6.17 Joint-product/by-product distinctions, ethics. (20–30 min) 1 The 2011 method gives Flori-Dante managers relatively little discretion vis-à-vis the pre-2011 method. The 2011 method recognises all four products in the accounting system at the time of production. The pre-2011 method recognises only two products (apple slices and applesauce) at the time of production. Consider the data in the question. The €60,000 of joint costs would be allocated as follows (using the €60,000 and €36,000 estimated NRV amounts Apple slices = €60, 000 €96, 000 × €60,000 = €37,500 Applesauce The gross margin on each product is Apple slices = (€71, 280 – €37, 500 – €11, 280) = 31.57% €71, Applesauce €44,550 The gross margins on the two byproducts are Apple juice = €27,000 – €3,000 = 88.89% Animal feed = €2, 700 – €700 = 74.07 €2, 700 % With the pre-2011 method, managers have flexibility as to when to sell the apple juice and the animal feed. Both are frozen and can be kept in cold storage until needed. If there is a need fora large dose of gross margin at year-end to meet the target ratio, high gross margins from apple juice or animal feed can be drawn onto help achieve the target. 2 The accountant could examine the sales patterns of apple juice and animal feed at year-end. Do managers, who have ratios from existing sales below the target, sell apple juice and animal feed stocks to achieve the target ratio Do managers, who have ratios above the target, put apple juice and animal feed production into stock so as to provide a cushion for subsequent years One piece of evidence here would be physical stock-holding patterns on a monthly basis. If the pattern of stock holding for the two byproducts was different from that for the two joint products, there would be grounds for further investigation as to whether managers are abusing the bonus system. 3 ab Using the estimated net realisable value method with all products treated as a joint product would reduce gaming behaviour by managers with respect to bonus payments. The estimated net realisable value of all four products (€60,000 + €36,000 + €24,000 + €2,000 = €122,000) would be used to allocate the €60,000 joint cost
