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Question
A company produces two products, XX and YY, from a single raw material called Zub. Zub 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 Zub to produce XX and YY. The cost of Zub was $90 per drum.Required:
(1) If the cost of Zub 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 Zub 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?
Answer
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