Question

(Depletion Computations—Mining) Alcide Mining Company purchased land on February 1, 2017, at a cost of \(1,190,000. It is estimated that a total of 60,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at \)90,000. It believes it will be able to sell the property afterwards for \(100,000. It incurred developmental costs of \)200,000 before it was able to do any mining. In 2017, resources removed totaled 30,000 tons. The company sold 22,000 tons.

Instructions

Compute the following information for 2017.

1. Per unit material cost.
2. Total material cost of December 31, 2017, inventory.
3. Total material cost in cost of goods sold at December 31, 2017.

Short answer

Answer

1. Cost per tones = 23
2. Total material cost = $184,000
3. Total cost of goods sold = $506,000

Step-by-step solution

Meaning of Depletion 

Depletion is defined as a reduction in the quantity of a production factor due to the manufacturing process.Companies generate new products by combining current goods and services. When old items are turned into new products, it is termed a production process.

(a) Computing per unit material cost

The total cost to be incurred in relation to mining

Cost of land	1,190,000
Add: Restoration obligation	90,000
Add: Development cost	200,000
Less: Resale value	100,000
Total cost incurred	1,380,000
Quantity of minerals to be mined	60,000 tones
Cost per tons	23

Working Notes:

Calculating per unit material cost

$\begin{array}{rcl}\text{Cost}\text{per}\text{tones}& =& \frac{\text{Total}\text{cost}\text{incurred}}{\text{Quantity}\text{of}\text{minerals}\text{to}\text{be}\text{mined}}\\ & =& \frac{\$1,380,000}{60,000}\\ & =& 23\text{per}\text{tone}\end{array}$

(b) Determining cost of Total material cost of December 31, 2017, inventory 

$\begin{array}{rcl}\text{Cost}\text{of}\text{material}& =& \text{Total} \text{tones}\text{after}\text{adjustmet}\times \text{Cost}\text{per}\text{tones}\\ & =& 8,000\times \$23\\ & =& \$184,000\end{array}$

(c) Calculating the total cost of goods sold

$\begin{array}{rcl}\text{Cost} \text{of} \text{goods}\text{sold}& =& \text{Total}\text{tones}\text{sold}\times \text{Cost}\text{per}\text{tones}\\ & =& 22,000\times \$23\\ & =& \$506,000\end{array}$