Question

​Resources, Inc., mines copper. Its smelting process also yields a​ byproduct, molybdenum, that can be sold for industrial use. Both products are sold at the splitoff point. Lake Resources started November 2017 with no inventories and spent $590,000 on operations that month. Production and sales information for November are given​ below:

What is the gross margin for Lake ​Resources, Inc., under the production method and the sales method of accounting for​ byproducts?

Begin by calculating the gross margin under the production method and then the sales method.

Answer 1

	INCOME STATEMENT
	Production Method	Sales Method
Revenues
Main	521400	521400
Byproduct		40200
Total Revenues	$ 521400	$ 561600
Cost of goods sold
Manufacturing cost	590000	590000
Less : Byproduct net realisable value	(55800)
Net Manufacuring cost	534200	590000
Unit cost	26.71	29.5
Less : Main product inventory	(112182)	(123900)
Cost of goods sold	$ 422018	$ 466100
Gross Margin	$ 99382	$ 95500
Gross Margin %	19.06%	17.01%

Production method recognizes the value of byproduct when it is produced, while sales method recognizes the value when the byproduct is sold.

It should be noted that there is ending inventory of byproduct , under the production method that is not recognized in the income statement.

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