Costing Co-Products

Objective

After completing this lesson, you will be able to create a cost estimate for co-products

Co-Products and By-Products

Note

A recipe can be created for either a process material or a leading material. The material type PROC is used to identify a process material. These materials are not actually produced, but used only when recipes are created. All the output of the recipe is defined as a co-product. Co-products are also referred to as Joint products.

The diagram illustrates Co-Products in Process Industries where input materials are mixed in a tank during Phase 10, leading to a reaction with a catalyst in Phase 20, resulting in the creation of Product A and Product B.

The production process can be divided in the following sub-processes:

Input materials removed from stock at the start of the production process.
The temporary appearance of an intra-material between two production phases that remains in the production process. These materials are assigned material type INTR.
The remaining materials arising from the production process.
The catalyst added during the production process, which is removed later.
The simultaneous production of one or more materials. The planned production of multiple products using one process is called joint production.

Definition of Co-Product

The image outlines a joint production process where material input yields two co-products, Co-Product A and Co-Product B, emphasizing that the production is intentional and requires controlling.

A co-product is a valuated product that is produced simultaneously with one or more products. If a material is a co-product, you can specify the Material Requirements Planning (MRP) or costing view in the material master. Choose the co-product indicator for this.

You can specify in the material view that the product is a fixed-price co-product. If this indicator is selected, the product is included using the net realizable-value method rather than the apportionment structure.

Leading Co-Product

A material cost estimate with a quantity structure determines the quantity structure using the master data of the leading co-product. By-products are entered with a negative quantity in the Bill of Material (BOM) of the leading co-product. The remaining (non-leading) co-products also have negative quantities, but they are indicated in the BOM item data by the Joint production indicator. The non-leading co-products can be linked to the leading co-product in the production version.

By-Products

A flowchart diagram shows the concept of joint production, where material input leads to co-product A, co-product B, and an incidental by-product, with the note that controlling is not required for the by-product.

The costs for these by-products are calculated using the net realizable-value method. The cost of the manufactured goods (primary product) is calculated by subtracting the costs of by-products from the total cost of the production process. The costs of by-products reduce the cost of the primary product or process.

Co-Product Cost Estimates

The image outlines different valuation methods for products, including apportionment structure and net realizable-value methods with fixed price and net realizable-value methods with cost component split.

The following are descriptions of the different valuation methods:

Apportionment structure:
You can use an apportionment structure to calculate the cost of goods manufactured for each primary product. The structure apportions the total costs of the manufacturing process by distributing the total costs to co-products. The total costs of the process are allocated to co-products for each cost component using the equivalence numbers.
Net realizable-value method:
The cost of goods manufactured for the co-product is calculated by subtracting the costs of by-products from the total costs for the production process. This is known as the net realizable-value method. The costs of by-products represent a reduction in the costs of the co-product or process.
Net realizable-value method with fixed price:
The system uses a price from the material master. The cost of goods manufactured for by-products is calculated by multiplying the output quantity by the price. It appears as a negative figure in the itemization of the cost estimate. If you do not want to include the costs for by-products, deselect the Relevant to costing indicator in the material list item.
Net realizable-value method with cost component split:
A by-product (or fixed-price co-product) can be produced through an alternative production structure. A corresponding cost estimate already exists for the by-product. The cost component split of the by-product is subtracted by the cost component. The cost of goods manufactured for by-products is calculated by multiplying the output quantity by the costing result of the alternative cost estimate.

Apportionment Structure

The costs for the entire production process are calculated.

The apportionment structure lists all co-products to which costs must be apportioned for a primary product or the process material and assigns the equivalence numbers to co-products.

Note

It is possible to use cost components for co-products.

The costs of the primary product or the process material are apportioned to co-products using the equivalence numbers. You can also enter the source assignment of a source structure in the apportionment structure. The source structure enables you to apportion various cost element groups. This structure is defined in Customizing.

If there are production versions that contain various co-products or alternative output relationships between co-products, you can assign specific apportionment structures to the production versions.

Note

One apportionment without a source structure is adequate because a proportional cost apportionment by equivalence number takes care of all the costs.

Costing Result with Apportionment Structure

The image shows the costing results for Product A and Co-product B, with apportionment structured at a 2:1 ratio from Product A to Product B, itemizing materials, activity, and overhead for calculating production costs.

Apportionment Structure Features

The features of the apportionment structure are as follows:

The apportionment structure can be used to calculate the cost of goods manufactured for each co-product.
The structure apportions the total costs of the manufacturing process by distributing the total costs (minus the by-products and fixed-price co-products) to co-products.
The total costs of the process are allocated to co-products for each cost component using the equivalence numbers.

Itemization for Co-Products

The following products are the itemization characteristics of co-products and by-products:

Co-products are designated with item category A and have negative quantities.
By-products have item category M and also have negative quantities.

Cost each co-product so that its costing results can be saved. In the costing run, ensure that all co-products have been selected.

There is only one production alternative for both co-products. To ensure that the cost estimates of products A and B are the same, product A can be the leading co-product, and product B can specify that product A is the header material, which contains the quantity structure data.

The apportionment structure, the costing lot size, and the costing parameters are derived from the leading co-product.

There are multiple production alternatives for a co-product.

The system checks whether the co-product has its own quantity structure data and uses it to cost the co-product. If not, the system checks whether the co-product is produced in another process and uses the quantity structure data of this process to cost the co-product.

Flexible Itemization for Co-Products

Flexible itemization supports the following two types of analysis:

The product view shows the costs of the co-product.
The process view shows the total costs of the production process and the costs of the co-products.

Net Realizable-Value Method

The cost of goods manufactured for the co-product is obtained by subtracting the costs of by-products from the total cost of the production process, using the net realizable-value method. The costs of by-products thus reduce the costs of the co-product or process.

With fixed prices, the system uses a price from the material master. The cost of goods manufactured for the by-products is obtained by multiplying the output quantity by the price. This appears in the itemization of the cost estimate with a negative sign. If you do not want to include the costs for by-products, you must deselect the Relevant to costing indicator in the material list item.

Hint

The net realizable value method is useful for by-products that have a value.

For by-products, it is helpful to find another cost component using account determination or the origin group.

Example of Recursive Structures

The diagram illustrates a recursive structure in yoghurt production, where yoghurt is both an output and an input, maintaining a ratio where input is less than or equal to 0.95 times the output.

Recursive structures are automatically recognized by the system in costing runs or material cost estimates with a quantity structure. You do not need to take any action in the system. The conditions displayed in the figure are checked first. Materials are then calculated iteratively until a result is obtained.

The Recursiveness allowed indicator should be set for the BOM item in the BOM.

Create a Cost Estimate for Co-Products

ExerciseStart Exercise

Summary

Understand the concept and differences between co-products and by-products in joint production processes.
Learn how to create cost estimates for co-products using various valuation methods.
Explore the apportionment structure to allocate costs among co-products effectively.
Recognize the role of master data in setting up co-products and by-products.
Apply the net realizable-value method to reduce costs of primary products using by-products.

Next lesson