Chapter 24, Problem 19E

To determine

Assign the joint land and improvement costs to the lots using the value basis of allocation and determine the average cost per lot.

Explanation of Solution

Joint cost: The total cost incurred to produce or manufacture or process, more than two products at the same time, is referred to as joint cost.

Allocation of joint costs:

• Physical basis of allocation: In this method, joint costs are allocated when the number of units, or pounds, or square feet, cubic feet, gallons used by individual products, can be compared and measured with the total number of units, or pounds, or square feet, cubic feet, gallons used by the total products.
• Value basis of allocation: In this method, the joint costs are allocated to the value of sales revenue generated by number of units of individual products, can be compared and measured to the sales revenue generated by total number of units.

Allocate the joint land and improvement costs to the lots using the value basis of allocation and calculate the average cost per lot:

Particulars	Market Value	% of total	Allocated cost	Average lot cost
Canyon section	$24,750,000 (1)	60% (2)	$4,500,000 (4)	$10,000 (6)
Hilltop section	$16,500,000 (1)	40% (3)	$3,000,000 (5)	$20,000 (7)
Total	$41,250,000 (1)	100%	$7,500,000

Table (1)

Note: Allocated cost-value basis of allocation is $7,500,000

Working note:

Calculate the total market value of lots:

Lots	Quantity	Price	Total
Canyon	450 lots	$55,000	$24,750,000
Hilltop	150 lots	$110,000	$16,500,000
Total market value			$41,250,000

Table (2)

…… (1)

Calculate the percentage of allocation for canyon section:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\text{allocation}\\ \text{for}\text{canyon}\text{section}\end{array}\}\text{=}\frac{\text{Market}\text{value}\text{of}\text{canyon}\text{lots}}{\text{Total}\text{market}\text{value}}\text{×100}\\ \text{=}\frac{\text{\$24,750,000}}{\text{\$41,250,000}}\text{×100}\\ \text{=}\text{60\%}\end{array}$ (2)

Calculate the percentage of allocation for hilltop section:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\text{allocation}\\ \text{for}\text{hilltop}\text{section}\end{array}\}\text{=}\frac{\text{Market}\text{value}\text{of}\text{hilltop}\text{lots}}{\text{Total}\text{market}\text{value}}\text{×100}\\ \text{=}\frac{\text{\$16,500,000}}{\text{\$41,250,000}}\text{×100}\\ \text{=}\text{40\%}\end{array}$ (3)

Calculate the cost allocated to canyon section:

$\begin{array}{c}\begin{array}{l}\text{Calculate}\text{the}\text{cost}\text{allocated}\\ \text{to}\text{canyon}\text{section}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{cost}\text{allocated}\text{×}\text{percentage}\text{of}\\ \text{allocation}\text{to}\text{canyon}\text{section}\end{array}\right)\\ \text{=}\text{\$7,500,000×60\%}\\ \text{=}\text{\$4,500,000}\end{array}$ (4)

Calculate the cost allocated to hilltop section:

$\begin{array}{c}\begin{array}{l}\text{Calculate}\text{the}\text{cost}\text{allocated}\\ \text{to}\text{hilltop}\text{section}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{cost}\text{allocated}\text{×}\text{percentage}\text{of}\\ \text{allocation}\text{to}\text{hilltop}\text{section}\end{array}\right)\\ \text{=\$7,500,000×40\%}\\ \text{=}\text{\$3,000,000}\end{array}$ (5)

Calculate the average lot cost of canyon section:

$\text{Average}\text{lot}\text{cost}\text{of}\text{canyon}\}\text{=}\frac{\text{Cost}\text{allocated}\text{to}\text{canyon}\text{section}}{\begin{array}{l}\text{Number}\text{of}\text{lots}\\ \text{=}\frac{\text{\$4,500,000}}{\text{450}\text{lots}}\\ \text{=}\text{\$10,000}\end{array}}$ (6)

Calculate the average lot cost of hilltop section:

$\text{Average}\text{lot}\text{cost}\text{of}\text{hilltop}\}\text{=}\frac{\text{Cost}\text{allocated}\text{to}\text{hilltop}\text{section}}{\begin{array}{l}\text{Number}\text{of}\text{lots}\\ \text{=}\frac{\text{\$3,000,000}}{\text{150}\text{lots}}\\ \text{=}\text{\$20,000}\end{array}}$ (7)