Understand the difference between a co-product and a by-product in production processes. Walk through both options and see the pros and cons of each.
Key Concept
In addition to the main material made during the production process of semi-finished or finished goods, additional products often are produced. These additionally produced materials can either be used internally in other production processes or sold. They hold commercial value and add positively to the cost of goods manufactured. Some companies are faced with the scenario that in addition to their main product range, they produce additional products, some of which hold significant financial value. These additional products are either classified as a co-product or a by-product.
While co-products are desirable due to the fact they can be used in other production processes or even sold as standalone offerings, by-products are of significantly lower financial value. For example, in the petrochemical industry when a company produces its main input, which is crude oil, it can also generate co-products including petrol, diesel, kerosene, and naphthalene. A co-product entails joint production and the cost of production can apportioned between the main product and co-products. Examples of a by-product are the metal strips produced during the re-rolling mill process in the steel industry or ethanol as a by-product of the sugar industry, both of which have insignificant commercial value.
Table 1 shows some of the key differentiators between a co-product and a by-product to help you decide how to treat these additional products in your SAP system.

Table 1
Key differentiators of a co-product with by-product
Usually a company’s Managerial Accounting-Product Costing (CO-PC) team declares a material as a co-product or by-product. The primary responsibility of implementing it ends up with production planning and materials management teams in coordination with the CO-PC team. Co-products and by-products are each handled differently in an SAP system.
Side-by-side descriptions of a co-product and a by-product show the similarities and differences so that you can see which option would best suit your business requirements. The descriptions include details such as the required material master and BOM master data. Sample process orders show the impact and behavior, including costing when there is a co-product or by-product. Subsequent production transactions include goods issuance against the production order, confirmation, and finally goods receipt against a production order. I also cover some of the standard material document information available in a process order along with planned versus actual costs in analyses and itemized forms.
Generally the co-product option offers better controls. Therefore, if the material is financially significant, declaring the material a co-product offers more checks and balances as compared to the by-product option. I now cover the master data needed to set up co-products and by-products.
Check in Material Master for Co-Product
To declare a material as a co-product, you set the co-product flag in the material master of all co-products and in the BOM/process order. All co-products include the main co-product (BOM header) and the co-products in the BOM items. There is no such requirement for a by-product.
To activate a co-product in the material master and to change the material master, follow menu path Logistics > Materials Management > Material Master > Material > Change > Immediately or use transaction code MM02. Enter the material number and click the Select view(s) button. In the pop-up window, select the Costing views and click the continue icon.
Then select the Organizational levels button. Select the organizational level – that is, Plant. In my example, I use Plant Z001. After entering Z001, press Enter or click the enter icon. This leads to Figure 1, which is the costing view of the material master. In Figure 1, select the Co-product check box to declare that the material is a co-product.

Figure 1
Costing view of material master with Co-product check box flagged
Save the material by pressing Ctrl+S or clicking the save icon
. Note that you can activate it in the MRP-2 view or the costing view. Whichever view is activated first causes it to be shown in the other view in the material master.
Next, click the Joint production button in Figure 1 to get to Figure 2, which is the cost apportionment structure for co-products. When a process order or a production order is created in an SAP system, the system generates an order item for each co-product. The actual costs for goods issues and confirmed internal activities are collected on the order header. Goods receipts for the co-products are entered with reference to the order item. At the end of the period, the actual costs incurred for the order are distributed to the co-products as equivalence numbers or as percentages.
In Figure 2, I entered 40 percent as the equivalence number (in the first column), followed by a short description. Next select the apportion structure as PI, which is for a process order. This means that 40 percent of the total cost of production of material ZF01 will be allocated to the material ZS11.

Figure 2
Cost Apportionment Structure to co-products
Next keep the mouse in the first row of Figure 2 and click the Equivalence Numbers button to get to Figure 3. Figure 3 requires details of the assignment of the apportion structure – that is, the cost of the finished good (ZF01) that will be allocated to the co-product (ZS11). In my example it is 40 percent. Click the continue icon
and save the material master by pressing Ctrl+S.

Figure 3
Equivalence Number of cost apportionment to co-product
By-Product
No such check in the material master is needed for a by-product.
Bill of Materials (BOM)
For a co-product, the relevant check in the BOM has to be activated. There is no such requirement for a by-product. The quantity is defined in negative terms for both co-products and by-products, for example, -2 units.
Co-Product
If the material is marked as a co-product, you must set the co-product flag in the BOM of the product in which the co-product exists. Both the main product in the BOM header and the co-products with the negative quantity in the BOM need to have the co-product flag set in the material master.
Figure 4 is the change screen for the BOM. To get to the screen follow menu path Logistics > Production > Master Data > Bill of Material > Bill of Material > Material BOM > Change, or use transaction code CS02. Enter the product’s material code — ZF01 in this example — of the main co-product together with the plant and BOM usage (1 for production). Click the Item button in Figure 4 to get to the screen shown in Figure 5. You could also press Enter to go to Figure 5.

Figure 4
BOM for material ZF01 with Plant Z001 and usage as 1, which is for the production BOM
Figure 5 is the item overview of BOM. Here the negative quantity is entered for material ZS11, which is a co-product. Other components such as ZP01 and ZP01 are defined in positive quantities and are consumed during production.

Figure 5
Item overview of BOM
Next, select the line item 0010 and click the item icon
or press F7. This leads to Figure 6.

Figure 6
Detailed view of BOM with co-product check box selected
Save the BOM by pressing Ctrl+S or clicking the save icon.
By-Product
For a by-product, just a quantity in the negative is sufficient in a BOM, as shown in Figure 5. The Co-product check box in the BOM should not be checked. This is all that is needed to set up the relevant master data for both co-products and by-products. The recipe is identical to recipes without co-products. However, to reflect how co-products and by-products are handled in transactional data, I show the entire process below.
For transactional data, I first created a process order of the main material in which the co-product was also produced followed by goods issuance, confirmation, and goods receipt. I then created another (new) process order of the main material in which the by-product was produced and all subsequent steps were taken (such as goods issuance, confirmation, and goods receipt).
Process Order
I’ll create separate process orders to show co-products and by-products.
Co-Product
To create a process order, follow menu path Logistics > Production – Process > Process Order > Process Order > Create > Create with material or use transaction code COR1. Enter the material number, plant, and order type and press Enter (Figure 7). Figure 7 is the initial screen for the creation of a process order. Enter the Material Number ZF01, Production Plant Z001, and Process Order Type TI01. Press Enter, which leads to Figure 8.

Figure 7
Initial screen of process order
Figure 8 is the header data of a process order. Notice that in addition to the main product ZF01, a co-product ZS01 is also being produced. Therefore, the system automatically selects the Multiple items check box. Click the Materials button in Figure 8 to get to Figure 9.

Figure 8
Process order header data
Figure 9 is the material list view of a process order. Here, the co-products are automatically reflected by the relevant check as well as by the fact that the quantity of both the product (main product = item 0000 and co-product) are shown in the negative. In a process order without a co-product, the main material is not shown in the material list. The positive quantity is the consumption quantities of materials in the process order.

Figure 9
Material list with co-product
Click the release icon
and save by pressing Ctrl+S or clicking the save icon. The system generates a process order number.
By-Product
In the case of a by-product you click the Materials button in Figure 8, which takes you to Figure 10. For a by-product, the system shows just a negative quantity. In Figure 10, I also selected the backflush functionality by checking the check box under the column backflushing. This ensures that when the actual production of the process order is confirmed, the system provides an option to simultaneously record the amount of a by-product that was generated. You do not do the same for the co-product, because the goods receipt of a co-product is simultaneously done with the main material via movement type 101.

Figure 10
Material list with by-product and back-flush tick on
A by-product does not have a check box. It is just shown as a negative quantity.
Goods Issue
Release the process order by clicking the release icon in Figure 10 and save the process order by pressing Ctrl+S. Then the next step is the issuance of goods against the process order.
Co-Product
Goods issuance for a process order is the standard process whereby the components of the process order are available for issuance. To issue goods against a process order, use menu path Logistics > Materials Management > Inventory Management > Goods Movement > Goods Movement or use transaction code MIGO (Figure 11).
In Figure 11, I selected GI for order [Goods Issue for order] and entered the process order number. Then I pressed Enter, which brought up the components to be issued. Check the items as OK and save by pressing Ctrl+S or clicking the save icon. The system then generates a material document. A material document is an SAP document that captures all the details of the goods movement.

Figure 11
Goods issuance of process order
By-Product
For a process order with a by-product, the process of goods issuance is the same as in Figure 11.
Confirmation
The confirmation is the process to declare the quantity against the process order that has been produced. No special process is needed for confirmation of a process order having a co-product, but it exists for a by-product. To enter the confirmation of a process order of a main material that has a by-product use SAP menu path Logistics > Production – Process > Process Order > Confirmation > Enter for Order or use transaction code CORK. Enter the process order number and press Enter.
For a main material having a co-product, the confirmation process is standard as shown in Figures 12 and 13. For a main material having a by-product, the confirmation process is still the same as in Figures 12 and 13. However, since I activated the backflush for a by-product, the details of backflush, which entails recording the by-product quantity produced, are covered in Figure 14.
Co-Product
Figure 12 is the initial screen for process order confirmation. Enter the process order number and press Enter. This leads to Figure 15.

Figure 12
Initial screen for process order confirmation
Figure 13 is the process order confirmation screen in which you enter the quantity of goods produced. In my example, I entered a quantity of 10 to show that yield or production quantity against the process order was 10 units. Save the confirmation by pressing Ctrl+S or clicking the save icon.

Figure 13
Process order confirmation
By-Product
For a process order with a by-product, the process of confirmation is the same as detailed in Figure 13. Click the Goods movement button in Figure 13 to go to the screen shown in Figure 14.
Figure 14 is the goods movement screen of a process order, in which you can enter the quantity of the by-product generated. Also, notice that the by-product is denoted by Movement Type 531. Save the confirmation by pressing Ctrl+S or clicking the save icon.

Figure 14
Goods movement of process order with backflush functionality
It is due to backflush functionality that the goods movement (goods issuance at this stage) is made possible. When confirmation of a process order is being done, goods issuance (through backflushing) is also simultaneously done. Since this is a by-product with mvmt. Type 531, I am declaring that 20Kg of material ZS11 was produced as by-product during the actual confirmation process of main material ZF01.
Goods Receipt
Once the goods are produced against a process order, the goods receipt can be performed. Use menu path Logistics > Materials Management > Inventory Management > Goods Movement > Goods Movement or use transaction code MIGO (Figure 13).
Co-Product
For process orders with a co-product, both the materials (main material as well as the co-product) will be available for goods receipt. Additionally, the movement type for the co-product is also 101. Co-products are received via movement type 101 (just like the main product) as shown in Figure 15, whereas by-products are received via movement type 531 as shown in Figure 14.
Figure 15 is the screen in which the goods receipt against the process order is undertaken. Enter the process order number and save by pressing Ctrl+S or clicking the save icon.

Figure 15
Goods receipt against process order with co-product
Goods Receipt for a By-Product
To perform a goods receipt against a by-product, use menu path Logistics > Materials Management > Inventory Management > Goods Movement > Goods Movement or use transaction code MIGO (Figure 16).
In Figure 16, I selected Goods Receipt and Other, and then I assigned movement type 531. Thereafter, you have to give the component numbers along with quantities, followed by the process order number against which these are declared as a by-product. This is also a way to receive by-products against a process order (in case backflush functionality in the process order confirmation is not activated). I mention it here in detail as an alternate option to declare a by-product as produced.
Save by pressing Ctrl+S or clicking the save icon to generate a material document. A material document captures all the details of the goods movement.

Figure 16
Goods receipt for by-product against process order
Documented Goods Movement
A documented goods movement against a process order is the list of all the goods movements that have taken place. This includes goods issuance and goods receipt along with any goods receipt of a co-product or a by-product.
Each goods movement is denoted by the material document number along with the quantity and value. To view the documented goods movement of a process order, follow menu path Logistics > Production – Process > Process Order > Process Order > Display or use transaction code COR3. Enter the process order number and press enter. On the display process order screen, follow menu path Goto > Lists > Documented Goods Movement (Figure 17).
Co-Product
Figure 17 provides the list of quantities as well as the amount of goods receipt and goods issuance against a process order. The relevant movement types are also shown as well as whether it is a debit entry (S) or a credit entry (H).

Figure 17
Documented goods movement for a process order
By-Product
Figure 18 provides a list of documented goods movements in which a by-product was generated. The by-product received is denoted by movement type 531. The goods receipt of the finished good is denoted by movement type 101. The goods issuance of raw materials against process order is denoted by movement type 261.

Figure 18
Documented goods movement of process order with planned and unplanned goods movements [20-kg via CORK, 3-kg via MIGO]
Cost Analysis
In view of the fact that production planning is completely integrated with product costing, all planned costs are calculated at the time of creation and release of a process order including the cost of a main material having a co-product or by-product. These planned costs are then updated with actual costs in the process order when necessary transactional data like goods issuance, confirmation and goods receipts are undertaken. All planned versus actual costs are subsequently available for comparison and analysis purposes.
Co-Product
To view the costing details of the process order, follow menu path Logistics > Production – Process > Process Order > Process Order > Display or use transaction code COR3. Enter the process order number and press Enter.
On the display process order screen, follow menu path Goto > Costs > Itemization (Figure 19).
Figure 19 shows the quantities of the different elements of the process orders. The activities such as machine and labor are denoted by E, while the goods receipt of a finished good as well as a co-product is denoted by A. The components that will be issued against the process order and their quantities are denoted by M. Finally, simulated goods receipt quantities and values are denoted by indicator H. This is because SAP provides an option to provide a financial value of simulated goods receipts (before actual goods receipt has taken place) by H. Then when the actual goods receipt (A) is undertaken, the values are automatically updated to reflect the difference between the simulated value and actual value.

Figure 19
Planned cost of process order – itemized view
Figure 20 is the plan versus actual comparison of financial values against a process order. On the display process order screen, follow menu path Goto > Costs > Analysis (Figure 20).

Figure 20
Planned cost of co-product in process order
By-Product
All details of planned versus actual values and quantities are automatically updated when you access a process order. Figure 21 is the target versus actual comparison of values as well as quantities against a process order. On the display process order screen, follow menu path Goto > Costs > Analysis (Figure 21). Figure 21 shows that a semi-finished material ZS11, which is also the by-product, was generated in 23 units against the planned quantity of 20 units.

Figure 21
Target versus actual cost of process order – analysis version
Figure 22 is the analysis version of planned versus actual cost.

Figure 22
Planned versus actual cost of process order with by-product

Jawad Akhtar
Jawad Akhtar earned his chemical engineering degree from Missouri University of Science and Technology. He has 17 years of professional experience, of which nine years are in SAP. He has completed eight end-to-end SAP project implementation lifecycles in the areas of PP, QM, MM, PM, and DMS in the steel, automobile, chemical, fertilizer, FMCG, and building products industries. He also has worked as an SAP integration manager and an SAP project manager. He has been proactively involved in a business development and solution architect role for seven years. He is the author of Production Planning and Control with SAP ERP, it's filled with in-depth infomation on discrete, process, and repetitive manufacturing types. His profile on LinkedIn is at https://pk.linkedin.com/in/jawadakhtar. You may follow Jawad on Twitter @jawadahl. Currently, he is associated with AbacusConsulting as Head of SAP Delivery.
You may contact the author at jawad.akhtar@live.com.
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