I have trouble understanding joint product costing. Please help.
Can anyone explain this problem and solution better?
Thanks guys!
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 $4 for each unit of May sold.
c.
Gross margin increases by $1 for each unit of May sold.
d.
No effect.
Explanation
Choice “c” 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 income is the same under both methods, the joint product method results in an increased gross margin of $1 per unit of May sold.
Choice “d” is incorrect. The $1 selling expense would be deducted from gross margin using the joint product method.
Choice “a” is incorrect. The $4 sales price is included in the calculation of gross margin under both methods.
Choice “b” is incorrect. The $4 sales price is included in calculation of gross margin under both methods
.