Key Difference – By Product vs Waste
By product and waste are two components that should be managed effectively in order to control costs. The key difference between by product and waste is that by product is a secondary product obtained incidentally in the manufacturing process of the main product whereas waste is defined as inefficient activities that do not add value to a product or service. Understanding these concepts is essential to implement necessary strategies to manage by-products and waste.
CONTENTS
1. Overview and Key Difference
2. What is a By Product
3. What is Waste
4. Side by Side Comparison – By Product vs Waste
5. Summary
What is a By Product?
By-product is a secondary product obtained incidentally in the manufacturing process of the main product. By-products contain some saleable value, which is generally much less than the value of the main product. Many by-products often require further processing before sale.
E.g. In the dairy industry, buttermilk (by product) is produced along with butter and cheese (main products).
Companies can use a number of methods to account for by-products as follows.
Miscellaneous Income Method
Miscellaneous income method is used when the by-product has very limited commercial value and low importance. Thus, the sales value of the by product is recorded as other income or miscellaneous income in the profit and loss account under this method.
Total Sales Less Total Cost
Under this method, the sales value of the by-product is added to the sales value of the main product. As a result, the sales revenue will include the proceeds from both main product and by-product. The main disadvantage of this method is that the revenue from the main product and the by-product cannot be identified separately.
Standard Cost Method
Standard cost method can only be used if the company is operating with a standard costing system. In standard costing, a pre-determined cost is assigned to a product based on the technical assessment. Here, the by-product is valued at the standard rate, which remains constant for a predetermined time period.
Figure 01: Orange oil is extracted as a by-product of orange juice production
What is Waste?
In a commercial and industrial sense, waste is defined as inefficient activities that do not add value to a product or service. In other words, waste is anything that does not generate any economic value to the company. Waste is found in both production and service oriented organizations. Below are some common ways that companies encounter waste.
Unwanted Material Left from Production Process
This is encountered when excess raw materials are ordered or the ordered materials do not meet the expected quality standard and cannot be used for production. Companies should be careful about how much raw materials are ordered in expected quality.
Product Defects
A product defect is a unit of output which has no marketable value. It is important to maintain defects at a minimum level and companies have a defined acceptable rate of maximum defects for a specified period.
Over Production
This occurs as a result of incorrect demand estimations and excess products are manufactured before it is needed.
Idle Capacity
This is the amount of capacity not used for production. Generally, it is very difficult for a business to operate at maximum capacity due to bottlenecks, which are various limitations in the production process.
Idle Labor
Idle labor occurs when workers are paid for the time that they are not involved in the production. If the labor idle time is high, this results in increased loss of profits.
Waste disposal and waste management have become aspects that companies must spend adequate resources and time since the rules and regulations are continuously increasing, especially in industries where chemical and other hazardous waste is originated as a result of the production process.
Figure 02: Recycling is a popular form of waste management.
What is the difference between By Product and Waste?
By Product vs Waste |
|
| By product is a secondary product obtained incidentally in the manufacturing process of the main product. | Waste is defined as inefficient activities that do not add value to a product or service. |
| Type of Organization | |
| By-products are encountered in production-oriented organizations | Waste is encountered in production and service oriented organizations |
| Commercial Value | |
| By-products have limited commercial value. | Waste has no commercial value. |
Summary- By Product vs Waste
The difference between by product and waste mainly depends on the existence of a commercial value. By-product has a commercial value, even though it is limited; thus, it can be sold to make a revenue. Waste can be identified as any aspect that reduces the economic efficiency and does not result in a productive output. If waste is managed effectively, companies are able to enjoy significant advantages in the form of cost savings.
Reference:
“What is waste? definition and meaning.” BusinessDictionary.com. N.p., n.d. Web. 25 May 2017. <http://www.businessdictionary.com/definition/waste.html>.
“By-Products: Meaning and Methods of Accounting.” YourArticleLibrary.com: The Next Generation Library. N.p., 02 July 2015. Web. 25 May 2017. <http://www.yourarticlelibrary.com/accounting/product-costing/by-products-meaning-and-methods-of-accounting/62345/>.
“What is waste management? definition and meaning.” BusinessDictionary.com. N.p., n.d. Web. 25 May 2017. <http://www.businessdictionary.com/definition/waste-management.html>.
Image Courtesy:
1. “Plastic and metal cans recycling machine” by Richard Hoare (CC BY-SA 2.0) via Geograph.uk
2. “Natural oil from citrus” (CC BY 4.0) via torange.biz