Question

1. 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	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 $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	$

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Answer 1

1a. Relative sales-value-at-split-off method

	Monthly Unit Output	Sales Price per Unit	Relative Sales Value at Split-Off	Percent of Sales	Allocated Joint Costs
Studs	80000	8	640000	51.61%	521261
Decorative pieces	5000	60	300000	24.19%	244319
Posts	15000	20	300000	24.19%	244319
Total			1240000	100.00%	1009899

Note: Difference due to rounding $1010000 - $1009899 = $101

b. Physical units method at split-off

	Units	Percent	x	Joint Cost	=	Allocated Joint Costs
Studs	80000	80%		1010000		808000
Decorative pieces	5000	5%		1010000		50500
Posts	15000	15%		1010000		151500
Total	100000	100%				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
Studs	80000	8	640000	50.39%	508939
Decorative pieces	4500	100	330000	25.98%	262398
Posts	15000	20	300000	23.62%	238562
Total			1270000	100.00%	1009899

Decorative pieces: Fully processed monthly unit output = 5000 - (10% x 5000) = 5000 - 500 = 4500

Decorative pieces: NRV = (4500 x $100) - $120000 = $450000 - $120000 = $330000

Note: Difference due to rounding $1010000 - $1009899 = $101

2.

Sonimad Sawmill, Inc.
Analysis Report
Monthly unit output	5000
Less: Normal further processing shrinkage	500
Units available for sale	4500
Final sales value (4500 x $100)	450000
Less: Sales value at split-off (5000 x $60)	300000
Differential revenue	150000
Less: Further processing costs	120000
Additional contribution from further processing	30000