Joint product/by-product distinctions, ethics (continuation of 6-16).g4

(20-30 minutes) 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 1999, 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 6 months, managers are given ‘stretch’ operating-incometo-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-1999 method or the 1999 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 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.