Joint-cost allocation with a byproduct. Mat Place purchases old tires and recycles them to produce rubber floor mats and car mats. The company washes, shreds, and molds the recycled tires into sheets. The floor and car mats are cut from these sheets. A small amount of rubber shred remains after the mats are cut. The rubber shreds can be sold to use as cover for paths and playgrounds. The company can produce 25 floor mats, 75 car mats, and 40 pounds of rubber shreds from 100 old tires.
In May, Mat Place, which had no beginning inventory, processed 125,000 tires and had joint production costs of $600,000. Mat Place sold 25,000 floor mats, 85,000 car mats, and 43,000 pounds of rubber shreds. The company sells each floor mat for $12 and each car mat for $6. The company treats the rubber shreds as a byproduct that can be sold for $0.70 per pound.
Required
1. Assume that Mat Place allocates the joint costs to floor mats and car mats using the sales value at splitoff method and accounts for the byproduct using the production method. What is the ending inventory cost for each product and gross margin for Mat Place?
2. Assume that Mat Place allocates the joint costs to floor mats and car mats using the sales value at splitoff method and accounts for the byproduct using the sales method. What is the ending inventory cost for each product and gross margin for Mat Place?
3. Discuss the difference between the two methods of accounting for byproducts, focusing on what conditions are necessary to use each method.