A company manufactures two products, X and Y, from a single raw material called

Question

A company manufactures two products, X and Y, from a single raw material called ZZ. ZZ is purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30 gallons of X and 15 gallons of Y. X sells for $10.00 per gallon and Y sells for $30.00 per gallon. During the current period, the company used 400 drums of ZZ to manufacture X and Y. The cost of ZZ was $90 per drum.
Required:
(1) If the cost of ZZ is allocated to the X and Y 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 ZZ is allocated to the X and Y 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?

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Explanation / Answer

Hi,

Please find the answer as follows;

Part 1:

Total Cost of 400 Drums = Number of Drums*Cost Per Drum = 400*90 = 36000

Cost Allocated to Product X = Total Cost*Gallon of X/Total Gallon = 36000*30/45 = 24000

Cost Allocated to Product Y = Total Cost*Gallon of X/Total Gallon = 36000*15/45 = 12000

Part 2:

Market Value of X = Gallon of X*Sales Price of X per Gallon = 30*10 = 300

Market Value of Y = Gallon of Y*Sales Price of Y per Gallon = 15*30 = 450

Cost Allocated to Product X = Total Cost*Market Value of X/Total Market Value of X and Y = 36000*300/(300+450) = 14400

Cost Allocated to Product Y = Total Cost*Market Value of Y/Total Market Value of X and Y = 36000*450/(300+450) = 21600

Part 3:

The company is most likely to Market Values as the basis as it helps in allocating the cost in accordance with the current values of both the products, thereby providing a more accurate position and cost structure.

Thanks.

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