Question2 The Canada Company prepares timber for companies w

Question2 The Canada Company prepares timber for companies who manufacture furniture. The main product is plywood with a by-product of matchsticks. The by-product is sold to matchmakers. For July, the manufacturing process incurred $432,000 in total manufacturing costs. Ninety thousand metres of plywood was produced and sold along with 6,800 kilograms of matchsticks. The plywood sold for $7.00/metre and the matchsticks sold for $0.60/kilogram. There were no beginning or ending inventories of the main or the by- product. Required: a. Calculate Canada Company\'s Gross Margin showing: I. the byproduct as a cost reduction during production Il. the byproduct as a revenue item when sold. b. Explain the difference between the two methods of accounting for byproducts and when each should ideally be used.

Solution

a). Plywood sales value = 90000 meters * $7 = $630,000
Byproduct sales value = 6800 kg * $0.60= $4080

1). Gross Margin when byproduct as a cost reduction during production:
Sales                                   = $630,000
Less: Manufacturing Cost       = $432000
         Less: Byproducts sales = $ 4080             $427,920
Gross Margin                         =                       $202,080

2). Gross Margin when byproduct as a revenue item:-
Sales of Plywood =            $630,000
Sales of Byproduct =              $4,080
Total Sales =                      $634,080
Less: Manufacturing cost = $432,000
Gross Margin =                  $202,080

b). In first method , the sale value of byproduct is treated just like sale of waste and scrap and hence reduced from the manufacturing cost. This method is used when the value of byproduct is very nominal and cannot form a substantial part of revenue.
In the Second method, the sale of byproduct is added to the revenue of the main product and then the total manufacturing cost is reduced from the total sales revenue. This method can be used when the sales value of byproduct are resulting to substantial amount.