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 Topic: NRV ( Topic Closed)
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cpagoal2009
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Posts: 72
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| Posted: 15 Nov 2009 at 00:11 | IP Logged
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why MSB sales value at split off is not calculated using $5 & further processing cost?
Sonimad 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 $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for
$2 per unit, each CBL sells for $4 per unit.
Continuing with the previous data, assume the commercial building lumber is not marketable at split-off but must
be further planed and sized at a cost of $200,000 per production run. During this process, 10,000 units are
unavoidably lost; these spoiled units have no discernable value. The remaining units of commercial building
lumber are saleable at $10.00 per unit. The mine support braces, although saleable immediately at the split-off
point, are coated with a tar-like preservative that costs $100,000 per production run. The braces are then sold for
$5 each.
Using the net realizable value (NRV) basis, the completed cost assigned to each unit of commercial building
lumber would be:
a. $2.92
b. $5.625
c. $5.3125
d. Some amount other than those given above.
Explanation
Choice "b" is correct. $5.625.
RULE: If net realizable value cannot be deteriend at split-off, then additional costs added after the split-off point
(separable costs) must be subtracted from the final selling price to arrive at net realizable value. [Note: In this
question, this applies to CBL only, as MSB is saleable at $2 each at split-off.]
CBL sales value at split off
Units of CBL produced 90,000
Less: Spoilage (10,000)
Units available for sale 80,000
S
ales price at point of sale: 80,000 units x $10/unit = $ 800,000
Less: Processing cost to complete (200,000)
Sales value at split off $ 600,000
MSB sales value at split off
60,000 units produced x $2 per unit sales price = $120,000
(Note that the additional processing costs incurred to generate a higher selling price of $5 per unit are not
relevant to the sales value at split off.)
Allocation of joint costs to CBL:
CBL sales value at split off $600,000 (600/720 = approx. 83.3%)
MSB sales value at split off 120,000 (120/720 = approx. 16.7%)
Total sales value at split off $720,000 (100%)
$300,000 joint costs x 600/720 = $250,000
Cost per unit of CBL:
Allocation of joint cost $250,000
Additional processing costs 200,000
Total costs $450,000
Divided by saleable units ÷ 80,000
Cost per unit $ 5.625
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bryris
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Joined: 07 Dec 2008
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| Posted: 15 Nov 2009 at 10:16 | IP Logged
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With MSB, you'd be adding the processing costs twice. It says that they are salable @ $5 AFTER further processing. They are salable before processing at $2.
The question is about CBL, though. When I first did the problem, I got C. I totally see the logic of the answer, but fail to see why this is the only way to do this. Allocation by nature is an art, not a science. I don't see why they even give the $4 figure when the CBL is not salable until it hits $10 (after further processing).
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letmebedone
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Joined: 25 Jun 2011
Location: United States
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| Posted: 25 Jun 2011 at 20:10 | IP Logged
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I agree with Byris. (I realize I am 1.5 years late on this post). But I also do not see why the $4 was given. I used it on my calculation and although I see the logic behind the answer it frustrates me because how will I know what figure to use? Thanks.
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