Question

Prescott Lumber processes logs into grade A and grade B lumber. Logs cost $18,600 per load. The milling process produces 5,000 units of grade A with a market value of $81,200, and 15,000 units of grade B with a market value of $11,600. The cost of the milling process is $15,000 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? Yes No

Answer 1

A) allocation based on units

Cost to be allocated = $18,600+ $15,000 = $33,600

Grade A = $33,600 * 5,000/20,000 =$8,400

Grade B = $33,600*15000/20000 = $25,200

B) allocation based on NRV

Grade A = $33,600*$81,200/$92,800 = $29,400.

Grade B = $33,600*$11,600/$92,800 = $4,200

C-1) profit / (loss) = NRV - cost allocated

= $11,600- $25,200

= ($13,600)

C-2) No it's not possible to determine which product is more profitable , it require specific cost allocation. Because in both above allocation there is a huge variance.