Greasy Ltd has a mining operation in Western Australia.It has reached the production stage with $10 million in costs carried forward.The company is leasing the mining rights to the area and at the beginning of this period the remaining term on the lease is 99 years.The expected production in tonnes from the area is 8 million.In the current period 500 000 tonnes were extracted.Revenues are expected to be highest in the early years of the mine's life and to decline at a rate of 15% per annum.How much of the accumulated costs should be allocated to production this period (round to the nearest dollar)?
A) $101 010
B) $625 000
C) $75 000
D) $150 000

Question

Quizplus · Accepted Answer

The accumulated cost to be allocated to production for the current period can be calculated using the depletion method. Depletion is calculated as the cost carried forward divided by the estimated total units of production.

Depletion = Cost carried forward / Estimated total units of production

Estimated total units of production = 8 million tonnes

Depletion = $10 million / 8 million tonnes = $1.25 per tonne

Since only 500,000 tonnes were extracted in the current period, the accumulated cost to be allocated to production this period is:

Accumulated cost = Depletion x Actual units extracted
Accumulated cost = $1.25 x 500,000 tonnes = $625,000

Therefore, the best choice is B.

Greasy Ltd Has a Mining Operation in Western Australia