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Physical Units Method, Relative Sales-Value-at-Split-off Method, Net Realizable Value Method, Decision Making Sonimad Sawmill, Inc. (SSI),...

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) 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 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 $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 $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 $ % $

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 $ % $

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
Final sales value $
Differential revenue $
Additional contribution from further processing $

Solutions

Expert Solution

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 75,000 $         8.00 $    600,000.00 46.15% $461,538.46
Decorative pieces 5,000 $       60.00 $    300,000.00 23.08% $230,769.23
Posts 20,000 $       20.00 $    400,000.00 30.77% $307,692.31
Total $ 1,300,000.00 $     1,000,000.00
b. Physical units method at split-off.
Units Percent x Joint Cost = Allocated Joint Costs
Studs          75,000.00 75.00% x $ 1,000,000.00 = $        750,000.00
Decorative pieces            5,000.00 5.00% x $ 1,000,000.00 = $          50,000.00
Posts          20,000.00 20.00% x $ 1,000,000.00 = $        200,000.00
Total        100,000.00 $     1,000,000.00
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          75,000.00 $         8.00 $    600,000.00 44.44% $        444,444.44
Decorative pieces (5000 x (1-10% spoilage )            4,500.00 $     100.00 $    350,000.00 25.93% $        259,259.26
Posts          20,000.00 $       20.00 $    400,000.00 29.63% $        296,296.30
Total          99,500.00 $ 1,350,000.00 $     1,000,000.00
4,500 good units × $100 = $450,000 – Further processing cost of $100,000 = $350,000
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            5,000.00
Less: Normal further processing shrinkage               500.00
Units available for sale            4,500.00
Final sales value (4,500 units @ $100 per unit) $    450,000.00
Less: Sales value at split-off $    300,000.00
Differential revenue $    150,000.00
Less: Further processing costs $    100,000.00
Additional contribution from further processing $      50,000.00

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