Approaches to allocating joint costs Joint-cost-allocation methods are less than ideal between the joint costs and individual products. Consequently, management must be very careful when evaluating performance or making other economic decisions based on numbers resulting from joint-cost allocations. Under the sales value at split-off method, the gross-margin percentage is identical for all products if there are no separable costs (and no opening stock. The sales value at split-off method allocates joint costs on the basis of sales revenue. In the absence of non-joint costs, this makes all products appear equally profitable. Emphasise that the sales value at split-off weighting is based on total sales revenue (of total production, not on sales price per litre (say) of each product (nor on just the sales revenue for the number of units actually sold. The primary advantage of the sales value at split-off method is that it is reasonably objective. No assumptions are necessary about actions beyond the split-off point (e.g. which products will be produced, what separable costs will be incurred. The major disadvantage of the sales value at split-off method is that there maybe no market at split-off for some products. The physical measure method is easy to use but has two disadvantages. First, the quantity of the joint products maybe measured indifferent units. For example, natural gas is measured in cubic metres but oil is measured in barrels. This problem can sometimes be overcome by converting both measures to a common denominator (BTUs in this case. Second, the method does not meet any of the cost-allocation criteria cause-and-effect, benefits received, fairness or ability to bear. For example, in meat packaging, the physical measure method would allocate a much larger share of the total joint costs to soup bones and minced meat than to fillet steak. This result violates all four cost-allocation criteria.
