(continuation of Exercise 15-39). The Princess Corporation classifies animal feed as a byproduct….

(continuation of Exercise 15-39). The Princess Corporation classifies animal feed as a byproduct. The byproduct is inventoried at its selling price when produced; the net realizable value of the product is used to reduce the joint production costs before the splitoff point. Before 2015, Princess classified both apple juice and animal feed as byproducts. These byproducts were not recognized in the accounting system until sold. Revenues from their sale were treated as a revenue item at the time of sale.

The Princess Corporation uses a “management by objectives” basis to compensate its managers. Every six months, managers are given “stretch” operating-income-to-revenue ratio targets. They receive no bonus if the target is not met and a fixed amount if the target is met or exceeded.

Required

 1. Assume that Princess managers aim to maximize their bonuses over time. What byproduct method (the pre-2015 method or the 2015 method) would the manager prefer?

 2. How might a controller gain insight into whether the manager of the Apple Products division is “abusing” the accounting system in an effort to maximize his or her bonus?

 3. Describe an accounting system for the Princess Corporation that would reduce “gaming” behaviour by managers with respect to accounting rules for byproducts.

Exercise 15-39

(CMA, adapted) The Princess Corporation grows, processes, packages, and sells three joint apple products: (a) sliced apples that are used in frozen pies, (b) applesauce, and (c) apple juice. The skin of the apple, processed as animal feed, is treated as a byproduct. Princess uses the estimated NRV method to allocate costs of the joint process to its joint products. The byproduct is inventoried at its selling price when produced; the net realizable value of the byproduct is used to reduce the joint production costs before the splitoff point. Details of Princess’s production process are presented here:

■ The apples are washed and the skin is removed in the Cutting Department. The apples are then cored and trimmed for slicing. The three joint products and the byproduct are recognizable after processing in the Cutting Department. Each product is then transferred to a separate department for final processing.

■ The trimmed apples are forwarded to the Slicing Department, where they are sliced and frozen. Any juice generated during the slicing operation is frozen with the slices.

■ The pieces of apple trimmed from the fruit are processed into applesauce in the Crushing Department. The juice generated during this operation is used in the applesauce.

■ The core and any surplus apple pieces generated from the Cutting Department are pulverized into a liquid in the Juicing Department. There is a loss equal to 8% of the weight of the good output produced in this department.

■ The outside skin is chopped into animal feed and packaged in the Feed Department. It can be kept in cold storage until needed.

A total of 270,000 kilograms of apples entered the Cutting Department during November. The following schedule shows the costs incurred in each department, the proportion by weight transferred to the four final processing departments, and the selling price of each end product.

Required

 1. The Princess Corporation uses the estimated NRV method to determine inventory cost of its joint products; byproducts are reported on the statement of financial position at their selling price when produced. For the month of November 2015, calculate the following:

 a. The output for apple slices, applesauce, apple juice, and animal feed, in kilograms.

 b. The estimated NRV at the splitoff point for each of the three joint products.

 c. The amount of the cost of the Cutting Department assigned to each of the three joint products and the amount assigned to the byproduct in accordance with corporate policy.

 d. The gross margins in dollars for each of the three joint products.

 2. Comment on the significance to management of the gross margin dollar information by joint product for planning and control purposes, as opposed to inventory costing purposes.

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