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) 60,000

Sizing (labor and overhead) 200,000

Product cutting (labor and overhead) 260,000

Total joint costs $1,020,000

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 75,000 $8

Decorative pieces 5,000 100

Posts 20,000 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 $120,000 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 $1,020,000 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 _______units _______% $_______ $_________

Decorative pieces _______units ________% $ ________ $__________

Posts ________units ________% $_________ $___________

Total _____units $_________

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 _______unit $______________ $_____________ __________% $____________

Decorative pieces ________unit $______________ $_____________ __________% $____________

Posts ________unit $_______________ $____________ _________ % $_____________

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 $