Sonimad Sawmill manufactures two lumber products from a joint milling process. T

Question

Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSBs) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each unprocessed unit of MSB sells for $2 per unit and each unprocessed unit of CBL sells for $4 per unit. If the CBL is processed further at a cost of $200,000, it can be sold at $10 per unit but 10,000 units are unavoidably lost (with no discernible value). The MSB units can be coated with a preservative at a cost of $100,000 per production run and then sold for $3.50 each. a. If no further work is done after the initial milling process, calculate the cost of CBL using physical quantities to allocate the joint cost. b. If no further work is done after the initial milling process, calculate the cost of MSB using relative sales value to allocate the joint cost. c. Should MSB and CBL be processed further or sold immediately after initial milling?

Explanation / Answer

MSB 60,000 units (60/150 = 40%) CBL   90,000 units (90/150 = 60%) Total units 150,000 units (100%) Allocation of Joint Costs MSB 40% × $300,000 = $120,000 CBL 60% × $300,000 = $180,000    = $300,000 MSB 60,000 units (60/150 = 40%) CBL   90,000 units (90/150 = 60%) Total units 150,000 units (100%) Allocation of Joint Costs MSB 40% × $300,000 = $120,000 CBL 60% × $300,000 = $180,000    = $300,000 ---------------------------------------------------------- Units of CBL produced 90,000 Less: Spoilage (10,000) Units available for sale 80,000 Sales price at point of sale: 80,000 units x $10/unit =  $ 800,000 Less: Processing cost to complete (200,000) Sales value at split off $ 600,000 Less: Processing cost to complete (200,000) Sales value at split off $ 600,000 60,000 units produced x $2 per unit sales price = $120,000 Allocation of joint costs to CBL:

CBL sales value at split off $600,000 (600/720 = approx. 83.3%) MSB sales value at split off 120,000 (120/720 = approx. 16.7%) Total sales value at split off   $720,000 (100%) $300,000 joint costs x 600/720 = $250,000 Cost per unit of CBL:
Allocation of joint cost   $250,000 Additional processing costs    200,000
Total costs $450,000 Divided by saleable units ÷  80,000 Cost per unit $  5.625

Allocation of joint costs to CBL:

CBL sales value at split off $600,000 (600/720 = approx. 83.3%) MSB sales value at split off 120,000 (120/720 = approx. 16.7%) Total sales value at split off   $720,000 (100%) $300,000 joint costs x 600/720 = $250,000 Cost per unit of CBL:
Allocation of joint cost   $250,000 Additional processing costs    200,000
Total costs $450,000 Divided by saleable units ÷  80,000 Cost per unit $  5.625
Cost per unit of CBL:
Allocation of joint cost   $250,000 Additional processing costs    200,000
Total costs $450,000 Divided by saleable units ÷  80,000 Cost per unit $  5.625

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