Question

Extra Credit - Problems (1) - Protected View - Saved to this PC- - Mailings Review View Help Search Unless you need to edit, it's safer to stay in Protected View Enable Editing 4. A company produces two products, AA and BB, from a single raw material called Zub. Zub is purchased in 55-gallon drums, and the contents of one drum are enough to produce 30 gallons of AA and 15 gallons of BB. AA sells for $10.00 per gallon and BB sells for $30.00 per gallon. During the current period, the company used 400 drums of Zub to produce AA and BB. The cost of Zub was $90 per drum. (Hint: First determine how many gallons of AA and BB are produced from the 400 drums of Zub purchased.) Required: a) If the cost of Zub is allocated to the AA and BB products based on the number of gallons produced, how much of the total cost of the 400 drums should be charged to each product? b) If the cost of Zub is allocated to the AA and BB products in proportion to their market values, how much of the total cost of the 400 drums should be charged to each product?

Answer 1

Total cost of Zub = 400 drums @ $90 each drum

= $36,000

(a)

Number of gallons produced of AA = 30 gallons @ 400 drums

= 12,000 gallons

Number of gallons produced of BB = 15 gallons @ 400 drums

= 6,000 gallons

Total Gallons produced = 12,000 + 6,000 i.e. 18,000 gallons

Cost to be allocated to AA = ($36,000 / 18,000) * 12,000

= $24,000

Cost to be allocated to BB = ($36,000 / 18,000) * 6,000

= $12,000

(b)

Market value of AA = 12,000 gallons @ $10 each

= $120,000

Market value of BB = 6,000 gallons @ $30 each

= $180,000

Total Market Value = $120,000 + $180,000

= $300,000

Cost to be allocated to AA = ($36,000 / $300,000) * $120,000

= $14,400

Cost to be allocated to BB = ($36,000 / $300,000) * $180,000

= $21,600