Cost Accounting - Allocating Joint Costs

I’ve chosen to use an article from the Cost Accounting for Dummies website - http://www.dummies.com/how-to/content/methods-of-joint-cost-allocation-in-cost-accountin.html.

The article breaks down the methods for allocating joints costs in a rather simplified method, as compared to the text, and also ranks them in order best to worst method. The best method, per the site, is the splitoff method, which the text (page 637) refers to as the sales value at spinoff method. This method allocates joint costs at the point the product becomes two or more products. Also, according to the site, this may be the best allocation method for joint costs in terms of budgeting and planning, since, selling prices for the various products, per the text on page 638, are known at the splitoff point.

Net realizable value (NRV) is the second best method, listed by Dummies for allocating joint costs. This method distributes costs using the sales value of each items minus separable costs. Unlike the splitoff method which allocates costs at the splitoff point, while the products are still in production, NRV waits until the end of production to allocate joint costs. In contrast to the article, the text on page 641 states that the NRV method is only second to the splitoff method when a company doesn’t have the sales price for any one of the products.

Next the constant gross margin percentage method aims to assume profitability for each department. Lastly the physical measure method, which allocates costs by weight, volume or some other measurement, is the least useful allocation method as it doesn’t relate revenues to expenses in any manner.