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 Topic: A BEC problem ( Topic Closed)
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berry0331
Newbie
Joined: 04 Sep 2011
Online Status: Offline
Posts: 49
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| Posted: 03 Nov 2011 at 22:16 | IP Logged
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Hi everyone,
While I was doing Becker homework problems, I had question about the
below question. I also posted the correct answer and the following
explanation, but I still didn't understand why it is $1 for each of unit May
is sold...
Kode Co. manufactures a major product that gives rise to a by-product
called May. May's only separable cost is a $1 selling cost when a unit is
sold for $4. Kode accounts for May's sales by deducting the $3 net
amount from the cost of goods sold of the major product. There are no
inventories. If Kode were to change its method of accounting for May from
a by-product to a joint product, what would be the effect on Kode's
overall gross margin?
a. No effect.
b. Gross margin increases by $1 for each unit of May sold.
c. Gross margin increases by $3 for each unit of May sold.
d. Gross margin increases by $4 for each unit of May sold.
"Choice "b" is correct. Changing the accounting from by-product to joint
product changes the computation of gross margin because the $1 selling
cost is treated differently under each method. Using the by-product
method, the $1 selling expense is netted against the $4 selling price to
arrive at a $3 deduction from cost of goods sold. Since gross margin is
calculated as sales less cost of goods sold, the $1 does flow into the gross
margin amount using this method. Using the joint product method, the
$1 cost would be a selling expense, which is not included in the
calculation of gross margin. Instead, selling expenses are deducted from
gross margin (after it is computed) to arrive at net income. Although the
total net ncome is the same under both methods, the joint product
method results in an increased gross margin of $1 per unit of May sold."
Does anyone have an idea or anything of what it's talking about? Why the
gross margin is increased when the byproduct is added to the joint
product? And why $1 is taken into account for computing the gross
margin?
Thanks in advance to anyone who will provide explanations.
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divyagovil1
Major Contributor
Joined: 30 Jan 2009
Location: India
Online Status: Offline
Posts: 1456
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| Posted: 07 Nov 2011 at 05:16 | IP Logged
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In simple terms,
Gross Margin = Sales revenue – COGS
Net Income = Gross Margin – Operating (Selling, General
and Administrative) expenses -/+ other revenues/expenses
Now, let’s take an example with numbers:
Assume,
Major product selling price p.u. $10
Major product COGS &n bsp; $5
Operating expenses $2
Given,
May’s (by product) selling price p.u. $4
May’s separable selling cost &n bsp;$1
Net sales of May (4-1) & nbsp;$3
Option 1: By-product accounting separately
When Kode accounts for May's sales by deducting the $3
net
amount from the cost of goods sold of the major product.
Sales p.u &nb sp; $10
Less.
COGS $2
(5 – net sales of May)
Gross Margin $8
Less.operating expenses $2
Net Income $6
Option 2: By-product accounting changed to joint product
accounting
In this case, $1 selling expense of May is added to total
operating expenses below the line and sale price of $4
is included above the line in Sales Revenue
Sales p.u (Major 10+May 4) &nbs p;$14
Less.
COGS &n bsp; &n bsp; $5
Gross Margin $9
Less.operating expenses &nbs p; $3
($2+$1 selling expense of May)
Net Income $6
Thus, in both cases, Net income remains the same. Only
gross margin changes
Let me know if you have any further doubts. Also, read
the different methods of by product accounting in Beckers
which would make above example more clear. Good Luck !
__________________
Divya - CO State
Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
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