Prescott Lumber processes logs into grade A and grade B lumber.
Logs cost $18,800 per load. The milling process produces 5,000
units of grade A with a market value of $78,400, and 15,000 units
of grade B with a market value of $11,200. The cost of the milling
process is $14,000 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?
cost allocation | |
grade A | ? |
grade B | ? |
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?
cost allocation | |
grade A | ? |
grade B | ? |
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)?
loss | ? |
SOLUTION
A.
Cost per logs | 18,800 |
Cost of milling process per load | 14,000 |
Total Cost | 32,800 |
Total Output = Output of Grade A (units) + Output of Grade B (units)
= 5,000 + 15,000 = 20,000 units
Cost Allocation Grade A = 32,800 * 5,000 / 20,000 = $8,200
Cost Allocation Grade B = 32,800 * 15,000 / 20,000 = $24,600
B.
Cost per logs | 18,800 |
Cost of milling process per load | 14,000 |
Total Cost | 32,800 |
Total Realizable Value = Net Realizable Value of Grade A + Net Realizable Value of Grade B
= 78,400 + 11,200 = 89,600
Cost Allocation Grade A = 32,800 * 78,400 / 89,600 = $28,700
Cost Allocation Grade B = 32,800 * 11,200 / 89,600 = $4,100
C.
Total realizable value from Grade B | 11,200 |
Less: Cost allocated to Grade B | (24,600) |
Loss from Grade B | (13,400) |
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