By-products
By-products are items that are produced along with a formula item or co-products. These products are inherent to the manufacturing process and cannot be avoided. By-products are stored in inventory but typically have no inventory value. They are typically scrapped in the production process or sold for a loss.
By-products can also be used as a recycled material for future production processes if they are stored with an inventory value at standard cost. By-products are used to add cost burden to the production order to account for scrapping the product, including some of the costs of disposal of the materials. This cost burden is manually allocated to the formula item through the by-product in the formula.
Example
In the production of gasoline from sand oil, a by-product of coke is produced. The coke that is obtained from sand oil refining is too high in sulfur and has too fine of a particle to be used in iron and other industrial applications that oil refining coke can be used in. This product must be disposed of by the refinery through an environmentally-friendly method that can be costly. This by-product can be given a cost burden to include in the production formula of the gasoline to accommodate for that disposal of the material.