Question

Quality?, Inc. is a producer of potato chips. A single production process at Quality?, ?Inc., yields potato chips as the main product and a byproduct that can also be sold as a snack. Both products are fully processed by the splitoff? point, and there are no separable costs. For September 2014?, the cost of operations is $ 525 comma 000. Production and sales data are as? follows:

Production (in pounds)

Sales (in pounds)

Selling Price per Pound

Main Product:

Potato Chips

42,000

32,760

$26

Byproduct

8,400

7,500

$5

There were no beginning inventories on September? 1,

20142014.

Requirements

1.	What is the gross margin for QualityQuality?, ?Inc., under the production method and the sales method of byproduct?accounting?
2.	What are the inventory costs reported in the balance sheet on September? 30, 20142014?, for the main product and byproduct under the two methods of byproduct accounting in requirement? 1?

Answer 1

solution:

     

PARTICULARS	PRODUCTION METHOD	notes	SALES METHOD	notes
SALES REVENUE :
MAIN PRODUCT	851760	32760*26	851760	32760*26
BY PRODUCT	0		37500	7500*5
TOTAL REVENUE	851760		889260	851760+37500
COST OF GOODS SOLD
OPERATION COST	525000		525000
LESS: NET REALISABLE VALUE OF BY PRODUCT	42000	8400*5	-	-
NET OPERATION COSTS	483000		525000
LESS : MAIN PRODUCT INVENTORY COST	106260	[(42000-32760)/42000] * 483000	115500	[(42000-32760)/42000] * 525000
NET COST OF GOODS SOLD	376740		409500

GROSS MARGIN = TOTAL SALES REVENUE-NET COST OF GOODS SOLD

1) GROSS MARGIN UNDER PRODUCTION METHOD = 851760-376740 =475020

GROSS MARGIN UNDER SALES METHOD = 851760-409500=442260

2) INVENTORY COST UNDER PRODUCTION METHOD = MAIN INVENTORY COST + BYPRODUCT INVENTORY COST AT UNREALISABLE SALE VALUE

=106260+(8400-7500)*5 = 106260+4500=110760

INVENTORY COST UNDER SALES METHOD = 115500