The Everett Recycling Company (ERC) purchases old water and soda bottles and recycles them to produce plastic covers for outdoor furniture. The company processes the bottles in a special piece of equipment that first melts, then reforms the plastic into large sheets that are cut to size. The edges from the cut pieces are sold for use as package filler. The filler is considered a byproduct. ERC can produce 27 table covers, 74 chair covers and 9 pounds of package filler from 100 pounds of bottles.

Additional Information:

In June, ERC had no beginning inventory. It purchased and processed 150,000 pounds of bottles at a cost of $1,200,000. ERC sold 22,000 table covers for $10 each, 79,000 chair covers for $12 each, and 9,000 pounds of package filler at $0.80 per pound.

Question:

1.) Assume that ERC allocates the joint costs to table and chair covers using the sales value at splitoff method and accounts for the byproduct using the production method. What is the ending inventory cost for each product and gross margin for ERC?

2.) Assume that ERC allocates the joint costs to table and chair covers using the sales value at splitoff method and accounts for the byproduct using the sales method. What is the ending inventory cost for each product and gross margin for ERC?

3.) Discuss the difference between the two methods of accounting for byproducts, focusing on what conditions are necessary to use each method.