[Pass CPA]

Hi,

Could anyone please explain me the logic behind the question posted below-
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. Gross margin increases by $3 for each unit of May sold.
B. Gross margin increases by $1 for each unit of May sold.
Answer (B) is correct.
Gross margin is the difference between sales and the cost of goods sold. Subtracting the $3 net amount from cost of goods sold does not have the same effect on overall gross margin as recording the $4 sales revenue and subtracting the $1 cost. In the latter case, the $1 unit selling cost is not subtracted in arriving at the gross margin. Thus, gross margin increases by $1 for each unit of May sold.
C. No effect.
D. Gross margin increases by $4 for each unit of May sold.

[Skynet]

Joint Product Costing is when a Guy and his Wife or Girlfriend decides to make a purchase together but in reality it is her who will ultimately make the decision for the both of them.

The By-Product Costing is that the Guy learns that since his Wife or Girlfriend has already made the decision for him realizes his decision was a Moot Point to begin with and has no say in the matter.

[Pass CPA]

@Skynet LOL! That was a funny explanation about Jt product By product costing.Thank You! It would be great if you could explain why $1 unit selling cost is not deducted in arriving at gross margin if the by-product is treated as a joint product

[MO]

The $1 in now SG&A, not COGS.

[Author]

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