By-Product Cost Distribution

General Information

The valuation of manufactured products can be determined by using by-product cost distribution factors. The by-product cost distribution factors provide a means of distributing costs of materials, operations and general production between the by-products and the primary manufactured product. When not using by-product cost distribution, the valuation of the primary manufactured product is determined by removing the standard cost of the by-products from the sum of the material, operation, and general production costs.

The by-product cost distribution method requires identification of a portion of costs for material, operation, and general production costs to be allocated for each by-product on a manufacturing structure or a shop order with the remaining costs allocated to the primary manufactured part. Separate factors are used for material, operation, and general production costs. The by-product cost distribution method can be identified to be used for product structures, recipe structures, and configuration structures as well as for shop orders.

If by-product cost distribution is enabled for a specific product, then the cost for the manufactured product in costing and the weighted average cost for the manufactured product and the by-products will be calculated using the distribution as mentioned above.

Basic Data Requirements for By-Product Cost Distribution

The by-product cost distribution is enabled by selecting the Use By-Product Cost Distribution check box on the Product Structure/Product Structure or Recipe Structure/Recipe Structure or Configuration Structure/Config Structure tab depending on the structure type.

The value to determine how much operation cost should be allocated is decided by entering the the value in the Oper Cost Distribution Factor field in the Product Structure/Product Structure, Recipe Structure/Recipe Structure, or Configuration Structure/Config Structure tab.

The value to determine how much general overhead production cost should be allocated is decided by entering the value in the General OH Cost Distribution Factor field on the Product Structure/Product Structure, Recipe Structure/Recipe Structure, or Configuration Structure/Config Structure tab.

The value to determine how much component material cost should be allocated is decided by entering the value in the Item Cost Distribution Factor field on the Product Structure/By-Product Cost Distribution, Recipe Structure/By-Product Cost Distribution, or Configuration Structure/By-Product Cost Distribution tab.

The by-product cost distribution factors cannot allocate more than the total costs. Therefore, the sum of each type of by-product cost distribution factor cannot total more than 1. This means that, for a single structure, the sum of the operation cost distribution factors cannot be greater than 1. Similarly, the sum of the general overhead distribution factors cannot be greater than 1. For each component on the structure, the sum of the item cost distribution factors cannot be greater than 1.

By-Product Cost Distribution Process

During shop order cost calculations for estimated cost or weighted average actual cost, each of the shop order costs (component, operation, or general overhead) is multiplied by the appropriate by-product cost distribution factor to determine the allocation for each by-product. Any remaining cost is allocated to the primary product.

For example, suppose that product A has two by-products, B and C, and two components X and Y. The by-product cost distribution factors are as follows:

• The by-product general overhead cost distribution factors for B and C are both 0 (zero).
• The by-product operation cost distribution factors for B and C are 0.25 and 0.3 respectively.
• The by-product item cost distribution factors for B and C for component X are 0.1 and 0.2 respectively.
• For component Y, the by-product cost distribution factors for B and C are 0.1 and 0 (zero) respectively. 

If by-product cost distribution is enabled, then during the shop order cost calculations, the costs would be calculated as follows:

• Product A will get the entire amount of the general overhead cost.
• By-product B will get 25% of the operation cost (operation cost times 0.25).
  By-product C will get 30% of the operation cost (operation cost times 0.3).
  Therefore, product A will get the remaining 45% of the operation cost (Operation cost - (Cost allocated to B + Cost allocated to C)).
• By-product B will get 10% of the cost for component X and 10% of the cost for component Y ((Cost for X times 0.1) + (Cost for Y times 0.1)).
  By-product C will get 20% of the cost for component X and none of the cost for component Y ((Cost for X times 0.2) + (Cost for Y times 0)).
  Therefore, product A will get the remaining 70% of the cost for component X (Cost for X - (Cost allocated to B + Cost allocated to C)) plus the remaining 90% of the cost for component Y (Cost for Y - (Cost allocated to B + Cost allocated to C)).  

If by-product cost distribution is not enabled, then during the shop order cost calculations, the costs would be calculated as follows:

• By-products B and C will each use their respective inventory values.
• Product A will get the remaining costs (Total cost - (Value of B + Value of C)).