Physical Units Method, Relative Sales-Value-at-Split-off Method,Net Realizable Value Method, Decision Making

Sonimad Sawmill, Inc. (SSI), purchases logs from independenttimber contractors and processes them into the following threetypes of lumber products:

Studs for residential construction (e.g., walls andceilings)

Decorative pieces (e.g., fireplace mantels and beams forcathedral ceilings)

Posts used as support braces (e.g., mine support braces andbraces for exterior fences around ranch properties)

These products are the result of a joint sawmill process thatinvolves removing bark from the logs, cutting the logs into aworkable size (ranging from 8 to 16 feet in length), and thencutting the individual products from the logs, depending upon thetype of wood (pine, oak, walnut, or maple) and the size (diameter)of the log.

The joint process results in the following costs and output ofproducts during a typical month:

Joint production costs:
Materials (rough timber logs)	$500,000
Debarking (labor and overhead)	50,000
Sizing (labor and overhead)	200,000
Product cutting (labor and overhead)	250,000
Total joint costs	$1,000,000

Product yield and average sales value on a per-unit basis fromthe joint process are as follows:

Product	Monthly Output	Fully Processed Sales Price
Studs	70,000	$8
Decorative pieces	5,000	100
Posts	25,000	20

The studs are sold as rough-cut lumber after emerging from thesawmill operation without further processing by SSI. Also, theposts require no further processing. The decorative pieces must beplaned and further sized after emerging from the SSI sawmill. Thisadditional processing costs SSI $80,000 per month and normallyresults in a loss of 10 percent of the units entering the process.Without this planing and sizing process, there is still an activeintermediate market for the unfinished decorative pieces where thesales price averages $60 per unit.

Required:

1. Based on the information given for SonimadSawmill, Inc., allocate the joint processing costs of $1,000,000 toeach of the three product lines using the:

a. Relative sales-value-at-split-off method.When required, round decimal values to four places beforeconverting to a percentage. For example, .88349 would be rounded to.8835 and entered as "88.35" percent.

	Monthly Unit Output	Sales Price per Unit	Relative Sales Value at Split-Off	Percent of Sales		Allocated Joint Costs
Studs		$	$		%	$
Decorative pieces					%
Posts					%
Total			$		%	$

(Note: Difference due to rounding.)

b. Physical units method at split-off.

	Units	Percent	x	Joint Cost	=	Allocated Joint Costs
Studs		%		$		$
Decorative pieces		%
Posts		%
Total						$

c. Estimated net realizable value method. Whenrequired, round decimal values to four places before converting toa percentage. For example, .88349 would be rounded to .8835 andentered as "88.35" percent.

	Fully Processed Monthly Unit Output	Sales Price per Unit	Net Realizable Value	Percent of Value		Estimated Allocated Joint Costs
Studs		$	$		%	$
Decorative pieces					%
Posts					%
Total			$		%	$

(Note: Difference due to rounding.)

Feedback

1. a. The sales-value-at split-off methodallocates joint cost based on each product’s proportionate share ofmarket or sales value at the split-off point. b. The physical unitsmethod allocates the cost in proportion to the number of units andis useful when the value of one product is close to the value ofanother product. c. The net realizable value method is used whenone or more of the joint products cannot be sold at split-off. Inthis case, a hypothetical market value is constructed so that jointcost allocation can be done as close to the split-off point aspossible.

2. Prepare an analysis for Sonimad Sawmill,Inc., to compare processing the decorative pieces further as itpresently does, with selling the rough-cut product immediately atsplit-off.

Sonimad Sawmill, Inc.
Analysis Report
Monthly unit output
Less: Normal further processingshrinkage
Units available for sale
Final sales value	$
Less: Sales value at split-off
Differential revenue	$
Less: Further processing costs
Additional contribution from furtherprocessing	$

Feedback

1. Analyze the firm and give calculations.Review methods.

Feedback

Partially correct