Question – Sonimad Sawmill
Sonimad Sawmill Inc. (SSI) purchases logs from independent timber contractors and processes the logs into the following three types of lumber products.
Studs for residential building (e.g., walls, ceilings).
Decorative pieces (e.g., fireplace mantels, beams for cathedral ceilings).
Posts used as support braces (e.g., mine support braces, braces for exterior fences around ranch properties).
These products are the result of a joint sawmill process that involves removal of 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 for 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% of the units entering the process. Without this planning and sizing process, there is still an active intermediate market for the unfinished decorative pieces where the sales price averages $60 per unit.
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 method at split-off.
b. physical output (volume) method at split-off.
c. estimated net realizable value method.
2. Prepare an analysis for Sonimad Sawmill Inc. to compare processing the decorative pieces further as they presently do, with selling the rough-cut product immediately at split-off and recommend which action the company should take. Be sure to provide all calculations.
Answer: Question – Sonimad Sawmill
1. a. Relative sales value method at split-off
Product Monthly Output Sales Price Split-off Value % of Sales Allocated Costs
Studs 75,000 $ 8 $ 600,000 46.15% $ 461,539
Decorative pieces 5,000 60 300,000 23.08% 230,769
Posts 20,000 20 400,000 30.77% 307,692
Totals $1,300,000 100.00% $1,000,000
b. Physical output (volume) method at split-off
Product Monthly Output % of Output Allocated Costs
Studs 75,000 75.00% $ 750,000
Decorative pieces 5,000 5.00% 50,000
Posts 20,000 20.00% 200.000
Totals 100,000 100.00% $1,000,000
c. Estimated net realizable value method
Product Monthly Output Sales Price Net Value % of Net Value Allocated Costs
Studs 75,000 $ 8 $ 600,000 44.44% $ 444,445
Decorative pieces 4,5001
Posts 20,000 20 400,000 29.63% 296,296
Totals $1,350,000 100.00% $1,000,000
(1) 5,000 monthly units of output – 10% normal spoilage = 4,500 good units
(2) 4,500 good units x $100 = $450,000 – further processing costs of $100,000 = $350,000
2. Presented below is an analysis for Sonimad Sawmill comparing the processing of decorative pieces further versus selling the rough-cut product immediately at split-off.. Based on this analysis, it is recommended that Sonimad further process the decorative pieces as this action results in an additional contribution of $50,000.
Monthly unit output 5,000
Less normal further processing shrinkage 500
Units available for sale 4,500
Final sales value (4,500 units @$100 each) $450,000
Less sales value at split-off 300,000
Differential revenue 150,000
Less further processing costs 100,000
Additional contribution from further processing $ 50,000