A joint production process results in two or more products, which are termed joint products. The cost of the input and the joint production process is called a joint product cost. The point in the production process where the individual products become separately identifiable is called the split-off point. For example, a food processing plant separates a delivery of tomatoes into different categories. Grade A is unblemished, and Grade B is blemished. Grade A vegetables become part of salads and pizza toppings, while they cook the Grade B tomatoes for spaghetti and pizza sauces. One expense, a load of tomatoes, produces several different products, and the quantity produced varies with each load of tomatoes. The "physical measures of output" allocates joint product costs based on some physical characteristic, of the joint products at the split-off point. This may be weight, volume, or BTU’s (measure of thermal energy). The joint costs are then allocated in proportion to the chosen physical measure. The relative sales value method is based on the relative sales value of each joint product at the split-off point. These values are obtained simply by multiplying the prices with the quantities that the joint process yields. Under the net-realizable-value method, the relative value of the final products is used to allocate the joint cost. The net realizable value of a product then is the final sales price minus any incremental processing costs. Under this method, joint costs are allocated in proportion to their net realizable values.
Advantages:
This type of costing involves using some rational means for allocating costs to products for which there is no clearly attributable cost. The various methods for conducting these allocations are primarily used for valuing inventory for external reporting purposes.
Disadvantages:
It is generally unwise to use this information for any management purpose, since decisions based on allocated costs, with the intention of changing those costs can fail. Consequently, by-product and joint product costing is not recommended for anything other than inventory valuation.
The method I would recommend would be the relative sales value method at split off. . At the split-off point, you’re making an apples-to-apples comparison. The relative sale value at split off is not affected by other production or costs after split off. A product’s sales value after separable costs have been incurred may be very different. If you spend time and money after the split off point, you charge a higher price to recover those costs. So it is fair to say that the sales value at split off method is simple, compared with the others.