AA Company produces two products, XX and YY, from a single raw material called T
ID: 2482037 • 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
Total cost of TT (which is needed to be allocated) = 400 x $ 90 = $ 36,000
1. If the cost of TT is allocated to XX and YY on the basis of number of gallons produced:
Gallons of XX produced : 400 x 30 gallons = 12,000 gallons
Gallons of YY produced : 400 x 15 gallons = 6,000 gallons
Therefore, allocation of cost of TT of $ 36,000 : XX $ 24,000 ; YY $ 12,000
2. If the cost of TT is allocated to XX and YY in proportion to their market values:
Market value of XX: 400 x 30 gallons x $ 10 = $ 120,000
Market value of YY: 400 x 15 gallons x $ 30 = $ 180,000
Therefore, allocation of cost of TT of $ 36,000 : XX $ 14,400 ; YY $ 21,600
3. The first basis, i.e allocation on the basis of number of gallons produced is most likely to be used by the company, as market values can be volatile, and may change frequently.