The Princess Corporation classifies animal feed as a byproduct. The byproduct is inventoried at its selling price

Question:

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.

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Cost Accounting A Managerial Emphasis

ISBN: 978-0133138443

7th Canadian Edition

Authors: Srikant M. Datar, Madhav V. Rajan, Charles T. Horngren, Louis Beaubien, Chris Graham

Question Posted: