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MAINE CORPORATION …

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MAINE CORPORATION

….. purchases logs from independent timber contractors and processes them into the following three types of lumber products:

• Studs for residential construction (e.g., walls and ceilings)
• Decorative pieces (e.g., fireplace mantels and beams for cathedral ceilings)
• Posts used as support braces (e.g., mine support braces and braces for exterior fences around ranch properties)

In addition to the main products, the process produces a certain amount of sawdust which, while salable for commercial use, carries a very minor total sales value with respect to the principal products.  Accordingly, the company treats this sawdust as a by-product.

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:

Product yield and average sales value on a per-unit basis from the joint process are as follows:

Also consider the following information about the processing of the company’s products:

• The studs are sold as rough-cut lumber after emerging from the sawmill operation without further processing.
• Also, the posts require no further processing.
• The decorative pieces can be sold rough-cut immediately after processing at an average price of $60 per unit.  Alternatively, they can be further smoothed and sized after emerging from the sawmill.  This additional processing costs $100,000 per batch and normally results in a loss of 10 percent of the units entering the process.  Therefore, the company has a choice as to whether or not they should sell the decorative pieces as is, or, put them through the smoothing and sizing process.

Required:

1. The company wants your advice as to whether or not they should process the decorative pieces further, or, sell the rough-cut product immediately at split-off.  Prepare an analysis to compare these alternatives.  Be sure to provide all calculations.
2. WHY is it necessary to allocate joint costs to the various products?
3. Based on the information, allocate the joint processing costs of $1,000,000 to each of the three product lines using the following methods.  For each method, provide the journal entry to record the allocation of the joint cost.

 

1. Physical Units Method at split-off
2. Relative Sales Value at Split-Off Method
3. Estimated Net Realizable Value Method
4. Constant Gross Profit Method

 

In doing your allocations, assume that the decorative pieces are going to be finished by doing the smoothing and sizing.

 

4. Discuss the advantages and disadvantages of the allocation methods above.  Is one method clearly better than the other?  In what type of case would you choose to use each of the methods above?  In constructing your answer to this question, consider the purpose(s) of joint cost allocation.
5. WHAT IF, in addition to the products listed above, the joint process also produced 2,000 pounds of sawdust, with a total market value of @2,000. How do you think this should be handled and WHY?  What are the possibilities?