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Joint cost problems

Allegheny 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 $750,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $5, and each unit of CBL sells for $10.

1. Calculate the amount of joint cost allocated to commercial building lumber (CBL) on a physical units basis.

2. Calculate the amount of joint cost allocated to the mine support braces (MSB) on a relative-salesvalue basis.

3. Assume the commercial building lumber is not marketable at split-off but must be further planed and sized at a cost of $1,000,000 per production run. During this process, 10,000 units are unavoidably lost; these spoiled units have no value. The remaining units of commercial building lumber are saleable at $25.00 per unit. The mine support braces, although saleable immediately at the split-off point, are coated with a tarlike preservative that costs $250,000 per production
run. The braces are then sold for $12.50 each. Using the net-realizable-value basis, compute the completed cost assigned to each unit of commercial building lumber.

4. If Allegheny River Sawmill chose not to process the mine support braces beyond the splitoff point, the contribution from the joint milling process would increase or decrease by what amount?

5. Did you use the joint cost allocation results in answering requirement (4)? If so, how? Why did you use or not use the allocation results?

Solution Preview

Please see the attachment.

1. Calculate the amount of joint cost allocated to commercial building lumber (CBL) on a physical units basis.

In a physical unit basis, the cost would be allocated in proportion to the units produced. Total units are 60,000+90,000=150,000
Joint cost is 750,000
Cost allocated to CBL = 90,000/150,000 X 750,000 = $450,000

2. Calculate the amount of joint cost allocated to the mine support braces (MSB) on a relative-sales value basis.

In this case we calculate the sales value at split off and use that to allocate the joint costs
Sales value of MSB = 60,000 X $5 = $300,000
Sales value of CBL = 90,000 X $10 = $900,000
Total = 1,200,000
Cost allocated to MSB = 300,000/1,200,000 X 750,000 = ...

Solution Summary

The solution explains some questions relating to allocation of joint costs, including a calculation of the amount of joint cost allocated to commercial building lumber and mine support braces, as well as the cost assigned to each unit of commercial building lumber. How the contribution from the joint milling process could be affected by not processing the mine support braces beyond the splitoff point is also discusses along with if joint cost allocation results were used for this question.

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