Question

1. 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:

1. 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?
2. 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

	AA	BB
Gallons produced	12,000 (400*30)	6,000 (400*15)

Cost of Zub purchased = 400 drums * $90

= $36,000

a.

	AA	BB
Total cost allocated	$24,000 ($36,000*12,000/18,000)	$12,000 ($36,000*6,000/18,000)

b.

	AA	BB
Market values	$120,000 (12,000*$10)	$180,000 (6,000*$30)
Total cost allocated	$14,400 ($36,000*$120,000/$300,000)	$21,600 ($36,000*$180,000/$300,000)