The article presents a response of the author on comments made by scholar Joseph G. Louderback on his article "Another Approach to Allocating Joint Costs." The additional examples provided by "Another Approach to Allocating Joint Costs: A Comment," by Louderback do not demonstrate the existence of a conceptual error in the joint cost allocation procedure which I have advocated. Rather, examples demonstrate the robustness of the procedure. The apparent weakness in the allocation procedure as demonstrated in "A Comment" results from an error in the specification of the next best alternative means to obtain a service. Consider the first example, a firm has the opportunity to purchase a lot consisting of 400 units of A and 200 units of B for $1,500. The units of A are in saleable condition, but the B's would require an additional cost of $1,200 to restore them to saleable condition. The firm normally purchases units of A for $6 each and units of B for $4 each. The allocation procedure which I proposed requires the comparison of the joint purchase cost' with the next best alternative. The firm has the option to purchase 200 B's for $800. However, the next best alternative to purchase 400 units of A is 51.500. If the opportunity at hand were not available, the best alternative would be $2,400; however, goods are available for $1,500.

The article proposes a new computational procedure for allocating joint costs. This article assumes that accountants will continue to be required to allocate costs for reporting purposes. The argument for the acceptance of the proposed procedure is justified only to the extent that the results of this procedure do not possess the disadvantages of the allocation techniques employed in current practice. To an individual firm, all products and services obtained through the incurrence of a joint cost can also be obtained by incurring a separable cost. In the U.S. economy it is possible to contract for virtually any individual service desired, however, to do so may be quite expensive. This expense leads management to incur joint costs in order to effect cost savings. Given the observation that joint costs are incurred to effect cost savings, a different view of joint costs becomes obvious. Rather than allocate costs directly to a cost object, it should be possible to allocate cost savings as an offset to the cost of obtaining services independently.

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