Joint product/byproduct distinctions, ethics (continuation of 15-34). 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 2007, 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 ofsale.

The Princess Corporation uses a “management by objectives” basis to compensate its man¬

agers. Every six months, managers are given “stretch” operating-income-to-revenue ratio targets.

They receive no bonus ifthe target is not met and a fixed amount ifthe target is met or exceeded.

Required 1. Assume that Princess managers aim to maximize their bonuses over time. What byproduct method (the pre-2007 method or the 2007 method) would the manager prefer?

2. How might a controller gain insight into whether the manager ofthe 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.