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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

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:

  1. Studs for residential construction (e.g., walls and ceilings)
  2. Decorative pieces (e.g., fireplace mantels and beams for cathedral ceilings)
  3. 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) 240,000
Total joint costs $990,000

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 80,000 $8
Decorative pieces 5,000 100
Posts 15,000 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 $100,000 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 $990,000 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 fill in the blank e20d9efdafda07b_1 $fill in the blank e20d9efdafda07b_2 $fill in the blank e20d9efdafda07b_3 fill in the blank e20d9efdafda07b_4 % $fill in the blank e20d9efdafda07b_5
Decorative pieces fill in the blank e20d9efdafda07b_6 fill in the blank e20d9efdafda07b_7 fill in the blank e20d9efdafda07b_8 fill in the blank e20d9efdafda07b_9 % fill in the blank e20d9efdafda07b_10
Posts fill in the blank e20d9efdafda07b_11 fill in the blank e20d9efdafda07b_12 fill in the blank e20d9efdafda07b_13 fill in the blank e20d9efdafda07b_14 % fill in the blank e20d9efdafda07b_15
Total $fill in the blank e20d9efdafda07b_16 fill in the blank e20d9efdafda07b_17 % $fill in the blank e20d9efdafda07b_18

(Note: Difference due to rounding.)

b. Physical units method at split-off.

Units Percent x Joint Cost = Allocated Joint Costs
Studs fill in the blank e20d9efdafda07b_19 fill in the blank e20d9efdafda07b_20% $fill in the blank e20d9efdafda07b_21 $fill in the blank e20d9efdafda07b_22
Decorative pieces fill in the blank e20d9efdafda07b_23 fill in the blank e20d9efdafda07b_24% fill in the blank e20d9efdafda07b_25 fill in the blank e20d9efdafda07b_26
Posts fill in the blank e20d9efdafda07b_27 fill in the blank e20d9efdafda07b_28% fill in the blank e20d9efdafda07b_29 fill in the blank e20d9efdafda07b_30
Total fill in the blank e20d9efdafda07b_31 $fill in the blank e20d9efdafda07b_32

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 fill in the blank e20d9efdafda07b_33 $fill in the blank e20d9efdafda07b_34 $fill in the blank e20d9efdafda07b_35 fill in the blank e20d9efdafda07b_36 % $fill in the blank e20d9efdafda07b_37
Decorative pieces fill in the blank e20d9efdafda07b_38 fill in the blank e20d9efdafda07b_39 fill in the blank e20d9efdafda07b_40 fill in the blank e20d9efdafda07b_41 % fill in the blank e20d9efdafda07b_42
Posts fill in the blank e20d9efdafda07b_43 fill in the blank e20d9efdafda07b_44 fill in the blank e20d9efdafda07b_45 fill in the blank e20d9efdafda07b_46 % fill in the blank e20d9efdafda07b_47
Total $fill in the blank e20d9efdafda07b_48 fill in the blank e20d9efdafda07b_49 % $fill in the blank e20d9efdafda07b_50

(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 fill in the blank 8c0eb7019ffff8d_1
Less: Normal further processing shrinkage fill in the blank 8c0eb7019ffff8d_3
Units available for sale fill in the blank 8c0eb7019ffff8d_5
Final sales value $fill in the blank 8c0eb7019ffff8d_6
Less: Sales value at split-off fill in the blank 8c0eb7019ffff8d_8
Differential revenue $fill in the blank 8c0eb7019ffff8d_9
Less: Further processing costs fill in the blank 8c0eb7019ffff8d_11
Additional contribution from further processing $fill in the blank 8c0eb7019ffff8d_12

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