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

Sonimad Sawmill, Inc. (SSI), purchases logs from independent timber contractors and processes them into the following three types of lumber products:

Studs for residential construction (e.g., walls and ceilings)

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

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

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

The joint process results in the following costs and output of products 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 from the 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 the sawmill operation without further processing by SSI. Also, the posts require no further processing. The decorative pieces must be planed and further sized after emerging from the SSI sawmill. This additional processing costs SSI $80,000 per month and normally results in a loss of 10 percent of the units entering the process. Without this planing and sizing process, there is still an active intermediate market for the unfinished decorative pieces where the sales price averages $60 per unit.

Required:

1. Based on the information given for Sonimad Sawmill, Inc., allocate the joint processing costs of $1,000,000 to each of the three product lines using the:

a. Relative sales-value-at-split-off method. When required, round decimal values to four places before converting 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. When required, round decimal values to four places before converting to a percentage. For example, .88349 would be rounded to .8835 and entered 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 method allocates joint cost based on each products proportionate share of market or sales value at the split-off point. b. The physical units method allocates the cost in proportion to the number of units and is useful when the value of one product is close to the value of another product. c. The net realizable value method is used when one or more of the joint products cannot be sold at split-off. In this case, a hypothetical market value is constructed so that joint cost allocation can be done as close to the split-off point as possible.

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

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

Feedback

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

Feedback

Partially correct