The short answer
Ask two questions of every output: do you plan to make it, and does it matter to the margin of the main product? A planned output with real value is a co-product and takes a share of the joint cost. A planned output of small value is a by-product and is credited back. An output nobody buys is waste, and it has a cost of its own. The label belongs to your plant, not to the material.
Three words, three cost treatments
Finance teams often use co-product and by-product as if they meant the same thing. They do not, because each one changes the cost of the main product in a different way.
| Output | What it is | Cost treatment |
|---|---|---|
| Co-product | A planned output with real sales value, made in the same process as the main product | Carries a share of the joint cost, split by an agreed method |
| By-product | A planned output of small value next to the main product | Takes no joint cost; its value is credited back against the main product |
| Waste | Output with no sales value, sometimes with a disposal cost | Recorded as an output with its own cost, so the cost is visible instead of buried in the main product |
The difference matters most for the main product. Treat whey as a co-product and the cheese carries less cost. Treat it as a by-product and the cheese carries more, but the credit comes back. Treat it as waste and the cheese carries everything.
Four questions to put to each output
Before you classify an output, answer these four for the plant as it runs today.
- Is it planned? An output that appears on the formula every time is planned. A one-off off-cut is not.
- Is there a buyer and a price? If you sell it, even cheaply, it has a sales value you can point to.
- How large is that value against the main product? Close to the main product means co-product. A small fraction means by-product.
- Does it cost money to get rid of? If so, it is waste, and the disposal cost belongs to the batch.
Write the answers on one page per product family: the output, the class, the allocation method, who approved it and the date. Auditors and new cost accountants will both ask for that page.
The grey areas
Whey is the textbook case. In one dairy it is poured away or sold by the tanker for very little, so it is a by-product or even waste. In another dairy it goes to a drying plant and sells as a protein ingredient, so it is a co-product that deserves a real share of the milk cost. The whey is the same. The plant's economics are different.
Other grey areas follow the same pattern:
- A by-product whose market price rises until it is worth a share of the cost.
- A co-product whose buyer disappears and which drifts towards waste.
- Cream skimmed in a cheese plant: a by-product where it is sold on cheaply, a co-product where it is a product line of its own.
Decide in advance who reviews the classification, how often, and how a change is handled in the periods already closed. That is a policy decision for you and your auditor. The software applies the rule you set; it does not choose it.
One batch, line by line
The built-in dairy scenario in ManufacturingFlow 365 makes cheese from raw milk. Every output is classified, and each classification has a different effect on cost.
| Output | Class | Treatment in the batch |
|---|---|---|
| Cheese | Main product | Carries the largest share of the batch cost |
| Whey | Co-product | Carries part of the joint cost by relative sales value |
| Cream | By-product | Credited back against the batch |
| Acid water | Waste | Recorded as an output with its own cost |
Each output is posted against the production order, each lot can be traced back to the milk it came from, and the cost of the batch is on one sheet. A cost accountant can see what each output received and why.
What goes wrong when the system has one output
Standard Business Central expects each production order line to make one finished item. A plant that makes cheese, cream and whey from the same milk then has to improvise.
The usual result is a spreadsheet beside the ledger. Whole batch cost lands on the cheese. The whey is booked into stock at zero, or through a manual journal at a figure someone estimated once. The cream is ignored until it is sold. Month-end then shows cheese that looks expensive and whey that looks free, and nobody can say which is true.
People downstream feel it too. Sales quotes whey from a price list that has no link to cost, and quality keeps a separate lot list because the whey lot has no recorded link to the cheese lot.
In Business Central
The features involved sit in ManufacturingFlow 365.
- Co-products and by-products: define the outputs of a formula, post them against the production order, and allocate joint cost by fixed percentage, relative sales value, net realisable value or physical measure.
- Waste: recorded as an output with its own cost.
- Costing: actual-cost allocation of joint cost, and a cost sheet for every batch.
- Lots and traceability: genealogy through co-products, so a whey lot links back to its milk.
- Demo data: one action creates the dairy scenario in a sandbox, and another removes it.
If you use MESFlow 365 on the floor, co-products and by-products are reported on the last operation and posted through ManufacturingFlow 365. The product page for ManufacturingFlow 365 lists the modules in full.
Limits
Both apps have been run in a user acceptance sandbox with demo data. The classification rule is yours: the software will apply a method to a co-product, but it will not tell you whether whey is a co-product in your plant. Exports and some planning pages have not been run. The apps are built for Business Central online, version 29.
See it on your process
Bring the output list of one real product and we will classify it with you on screen. Book the dairy demo scenario and we will cost the cheese, whey, cream and acid water in a Business Central sandbox.
Keep reading: joint-cost allocation, four ways shows how one batch changes cost under each method, and disassembly costing covers the reverse case, one input and many outputs.