By-Product and Scrap Accounting: How to Split Raw Material Cost Across Several Outputs

By-product cost allocation starts with a decision on how much of the raw material cost goes to each output. When a log yields lumber, battens, firewood and sawdust, each output gets a cost share, the shares add up to 1, and the cost of an output is its share of the raw material cost. The choice of share decides whether firewood costs €8 or €9.60 per stacked cubic metre, and how much profit a month shows when only the lumber has been sold.

The example is fictional: a 12-person sawmill cuts 10 m³ of logs at €200 per cubic metre including delivery.

What are main product, by-product and waste?

The main product is what the raw material is bought for. From a log that is lumber. A by-product (also called a secondary or joint product) comes out at the same time and has a price of its own, for example battens made from offcuts. Waste is the rest of the output. Part of it has a market price or a possible use, such as firewood and sawdust, and is usually called saleable waste. The other part has no value and is hauled away or disposed of.

The manufacturer’s accounts raise one question here. The raw material cost at the moment of sawing is one figure, and the outputs are four. By-products and saleable waste are valued under a chosen principle, and the rule goes into the accounting policy. Your accountant confirms the treatment for your company, and what follows is management arithmetic only.

What input data do you need to split raw material cost?

Below is the list of outputs from 10 m³ of logs and their possible selling prices.

The raw material cost is 10 m³ × €200 = €2,000. Sawing costs (the sawyer’s pay, electricity) are not included in the example.

How do you split raw material cost in by-product accounting?

The first method splits by the market value of the outputs, which is the relative sales value method. The share of each output is its value at selling price divided by the total of €2,400. Lumber 2,100 / 2,400 = 0.875. Battens 240 / 2,400 = 0.100. Firewood 48 / 2,400 = 0.020. Sawdust 12 / 2,400 = 0.005. The sum 0.875 + 0.100 + 0.020 + 0.005 = 1.

The cost of an output is €2,000 multiplied by its share.

The total is 1,750 + 200 + 40 + 10 = €2,000. Every output carries the same 20% markup on cost (2,400 / 2,000), so none looks loss-making or excessively profitable. That is a property of this method.

The second method values by-products and saleable waste at their net realizable value and assigns the rest of the cost to the main product. Battens 240, firewood 48, sawdust 12, together €300. That leaves 2,000 − 300 = €1,700 for lumber, or €340 per cubic metre. The shares 0.850 for lumber, 0.120 for battens, 0.024 for firewood and 0.006 for sawdust add up to 1. By-products in this method carry no markup. All the profit from the batch shows on the lumber, 420 − 340 = €80 per m³.

The third method, by the number of output units, does not work here. There are 5 + 2 + 5 + 5 = 17 units of output, and each gets 2,000 / 17 ≈ €117.65. A unit of sawdust would receive €117.65 at a selling price of €2.40. Such an allocation suits outputs of equal value, like chairs of one model.

How does the choice of method change the month’s profit?

If everything is sold, total profit is the same, 2,400 − 2,000 = €400. The difference appears when part of the output is not sold.

Say only the lumber was sold in the month, 5 m³ for €2,100, while battens, firewood and sawdust sit in the warehouse.

In the first case 2,100 − 1,750 = €350 and the stock is 200 + 40 + 10 = €250. In the second 2,100 − 1,700 = €400 and the stock is 240 + 48 + 12 = €300. Both options add up to €2,000 (1,750 + 250 and 1,700 + 300). The second shows more profit in a month when the by-products are not yet sold, and the first defers part of the profit until they sell.

How do you estimate the net realizable value of waste?

The value of waste is the amount the shop receives after selling costs. If firewood sells at €9.60 but loading and delivery to the buyer cost €1.60 per stacked cubic metre, the net price is €8.00. For sawdust, 2.40 minus 0.40 for loading gives €2.00. Firewood is worth 5 × 8 = €40 and sawdust 5 × 2 = €10.

The total value of outputs is then 2,100 + 240 + 40 + 10 = €2,390. The cost of firewood on net values is 2,000 × 40 / 2,390 = €33.47, against €40 when calculated from the price list. The difference of €6.53 is small, but for low-value outputs selling costs visibly reduce the share. For waste with no buyer the net price is zero or negative, and such an item gets a zero share or needs a separate decision in the accounting policy.

How do you add sawing costs to the split?

The value of the outputs includes the work done on the log. Suppose sawing cost €200, of which the sawyer’s pay is €160 and electricity €40. Then €2,000 + €200 = €2,200 is split. With the same shares, lumber gets 2,200 × 0.875 = €1,925, battens €220, firewood €44 and sawdust €11. The sum 1,925 + 220 + 44 + 11 = €2,200.

Per unit that is €385 per cubic metre of lumber, €110 per cubic metre of battens, €8.80 per stacked cubic metre of firewood and €2.20 per cubic metre of sawdust. The markup of lumber on cost falls to 420 / 385 − 1 = 9.1%, and the same for the other outputs, because 2,400 / 2,200 = 1.091. Profit on the batch when everything is sold is 2,400 − 2,200 = €200.

What do you do with raw material losses that did not become output?

Part of the log volume disappears as kerf, bark and drying shrinkage. Such losses get no share of their own. The shares add up to 1 across the outputs, so their cost lands on the outputs. If the log is poorer and yields 4.5 m³ of lumber instead of 5 m³, then at an unchanged share of 0.875 a cubic metre of lumber costs 1,750 / 4.5 = €388.89 instead of €350, 11% more. That is why the lumber yield from a log is checked on every batch, and shares are reviewed when prices or the mix of outputs change.

What does a share calculation sheet for a disassembly specification look like?

For the accountant it is one sheet per raw material. It has five columns, and the last is carried into the specification.

Shares are calculated at current prices and reviewed when output prices change.

How do you record this in Bimp?

Bimp is a Ukrainian cloud ERP for manufacturers. Breaking raw material into outputs is done by the “Disassembly” document. First, in the card of the raw material you create a disassembly specification, add all outputs and enter the coefficients from the sheet in the “Cost share” column. The sum of shares must equal 1, or Bimp will block posting.

Then you create the document in Production → Disassembly. In the left panel you set “Product write-off warehouse”, “Production date” and the responsible person. On the “Products” tab you add the raw material (in the example “Raw birch log”), the quantity and the specification, and the Create batches button prepares batches for the outputs. On the “Materials” tab you check the quantity, cost share, “Post to” and batch number of each output. You post the document, and Bimp writes off the raw material, posts the outputs and allocates the cost price by the shares. If the split differs each time, you enter the shares directly in the materials table of the document.

The split is visible in the “Disassembly cost” report with the columns “Amount” and “Amount + Additional costs”. The first shows the base allocation by shares, the second adds the disassembly costs from the “Additional costs” and “Piecework pay” documents. The detailed guide is in Disassembly, and the general logic of cost price is in Cost price methods. For how raw material value forms before sawing and how cost builds up in a product, see the guide to manufacturing cost calculation and the Bimp home page.

What does Bimp do and what does it leave out?

Bimp breaks raw material into outputs, writes it off, posts each output with a separate batch and splits the cost price by the shares from the specification or from the document table. It blocks posting if the sum of shares is not 1 and shows the result in the disassembly cost report.

Bimp does not choose the shares itself. The choice of method, the net realizable value of waste and the review of shares when prices change are decided by the accountant. Bimp has no separate “by-product” or “waste” type, and an output is set up as an ordinary product. The disassembly costs from the “Additional costs” and “Piecework pay” documents are shown by the report in a separate “Amount + Additional costs” column, and the accountant checks how they are split between outputs in the report.

What did the 10 m³ log calculation show?

€2,000 for the logs was divided between lumber, battens, firewood and sawdust depending on the method. By relative sales value the lumber received €1,750 and by net realizable value €1,700, and the €50 difference changed the month’s profit. Sawdust received €2 per cubic metre instead of the €117.65 that a split by units would give.

Related reading: overhead cost allocation and scrap accounting.

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