to a recognized trade practice allocates cost across them may use that allocated cost as a basis for pricing inventories only with the consent of the Commissioner, and only where the allocation bears a reasonable relation to the respective selling values of the different kinds, sizes or grades (Treasury Regulation 1.471-7). Spreading a shared amount on a stated basis is allocation.
How Byproduct Proceeds Are Recorded
Two routes turn up on client books. One credits the byproduct against the cost of the main product, measured the way the donated foods rule measures a by-product credit, at the net value of the sale or the market value of the by-products, after subtraction of any documented expenses incurred in preparing the by-product for sale (7 CFR 250.33(d)).
The other reports the proceeds as revenue. EPA’s application appendix for a Primary Nonferrous Smelter Order, a program whose orders could not expire later than January 1, 1988 (40 CFR 57.106), puts co-product and by-product sales on their own operating revenue line, and says all by-product credits associated with pollution control facility operations should be eliminated and reported on that line instead (40 CFR part 57, appendix A).
Say a single process turns out both outputs and the period sells everything it made.
Joint cost to the split-off point $200,000
Main product sold $260,000
Byproduct sold $6,000
Cost of preparing the byproduct for sale $1,000
Credit route cost of main product 200,000 - (6,000 - 1,000) = $195,000
byproduct in income none
Revenue route cost of main product $200,000
other income 6,000 - 1,000 = $5,000Net income lands in the same place either way, and gross profit on the main product does not. Where the amount is too small to change either answer the choice is a materiality question.
Byproduct, Joint Product, Scrap and Waste
A joint product is worth enough to take a share of the joint cost and a byproduct is not, so the line between them moves when prices move and an output can change category while the process itself stays as it was.
Scrap is leftover material from what the process was working on rather than an output the process yields, which is why it is handled as an adjustment to material cost rather than priced. A government contractor adjusts the cost of material for credits for scrap, salvage and material returned to vendors, crediting them either to the cost of the material or to indirect costs (Federal Acquisition Regulation 31.205-26(b)). Waste has no recoverable value, so it brings a disposal cost instead.
Is Byproduct One Word or Two?
One word, written solid or hyphenated. Both forms are in live federal use: the donated foods rule writes by-products (7 CFR 250.33(d)), and the drinking water rule writes byproducts (EPA drinking water regulation 141.53). As two words, by product is a preposition followed by a noun and names nothing. Pick one live form and hold it across a client’s ledger and its statements.
Common Questions
Sulfuric acid recovered from a smelter’s pollution control facilities, which the smelter order application appendix names as a by-product outright (40 CFR part 57, appendix A). The plant exists to make metal and the acid comes out of cleaning the gas, which is why the appendix puts it on a by-product revenue line rather than with primary metal sales.
Secondary product, in ordinary writing. Accounting has no exact synonym, because the neighbouring words are narrower: a joint product takes a share of the joint cost and scrap is an adjustment to material cost, so swapping one in changes where the amount lands.
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