Question

Prescott Lumber processes logs into grade A and grade B lumber. Logs cost $17,800 per load. The milling process produces 5,000 units of grade A with a market value of $92,400, and 20,000 units of grade B with a market value of $13,200. The cost of the milling process is $19,000 per load.

Required:

a. If the costs of the logs and the milling process are allocated on the basis of units of output, what cost will be assigned to each product?

b. If the costs of the logs and the milling process are allocated on the basis of the net realizable value, what cost will be assigned to each product?

c-1. How much profit or loss does the grade B lumber provide using the data in this problem and your analysis in requirement (a)?

c-2. Is it really possible to determine which product is more profitable?

Answer 1

a) Cost Allocation on the basis of units output:
Cost per logs	17,800.00
Cost of milling process per load	19,000.00
Total Cost	36,800.00
Output of Grade A (units)	5,000.00
Output of Grade B (units)	20,000.00
Total Output	25,000.00
Cost Allocation Grade A	7,360.00
(36800*5000/25000)
Cost Allocation Grade B	29,440.00
(36800*20000/25000)
b) Cost Allocation on the basis of net realizable value:
Cost per logs	17,800.00
Cost of milling process per load	19,000.00
Total Cost	36,800.00
Net Realizable Value of Grade A	92,400.00
Net Realizable Value of Grade B	13,200.00
Total Realizable Value	105,600.00
Cost Allocation Grade A	32,200.00
(36800*92400/105600)
Cost Allocation Grade B	4,600.00
(36800*13200/105600)
c)Profit or Loss from Grade B lumber from analysis of (a):
Total realizable value from Grade B	13,200.00
Less: Cost allocated to Grade B	29,440.00
Loss from Grade B	-16,240.00

c2. yes. Because fair value minus cost shows profit/loss.