Case Analysis 3: Unit 7 In southern Ontario, The Wild Orchard Corporation grows, processes, packages, and sells three joint apple products: (a) sliced apples that are used in frozen pies, (b) applesauce, and (c) apple juice. The skin of the apple, processed as animal feed, is treated as a by-product. Wild Orchard uses the estimated NRV method to allocate costs of the joint process to its joint products. The by-product is inventoried at its selling price when produced, the net realizable value of the by- product is used to reduce the joint production costs before the splitoff point. Details of Wild Orchard's production process are presented here: The apples are washed and the skin is removed in the Cutting Department. The apples are then cored and trimmed for slicing. The three joint products and the by-product are recognizable after processing in the Cutting Department. Each product is then transferred to a separate department for final processing. The trimmed apples are forwarded to the Slicing Department, where they are sliced and frozen. Any juice generated during the slicing operation is frozen with the slices. The pieces of apple trimmed from the fruit are processed into applesauce in the Crushing Department. The juice generated during this operation is used in the applesauce. The core and any surplus apple pieces generated from the Cutting Department are pulverized into a liquid in the Juicing Department. There is a loss equal to 8% of the weight of the good output produced in this department The outside skin is chopped into animal feed and packaged in the Feed Department. It can be kept in cold storage until needed. A total of 270,000 kilograms of apples entered the Cutting Department during October. The following schedule shows the costs incurred in each department, the proportion by weight transferred to the four final processing departments, and the selling price of each end product. 0.66 Departments Costs incurred Proportion Selling Price Transferred to per kg of Final Department Product Cutting $72,000 Slicing 13,536 33% $0.96 Crushing 10,260 30% Juicing 3,600 27% 0.48 Feed 840 10% 0.12 Total $100,236 100% $2.22 The Wild Orchard Corporation classifies animal feed as a by-product. The by-product 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 2017, Wild Orchard classified BUSI 3423 INTERMEDIATE MANAGERIAL ACCOUNTING both apple juice and animal feed as by-products. These by-products 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 Wild Orchard 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. 3) Assume that Wild Orchard managers aim to maximize their bonuses over time. What by- product method (the pre-2017 method or the 2017 method) would the manager prefer? (10 marks) 4) How might a controller gain insight in to whether the manager of the Apple Products division is "abusing the accounting system in an effort to maximize his or her bonus? (10 mqarks) 5) Describe an accounting system for the Wild Orchard Corporation that would reduce "gaming" behaviour by managers with respect to accounting rules for by-products. (10 marks) 6) Provide a recommendation given the case facts and your analysis. (10 marks) 7) Pay attention to detail within your answers in terms of spelling, grammar, and formatting. (10 marks)
