By-products valuation

By-products refer to the incidental outputs or secondary products that are generated during the production process of the main product. These by-products often have some value and can be sold or used in other ways. However, in some cases, the cost of these by-products may not be directly traceable or separable from the cost of the main product. In such situations, the valuation of these by-products becomes important.

Options for valuation

When the cost of by-products is not directly traceable, there are several options for their valuation. The correct answer, in this case, is option 'B', which states that by-products are generally valued at Net Realizable Value (N.R.V.).

Understanding Net Realizable Value (N.R.V.)

Net Realizable Value (N.R.V.) is the estimated selling price of the by-product minus any estimated costs of completion, disposal, and other relevant expenses necessary to make the by-product ready for sale. In other words, it is the amount of cash that a company expects to receive from selling the by-product after deducting any additional costs.

Reasoning behind the correct answer

The reason why N.R.V. is considered the appropriate valuation for by-products when the cost is not directly traceable is that it reflects the economic benefit that the company can derive from selling the by-products. Since the cost of by-products cannot be directly allocated to them, using the cost of the main product would not accurately represent the value of the by-products.

On the other hand, N.R.V. takes into account the market value of the by-product and any additional costs necessary to make it ready for sale. Therefore, it provides a more realistic estimate of the value that the company can obtain from the by-products.

Conclusion

In summary, when the cost of by-products is not directly traceable, they are generally valued at Net Realizable Value (N.R.V.). This valuation method considers the estimated selling price of the by-product minus any costs of completion, disposal, and other relevant expenses. N.R.V. provides a more accurate reflection of the economic benefit that the company can derive from selling the by-products.