The Jacobson Company manufactures two products, A and B from a single raw materi
ID: 2487733 • Letter: T
Question
The Jacobson Company manufactures two products, A and B from a single raw material call Gizmo. Gizmo is purchased in 100 pound blocks, and the contents of one block are sufficient to produce 50 units of A and 30 units of B. A sells for $45 per unit and B sells for $35 per unit. During the current period, the company used 800 blocks of Gizmo to manufacture A and B. The cost of Gizmo was $350 per block.
Required:
1. If the cost of Gizmo is allocated to the A and B products on the basis of the number of units produced, how much of the total cost of the 800 blocks should be charged to each product?
2. If the cost of Gizmo is allocated to the A and B products in proportion to their market values, how much of the total cost of the 800 blocks should be charged to each product?
3. Which basis of allocating the cost is most likely to be used by the company? Why?
Explanation / Answer
Answer 1. Allocation of Cost of Gizmo on the Basis of Units Produced Product A Product B Total One Block of Gizmo Produce (in Units) 50 30 800 Blocks of Gizmo Produces (In Units) 40,000 24,000 Allocation of Cost of Gizmo ( in the ratio of 5:3) 175,000 105,000 280,000 Answer 2. Allocation of Cost of Gizmo on the Basis of Market Values Product A Product B Total One Block of Gizmo Produce (in Units) 50 30 800 Blocks of Gizmo Produces (In Units) 40,000 24,000 SP per Unit 45 35 Total Market Value 1,800,000 840,000 2,640,000 Allocation of Cost of Gizmo ( in the ratio of Market Value) 190,909 89,091 280,000 Answer 3. Company should allocate the cost on the bassis of Market Value of Products as its gives the company more realistic value.
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