About Co-Product/By-Product
Oftentimes a production process is designed with the goal of establishing a single output item. However, there are some cases, particularly within a process manufacturing environment, in which a single production order can have several intended outputs. Each one of these outputs can be packaged into a separate finished good, or used in additional production activities. When a production process has more than one primary output item, these items are referred to as co-products.
In addition to intended outputs, many production activities result in secondary products. While these items are not an intended result of the production process, they can still have a functional use as a component in another production process, or even be sold directly to a customer. When a production process has these secondary output items, these items are referred to as by-products.
Co-Products, By-Products, and Inventory Items
An output item is typically entered as a record in the program, then linked to the production bill of materials (BOM) that outlines the process for producing that item. The program allows the user to link a single production BOM to an inventory item. In most cases, this is adequate, since an output item is produced via a single defined process. The same rule holds true when dealing with co-products; a co-product item must be linked to a specific co-product/by-product process.
By-products are different in that a single by-product can be produced as the result of many different production activities. As a result, it is not possible to identify a specific production BOM that is responsible for the generation of a by-product item. For this reason, by-products are unique in that they are manufactured items that do not require a link to an existing production BOM.
Costing Allocation
Co-product and by-product items also differ in the manner in which the program allocates their costs. When a production process has a single output, the cost allocation process is fairly straightforward. When multiple outputs are involved, the program must somehow allocate the cost of production amongst them.
Because a by-product is a secondary item that can be produced through multiple processes, the process for assigning cost during production has been simplified. When a by-product is reported through production, the system looks to that item's defined standard cost, and assigns this value. This amount is also subtracted from the total dollar amount that is being used for cost allocation. Once any by-product costs have been subtracted, the system allocates the remaining amount equally amongst the co-product items.
For example, a production order has been completed, resulting in 2 co-products and 1 by-product. The total cost for the production order has been reported as $10. The standard cost of the by-product item is $2, so the system assigns this cost to the by-product, and also subtracts this amount from the total cost, leaving a new value of $8. The program then allocates this amount amongst the co-products. In this scenario, there are 2 co-products, so the program assigns a cost of $4 to each one.
The cost of co-products can be further impacted by the assignment of a cost share. By default, all co-products have a cost share of 1, but they can be changed if the user wishes to weight the cost of certain co-products in relation to one another. If we take the 2 co-products from our example and assign cost shares of 3 and 1, we are indicating that the cost of the first co-product should be 3 times as great as the cost of the second co-product. In this scenario, the $8 would not be split evenly between the 2 items. Instead, the first co-product would be given a cost of $6, and the second co-product would be assigned a cost of $2.
Planning
The co-product/by-product functionality also contains tools to perform supply driven production planning. This gives a production planner the ability to create production orders based on the current availability of production materials, as opposed to having demand from sales orders and forecasts drive production scheduling.
See also
How to: Create New Co-Product/By-Product Processes
How to: Tie a Co-Product/By-Product Process to Inventory