No such an allocation is unnecessary for the decision

No.
Such an allocation is unnecessary for the decision of whether to terminate the joint
production process. For this decision, the producer can look at the operation in its entirety
(total revenues from all joint products less total common costs and total separable costs).
Yet despite the fact that allocating common costs to joint products serves no decision-making pur-
pose, it is required for external financial reporting. It is necessary for product costing if we wish to
honor the matching principle for common costs, because these common costs are manufacturing
costs. For example, if the dairy sells lowfat milk shortly after split-off, but processes high milkfat
product into cheese that requires an aging process, the allocation of common costs is necessary for
the valuation of ending inventory (work-in-process for cheese) and the determination of cost-of-
goods sold (lowfat milk).

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Chapter 6
Alternative Methods for Allocating Common Costs:
Here are four methods of allocating common costs:
1. Physical measure: Using this method, some common physical measure is identified to
describe the quantity of each product obtained at split-off. For example: the weight of
the joint products, or the volume. Common costs are then allocated in proportion to this
physical measure. This method presumes that the quantities of all joint products can be
expressed using a common measure, which is not always the case. For example, crude
oil is a liquid, while natural gas is, naturally, a gas, and volumes of liquids and gasses
are not normally measured in the same units.
2. Sales value at split-off: If a market price can be established for the products that are
obtained at split-off, common costs can be allocated in proportion to the sales value of
the products at split-off. The sales value of each joint product is derived by multiplying
the price per unit by the number of units obtained. For example, if the dairy farmer ob-
tains 20 gallons of cream, and if cream can be sold for $3 per gallon, then the sales
value for cream is $60. If the farmer also obtains 40 gallons of skim milk that sells for
$2 per gallon, then the sales value of skim milk is $80. The total value of both products
is $140, and 43% ($60 ÷ $140) of common costs would be allocated to all 20 gallons of
cream. This method can be used whether or not one or more of the joint products are ac-
tually processed further, as long as a market price exists for the product obtained at
split-off. In other words, even if the farmer does not sell any cream, but processes all of
the cream into butter, the fact that there is a market price for cream is sufficient for the
farmer to be able to apply this method of common cost allocation.
3. Net Realizable Value: The net realizable value of a joint product at split-off is the
sales price of the final product after additional processing, minus the separable costs in-
curred during the additional processing. If the joint product is going to be sold at split-
off without further processing, the net realizable value is simply the sales value at split-
off, as in the previous method. Under the net realizable value method of common cost