Allocating Costs to Co-products

Assign cost allocation percentages in Process/Formula Maintenance (15.18) or Co/By-Product Maintenance (15.12.1).

The same co-product can result from more than one base process, but only one base process determines a co-product’s cost at a particular site. That is, a co-product receives costs only from the base process specified in the BOM/Formula field of the co-product’s item record.

Example: Base Process A produces three co-products—pitted prunes, prune juice, and prune purée used to make Danish pastry. It also produces one by-product, pits. The net cost calculation for Base Process A is as follows.


Gross Cost (Base Process A)	$105
By-product Costs	5
Net Cost (Base Process A)	$100

Although prune juice is a significant co-product of Base Process A, it is also a co-product of Base Process B and, as defined in the BOM/Formula field of Item Master Maintenance (1.4.1), takes its costs from Base Process B. For Base Process A, cost allocation percentages are:


Co-product 1 (Pitted Prunes)	80%
Co-product 2 (Prune Juice)	0%
Co-product 3 (Prune Purée)	20%


Co-product 1 (Pitted Prunes)	$100 * 80%	=	$80
Co-product 2 (Prune Juice)	$100 * 0%	=	$0
Co-product 3 (Prune Purée)	$100 * 20%	=	$20

By-product costs are calculated the same way as regular costs. That is, they are determined separately from the base process cost roll-up.

Once by-product costs are established, freeze them to ensure they are not changed during cost roll-up. Changing by-product costs after net base process costs have been calculated may result in unanticipated variances.

As in the previous example, the net cost for the base process should equal the sum of the costs allocated to the co-products. If these amounts are not equal, one or more of the following is likely:

• By-product costs were not frozen once subtracted from the base process gross cost. The system recalculated the by-product costs, changing the value of the base process net cost.

• Costs were allocated to a co-product whose cost was determined from a different base process than the one being rolled up. This can happen when a co-product is in the product structure of more than one base process.

If co-product costs do not add up to the base process net cost when work orders are closed, method change variances result.

The cost calculations related to base processes, by-products, and co‑products are shown in the equations below.


Batch size	*	Base proc. unit cost	=	Base proc. batch cost
Batch size	*	By-prod. unit cost	=	By-prod. batch cost
Base proc. batch cost	–	By-prod. batch cost	=	Net base proc. batch cost
Net base proc. batch cost	*	Allocation %	=	Co-prod. batch cost
Co-prod. batch cost	÷	Quantity per batch	=	Co-prod. unit cost