Question

Prescott Lumber processes logs into grade A and grade B lumber. Logs cost $18,800 per load. The milling process produces 5,000 units of grade A with a market value of $78,400, and 15,000 units of grade B with a market value of $11,200. The cost of the milling process is $14,000 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?

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?

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)?

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

• Req A
• Req B
• Req C1
• Req C2

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.)

Required A

	Cost Allocation Grade A Grade B

Required 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.)

	Cost Allocation Grade A Grade B

Required C

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.)

Answer 1

Given information

Log costs $ 18,800 per load.

Cost of milling process $ 14,000 per load.

The milling process produces 5,000 units of Grade A with a market value of $78,400 and 15,000 units of Grade B with market value of $11,200.

a. Costs of the logs and the milling process are allocated on the basis of units of output.

Total number of units = 5,000+15,000 = 20,000

Costs allocated to Grade A:

Log costs = $ 18,800 * 5,000/20,000 = $4,700.

Cost of milling process = $ 14,000 * 5,000/20,000 = $3,500.

Total costs = 4,700+3,500 = $8,200.

Costs allocated to Grade B:

Log costs = $ 18,800 * 15,000/20,000 = $14,100.

Cost of milling process = $ 14,000 *15,000/20,000 = $10,500.

Total costs = 14,100+10,500 = $24,600

Cost allocation

Grade A $8,200

Grade B $24,600

b. Costs of the logs and the milling process are allocated on the basis of net realizable value.

Total net realizable value = 78,400+11,200 = $89,600.

Costs allocated to Grade A:

Log costs = $ 18,800 * 78,400/89,600 = $16,450.

Cost of milling process = $ 14,000 * 78,400/89,600 = $12,250.

Total costs = 16,450+12,250 = $28,700.

Costs allocated to Grade B:

Log costs = $ 18,800 * 11,200/89,600 = $2,350.

Cost of milling process = $ 14,000 *11,200/89,600 = $1,750.

Total costs = 2,350+1,750 = $4,100.

Cost allocation

Grade A $28,700

Grade B $4,100

C-1.        Profit or loss does the grade B lumber provide:

                = 11,200 – 14,100 – 10,500

                = $ 13,400 (loss).