Sonimad Sawmill, Inc., (SSI) purchases logs from independent timber contractors and processes the logs into three types of lumber products:

Studs for residential buildings (walls, ceilings)
Decorative pieces (fireplace mantels, beams for cathedral ceilings)
Posts used as support braces (mine support braces, braces for exterior fences on 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.

The joint process results in the following costs of products for a typical month:

Direct 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 yields and average sales values on a per-unit basis from the joint process are as follows:

Product Monthly Output of Materials at Splitoff Point Fully Processed Selling Price
Studs 75,000 units $ 8
Decorative pieces 5,000 units $100
Posts 20,000 units $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 beyond the splitoff point. The decorative pieces must be planed and further sized after emerging from the sawmill. This additional processing costs $100,000 per month and normally results in a loss of 10% of the units entering the process. Without this planing and sizing process, there is still an active intermediate market for the unfinished decorative pieces in which the selling price averages $60 per unit.

Required

1. Based on the information given for Sonimad Sawmill, allocate the joint processing costs of $1,000,000 to the three products using Sales value at splitoff method

The allocation of the joint processing costs of $1,000,000 to the three products using Sales value at split off method is Studs = $461,500, Decorative pieces  = $230,800, Posts  = $307,700

Explanation:

Solution

Allocate joint process costs

Allocation of joint costs of $1,000,000  to the three products  using Sales value at split off method fall under:

The unit of number output per month together with price sale at split off of the three products.

No further processing is required for the posts and studs for selling it's product, so the studs and post final product will be handled as split off price sale.

Now, for decorative pieces, the sold product is unprocessed at $60 per unit which is a price sale at the split off point

However, the joint cost of $1,000,000 is distributed to the ratio of sales value at the split off point.

Therefore the calculation of ratio of sales value falls under the following:

No of units per month = (1)

Sales of price at split off = (2)

Sales of value at split off = (1) *(2) = (3)

The ratio of sales at split off = (4) sales value/total sales value

Allocation of Joint cost of $  $1,000,000 = (5)

Studs = No of units per month  = $75,000

             Sales of price at split off=$8

             Sales of value at split off = (75,000 *$8) =$600,000

             The ratio of sales at split off = 0.4615

             Allocation of Joint cost of $  $1,000,000 =$461,500

Decorative prices = No of units per month= 5000

               Sales of price at split off= $60

                Sales of value at split off = (5000 * $60) = $300,000

                The ratio of sales at split off = 0.2308

                Allocation of Joint cost of $  $1,000,0 =00 = $230,800

Posts        = No of units per month = 20,000

                 Sales of price at split off = $20

                 Sales of value at split off = (20,000 * $20) =$400,000

                 The ratio of sales at split off = 0.3077

                  Allocation of Joint cost of $  $1,000,000 = $307, 700

Total  =      Sales of value at split off = $1300,000

                  The ratio of sales at split off = 0.9999

                  Allocation of Joint cost of $  $1,000,000= $1,000,000

Now,

The ratio proportion of sales value at split off for the three product is as follows:

Sales value of product/total sales value of all three product

Studs = $600,000/$1,300,000 = 0.4615

Decorative pieces = $300,00/$1,300,000 = 0.2308

Posts = $400,000/$1,300,000 = 0.3077

Thus,

The allocation of joint costs of $1,000,000 is calculated in the ratio above:

Joint cost * ratio of sales value

Studs = $1,000,000 * 0.4615 =$461,500

Decorative pieces = $1,000,000 * 0.2308 = $230,800

Posts =  $1,000,000 * 0.3077 = $307,700