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 pro- duction costs before the splitoff point. Before 2013, 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.
1. Assume that Princess managers aim to maximize their bonuses over time. What byproduct method (the pre-2013 method or the 2013 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.