Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) 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 MSB sells for $2 per unit, each CBL sells for $4 per unit.Continuing with the previous data, assume the commercial building lumber is not marketable at split-off but must be further planed and sized at a cost of $200,000 per production run. During this process, 10,000 units are unavoidably lost; these spoiled units have no discernable value. The remaining units of commercial building lumber are saleable at $10.00 per unit. The mine support braces, although saleable immediately at the split-off point, are coated with a tar-like preservative that costs $100,000 per production run. The braces are then sold for $5 each.Using the net realizable value (NRV) basis, the completed cost assigned to each unit of commercial building lumber would be:
a.$5.3125
b.Some amount other than those given above.
c.$2.92
d.$5.625 Answer:D
Choice "D" is correct. $5.625. RULE: If net realizable value cannot be deteriend at split-off, then additional costs added after the split-off point (separable costs) must be subtracted from the final selling price to arrive at net realizable value. [Note: In this question, this applies to CBL only, as MSB is saleable at $2 each at split off.]CBL sales value at split off:
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 × $10/unit = | $ 800,000 |
Less: Processing cost to complete | (200,000) |
Sales value at split off | $ 600,000 |
MSB sales value at split off:60,000 units produced × $2 per unit sales price$120,000 |
(Note that the additional processing costs incurred to generate a higher selling price of $5 per unit are not relevant to the sales value at split off.) |
Allocation of joint costs to CBL:
CBL sales value at split off | $ 600,000 | (600/720. 83.3%) |
MSB sales value at split off | 120,000 | (120/720. 16.7%) |
Total sales value at split off | $ 720,000 | (100%) |
$300,000 joint costs × 600/720$250,000 |
(Note that the percentages did not come out "even." In such cases, it is important to use the exact computations on your calculator.) |
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 |
