AA Company produces two products, XX and YY, from a single raw material called T
ID: 2481635 • Letter: A
Question
AA Company produces two products, XX and YY, from a single raw material called TT. TT is purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30 gallons of XX and 15 gallons of YY. XX sells for $10.00 per gallon and YY sells for $30.00 per gallon. During the current period, the company used 400 drums of TT to produce XX and YY. The cost of TT was $90 per drum.
Required: (1) If the cost of TT is allocated to the XX and YY products on the basis of 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 TT is allocated to the XX and YY products in proportion to their market values, how much of the total cost of the 400 drums should be charged to each product? (3) Which basis of allocating the cost is most likely to be used by the company and why?
Explanation / Answer
Number of gallon produced :XX = 30 * 400 = 12000
YY = 15 *400 = 6000
Total gallons = 12000+6000 = 18000
2)Market value of XX = 12000 * 10 = 120000
YY = 6000 * 30 = 180000
Total = 300000
36000*180000/300000 = 21600
3) tHE Company will use allocation based on gallons produced as it is right to charge cost on the basis of quantity used by each department .
XX YY 1)Cost= 400*90 = 36000 36000*12000/18000 = 24000 36000*6000/18000= 12000 2)36000 36000* 120000/300000 = 1440036000*180000/300000 = 21600