Joint cost allocation, process further or sell. (CMA, adapted) fionimad fiawmill Inc. (SSI)

purchases logs from independent timber contractors and processes the logs into three types oflumber products.

1. Studs for residential building (e.g., walls, ceilings)

2. Decorative pieces (e.g., fireplace mantels, beams for cathedral ceilings)

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

These products are the result of a joint sawmill process that involves removal of bark from the logs, cutting the logs into a workable size (ranging from 2.5 to 5 metres long), and then cutting the individual products from the logs, depending on the type ofwood (pine, oak, 618 CHAPTER 15 walnut, or maple) and the size (diameter) of the log.

The joint process results in the following costs and output of products for a typical month:
Joint production costs Direct materials (rough timber logs) $ 600,000 Debarking (labour and overhead) 60,000 Sizing (labour and overhead) 240,000 Product cutting (labour and overhead) 300,000 Total joint costs $1,200,000 Product yield and average sales value on a per unit basis from the joint process are as follows:
Monthly Output of Fully Processed Product Materials at Splitoff Point Selling Price Studs 75,000 units $ 9.60 Decorative pieces 5,000 units 120.00 Posts 20,000 units 24.00 The studs are sold as rough-cut lumber after emerging from the sawmill operation without further processing by SSI. Also, the posts require no further processing beyond the splitoffpoint.
The decorative pieces must be planed and further sized after emerging from the sawmill. This additional processing costs $120,000 per month and normally results in a loss of 10% ofthe units entering the process. Without this planing and sizing process, there is still an active intermediate market for the unfinished decorative pieces where the selling price averages $72 per unit.
Required 1. Based on the information given for Sonimad Sawmill Inc., allocate the joint processing costs of $1,200,000 to each of the three product lines using the

a. sales value at splitoffmethod.

b. physical-measure method using volume in units.

c. estimated net realizable value method.
2. Prepare an analysis for Sonimad Sawmill Inc. to compare processing the decorative pieces further as they currently do with selling them as a rough-cut product immediately at splitoff.
3. Assume Sonimad Sawmill Inc. announced that in six months it will sell the rough-cut product at splitoff due to increasing competitive pressure. Identify at least three types of likely behaviour that will be demonstrated by the skilled labour in the planing and sizing process as a result of this announcement. Include in your discussion how this behaviour could be improved by management.
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