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.

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