What is the Relative Sales Value Method?

The relative sales value method is a technique used to allocate joint costs based on the prices at which products will be sold. The resulting cost allocation equitably spreads costs across products, resulting in roughly the same margins for each product. However, product margins may still vary, depending on the costs incurred by each product after the allocation point.

The steps used in the relative sales value method are as follows:

Calculate the total joint cost. This is the aggregate cost incurred to manufacture all joint products prior to the split-off point.
Determine product sales values. Product sales values can be derived from what they could be sold for at the split-off point.
Calculate relative sales values. Divide the sales value of each product by the total sales value for all of the joint products.
Allocate joint costs. Multiply the total joint cost by the relative sales value percentage for each of the joint products.

Characteristics of the Relative Sales Value Method

The key characteristics of the relative sales value method are as follows:

Based on sales value at split-off point. The method allocates joint costs proportionally based on the sales value of each product at the point where the products become separately identifiable (split-off point).
Proportional cost allocation. Joint costs are distributed to products in proportion to their contribution to the total sales value.
Considers market value. The method takes into account the market value of each product, reflecting their economic significance. Products with higher sales values receive a greater share of joint costs.
Avoids arbitrary allocation. Unlike other methods (e.g., physical quantity or average cost methods), this approach is more logical, as it aligns cost allocation with the economic benefits derived from each product.
Suitable for high-value products. Especially useful when the joint production process yields products with significantly different sales values.
Relies on accurate pricing data. Effective allocation depends on accurate and up-to-date sales value or market price information for each product.

Example of the Relative Sales Value Method

For example, a production process incurs $100 of costs in order to create two products, one of which (Product A) will sell for $400 and the other (Product B) for $100. Under this method, 80% of the $100 joint cost is assigned to Product A. The calculation is:

$100 joint cost x ($400 ÷ ($400+$100)) = $80

The remaining 20% of the $100 joint cost is assigned to Product B. The calculation is:

$100 joint cost x ($100 ÷ ($400+$100)) = $20