Question

Prescott Lumber processes logs into grade A and grade B lumber. Logs cost $19,200 per load. The milling process produces 6,000 units of grade A with a market value of $44,800, and 18,000 units of grade B with a market value of $6,400. The cost of the milling process is $8,192 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? (Do not round intermediate calculations.)

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? (Do not round intermediate calculations.)

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)? (Do not round intermediate calculations.)

c-2. Is it really possible to determine which product is more profitable?

	Yes
	No

Answer 1

a) To calculate the cost assigned to Grade A and Grade B lumber on the basis of units sold,

First add the total units produced Grade A and B = 6000+18000 =24000

Grade A = 6000/24000=25% of total Units

Grade B =18000/24000 =75% of total units

Total costs = 19200+8192 = 27392

Cost allocated to Grade A = 27392 * 25% =6848

Cost allocated to Grade B = 27392 * 75% = 20544

b) Cost allocation on the basis of net realizable value.

Total market value of Grade A and B = 44800+6400 = 51200

Grade A =44800/51200 =87.5%

Grade B =6400/51200 = 12.5%

Grade A cost allocation =27392*87.5% = 23968

Grade B cost allocation = 27392*12.5% = 3424

c-1) As per net realisable value, the cost allocated to grade B is $3424 and market value is $6400

So profit =6400-3424 =2976

On the basis of cost allocated to the unit sold the cost allocated to grade B is 20544

So there is a loss =6400-20544= (14144)

c-2) It is difficult to determine which product is more profitable. Both the method gives us extreme values. It is clear from the question b, we got profit when we used net realization method and loss in the other method. It will be possible to determine the profit or loss, if we have more information regarding further process expenses incurred.