Question

Problem 17-27 Joint Costs (LO 17-4, 17-5)

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Snake River 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 $460,000 and results in 76,000 units of MSB and 106,000 units of CBL. Each MSB sells for $2, and each unit of CBL sells for $10.

Problem 17-27 Part 5

5. Which of the following statements is true?

• The allocation of joint costs is irrelvant to the decision about coating the mine support braces. The decision should be based entirely on information pertaining to events from the split-off point forward.

• The joint cost allocation results should be used in the decision about coating the mine support braces because the decision should be based on total costs, i.e., costs incurred prior to split-off as well as those incurred post split-off.

Answer 1

Answer: The allocation of joint costs is irrelevant to the decision about coating the mine support braces. The decision should be based entirely on information pertaining to events from the split-off point forward.

The above mentioned statement is true because the joint costs incurred in developing the MSB and the CBL are irrelevant as they are sunk costs and would be incurred irrespective of whether the MSB is coated or not. The costs incurred from the split-off point in the further processing/coating of the MSB are future costs and relevant to the decision.