West-Coast Oceanic Water (WOW) desalinates and bottles sea water. The desalinated water is in high demand from a large group of environmentally conscious people on the west coast of Canada. During March, WOW processes 1,000 litres of sea water and obtains 800 litres of drinking water and 50 kilograms of sea salt (the rest of the sea water evaporates in the desalinization process). Processing the 1,000 litres of water costs WOW $1,500. WOW sells 600 litres of the desalinated water in 2-litre containers for $8 per container. In addition, WOW sells 40 kilograms of sea salt for $1.20 per kilogram. Due to the relatively small proportion of sea salt, WOW has decided to treat it as a byproduct.
REQUIRED
1. Assuming WOW accounts for the byproduct using the production method, what is the inventoriable cost for each product and WOW’s gross margin?
2. Assuming WOW accounts for the byproduct using the sales method, what is the invento riable cost for each product and WOW’s gross margin?
3. Discuss the difference between the two methods of accounting for byproducts.