Log cost allocation for multiple mill merchandising systems

Abstract

Co-located mills that share a log resource through a single merchandising facility are challenged with the task of allocating the costs of joint-products in order to determine log cost for each mill during a given period. While allocating joint-costs is inherently arbitrary, some allocation must be made to include raw material in inventory cost and accurately apply the matching principle. This problem is aggravated by the technical challenges of measuring the large volume of logs often processed by mills in this situation. A co-located veneer mill and sawmill producing stud material were modeled to compare different methods for allocating log cost. Allocation methods were compared individually to determine their sensitivity to influencing factors, and then compared as a group to determine how they relate to each other. The physical measure method was evaluated using both cubic and Scribner log scale. The estimated net realizable value method was evaluated using five different price scenarios representing different relationships of lumber and veneer value. Three examples of real world price relationships were also used. A third method, representing how at least one mill actually makes the allocation was also evaluated. This method attempts to apply a market price to log usage at the veneer mill, while allocating the remainder to the sawmill. While most similar to the sales value at splitoff method, it represents a completely different method for allocating log cost. The allocation methods were also evaluated under two different production ratios, one where the veneer mill only processed 25% of the total cubic volume, and one where the veneer mill processed 50% of the total volume. Evaluating the allocation methods revealed that a minimum range of 2-3% of total log cost might be allocated differently based on choice of method and influencing factors such as a change in prices or log characteristics. Production ratio was found to have no effect on the relationship between different methods. The unique sales value method evaluated here dramatically allocated more cost to the veneer mill, making the sawmill look more profitable. The physical measure method using cubic measurement, however, allocated more cost to the sawmill, making the veneer mill look more profitable. The estimated net realizable value method allocated a similar portion to each mill under equal price situations where both lumber and veneer shared particular high, low, or average prices. The estimated net realizable value method, being based on relative end product values offered a more balanced allocation.