Question

3. Hampton Lumber Mills Inc. produces lumber from farmed trees. Raw logs are delivered to the company's plant where they are processed up to the split-off point into three products two-by-four lumber, two-by-six lumber and two-by-twelve lumber. Lumber is sold by the FBM (foot board measure), which is a common standard in the industry The joint costs of this process are $60,000, resulting in the following output Product Units Two-by-four Two-by-six Two-by-twelve 90,000 FBM 60,000 FBM 40,000 FBM Selling price per FBM $0.40 $0.60 $0.70 Each of these products can be further refined by going through a process that smooths the board by running it through a planer. While the output remains the same, this process increases the production cost and the sales value of the output as follow:s Product Two-by-four Two-by-six Two-by-twelve Further processing costs $20,000 $12,000 $13,000 Finished selling price per FBM $0.50 $0.82 $0.85 Which of the following statements regarding allocation of joint costs using the sales value at split-off method and the net realizable value (NRV) method is true, assuming that the wood is processed further? a) Joint costs allocated to the two-by-four product using the sales value at split-off method b) Joint costs allocated to the two-by-six product using the sales value at split-off method c) Joint costs allocated to the two-by-twelve product using the sales value at split-off d) Joint costs should be considered when making the decision to sell or process further would be $3,571 less than the costs allocated using the NRV method would be $5,227 less than the costs allocated using the NRV method method would be $1,656 less than the costs allocated using the NRV method

Answer 1

Joint costs are the cost incurred the split-off point

It can be allocated in 2 ways:

1.By Sales value at split-off method

2.By NRV Method

Sales Value at split-off is as follows:

Product	Units	Selling Price per Unit	Total Sales Value	Allocated Joint Cost
Two-by Four	90,000	0.40	36,000	21,600
Two by six	60,000	0.60	36,000	21,600
Two by twelve	40,000	0.70	28,000	16,800
Total			100,000	60,000

By NRV Method:

Product	Units	Selling Price per Unit	Total Sales Value (A)	Processing Cost (B)	NRV (A-B)	Allocated Joint Costs
Two-by Four	90,000	0.50	45,000	20,000	25,000	18,029
Two by six	60,000	0.82	49,200	12,000	37,200	26,827
Two by twelve	40,000	0.85	34,000	13,000	21,000	15,144
Total					83,200	60,000

Comparison:

Product	Sales Value at Split-off Point	NRV	Difference
Two-by Four	21,600	18,029	3,571
Two by six	21,600	26,827	(5,227)
Two by twelve	16,800	15,144	1,656

a)is false, amount is 3,571 but it is more under sales at split off method

b) is true

c) is false, it is more under sales at split off method

d)is false, joint costs are sunk costs and are not relevant for decision making

Hence, the correct answer is b