The global dairy market is highly competitive and cost versus price comparisons and benchmarking with peers can help identify strengths and weaknesses of a business. However, calculating the cost of milk production is not straightforward because milk production inevitably entails the production of joint products such as calves. Based on theoretical considerations and simulated data sets, this study examines how different methods to allocating joint costs affect the estimated cost of milk production. The first method, subtracting revenues of joint products from the cost of the milk production branch, turns out to be less accurate in the majority of modelled scenarios, compared to the ratio method splitting costs between milk and joint products according to their relative sales values. Even though the subtraction method reflects better the ranking order in true cost of milk production, it overestimates the variability in the majority of cases. Considering all strengths and weaknesses, we conclude that the ratio method is the safer choice for allocating costs of joint products because it bears less potential for biased conclusions. The subtraction method should only be applied when farms need to know their break-even milk price for planning purposes or when the exact ranking between farms is of paramount importance for benchmarking.
