Flori-Dante classifies animal feed as a by-product. The by-product is inventoried at its selling price when produced;

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Flori-Dante classifies animal feed as a by-product. The by-product is inventoried at its selling price when produced; the net realisable value of the product is used to reduce the joint production costs before the split-off point. Prior to 2022, Flori-Dante classified both apple juice and animal feed as by-products. These by-products were not recognised in the accounting system until sold.

Revenues from their sale were treated as a revenue item at the time of sale.

Flori-Dante 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 Flori-Dante managers aim to maximise their bonuses over time. What by-product method (the pre-2022 method or the 2022 method) would the manager prefer?
2 How might an accountant gain insight into whether the manager of the Apple Products division is ‘abusing’ the accounting system in an effort to maximise his bonus?
3 Describe an accounting system for Flori-Dante that would reduce ‘gaming’ behaviour by managers with respect to accounting rules for by-products.

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Management And Cost Accounting

ISBN: 9781292436029

8th Edition

Authors: Alnoor Bhimani, Srikant Datar, Charles Horngren, Madhav Rajan

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