Question

Northwest Building Products (NBP) manufactures two lumber products from a joint milling process: residential building lumber (RBL) and commercial building lumber (CBL). A standard production run incurs joint costs of $380,000 and results in 100,000 units of RBL and 70,000 units of CBL. Each RBL sells for $8 per unit and each CBL sells for $12 per unit.

QUESTIONS:

1. Assuming that no further processing occurs after the split-off point, how much of the joint costs are allocated to commercial lumber (CBL) on a physical measure method basis?

2. If no further processing occurs after the split-off point, how much of the joint cost is allocated to the residential lumber (RBL) using a sales value at split-off method?

3. Assume that the CBL is not marketable at split-off but must be planed and sized at a cost of $270,000 per production run. During this process, 10,000 units are unavoidably lost and have no value. The remaining units of CBL are salable at $13 per unit. The RBL, although salable immediately at the split-off point, is coated with a tarlike preservative that costs $210,000 per production run. The RBL is then sold for $10 each. Using the net realizable value basis, how much of the completion costs should be assigned to each unit of CBL?

4. Based on information in requirement 3, should NBP choose to process RBL beyond split-off?

Answer 1

1. Physical Measure Basis

Output of RBL = 100,000 units

Output of CBL = 70,000 units

Joint Cost = $380,000

Cost Allocated to RBL = ($380,000 / 170,000 units) * 100,000 units

= $223,529.41

Cost allocated to CBL = ($380,000 / 170,000 units) * 70,000 units

= $156,470.59

2. Sale value at split off method

Sale value of RBL = 100,000 units @ $8 = $800,000

Sale value of CBL = 70,000 units @ $12 = $840,000

Cost allocated to RBL = ($380,000 / $1,640,000) * $800,000

= $185,365.85

Cost allocated to CBL = ($380,000 / $1,640,000) * $840,000

= $194,634.15

3.

Net realizable value = Final Sale price - Processing cost after split off

RBL = ($10 * 100,000 units) - $210,000 i.e. $790,000

CBL = ($13 * 60,000 units) - $270,000 i.e. $510,000

Cost allocated to 60,000 units of CBL = ($380,000 / $1,300,000) * $510,000 i.e. $149,076.92

Joint cost allocated to per unit of CBL = $149,076.92 / 60,000 units i.e. $2.4846 per unit

Further processing cost per unit of CBL = $270,000 / 60,000 units i.e. $4.5

Total cost per unit of CBL = $4.5 + $2.4846 i.e. $6.9846

4.

Let us perform incremental benefit analysis for further processing of RBL

Incremental revenue on sale of further processing (100,000 units @ $2 each) : $200,000

Less: Further processing cost: $210,000

Incremental Benefit : -$10,000

Therefore, NBP should not process RBL beyond split off