Question

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)	260,000
Total joint costs	$1,010,000

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 $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 $1,010,000 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.)

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

Answer 1

1
a.	Relative sales-value-at-split-off method
			Monthly unit output	Sales price per unit	Relative sales value at split-off	Percent of sales	Allocated costs
			a	b	c=a*b	d	d*1010000
	Studs		70000	8	560000	41.18%	415882
	Decorative pieces		5000	60	300000	22.06%	222794
	Posts		25000	20	500000	36.76%	371324
	Total				1360000		1010000
b.	Physical units method at split-off:
			Units	Percent	*	Joint cost	=	Allocated joint costs
	Studs		70000	70.00%		1010000		707000
	Decorative pieces		5000	5.00%		1010000		50500
	Posts		25000	25.00%		1010000		252500
	Total		100000					1010000
c.	Estimated net realizable value method:
			Fully processed monthly unit output	Sales price per unit	Net realizable value	Percent of value	Estimated Allocated joint costs
						a	a*1010000
	Studs		70000	8	560000	40.29%	406907
	Decorative pieces		4500	100	330000	23.74%	239784
			(Note:1)		(Note:2)
	Posts		25000	20	500000	35.97%	363309
	Total				1390000		1010000
	Notes
	1. Units entering in the process-Normal spoilage=5000-10%=4500
	2. Net realizable value=Final sales price-Additional processing cost=(4500*100)-120000=$ 330000
2			Sonimad Sawmill, Inc.
			Analysis Report
	Monthly unit output			5000
	Less:Normal spoilage		(5000*10%)	500
	Fully processed monthly unit output			4500
					$
	Final sales value		(4500*100)		450000
	Less:Sales value at split-off				300000
	Differential revenue				150000
	Less:Additional processing cost				120000
	Additional contribution from further processing				30000