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What is the Relative Sales Value Method?

Relative Sales Value Method

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Relative Sales Value Method

The Relative Sales Value Method is a technique used to allocate the joint cost of producing multiple products to those products based on their relative sales values. This method is particularly useful when products are produced simultaneously from a common input or process, resulting in joint products. In such cases, it might be challenging to assign production costs to each product directly.

The main steps in the Relative Sales Value Method are:

  • Determine the total joint cost: This is the combined cost of producing all the joint products before the split-off point (i.e., the point where the products become distinguishable and separable).
  • Determine the sales value of each product: This can be based on either the final sales values of the products or their sales values at the split-off point.
  • Calculate the relative sales value: For each product, divide its sales value by the total sales value of all joint products.
  • Allocate the joint costs: Multiply the total joint cost by each product’s relative sales value percentage.

Example of the Relative Sales Value Method

Let’s illustrate the Relative Sales Value Method with a more detailed example involving a fictional company.

Scenario:

ForestryCorp operates in the timber industry. From its operations, it produces two main products from a single log of wood: lumber and wood chips. After processing a batch of logs, ForestryCorp incurs a joint cost of $10,000.

Upon further processing:

  • The lumber can be sold as-is for $15,000.
  • The wood chips, usually a by-product, can be sold as-is for $5,000.

Let’s use the Relative Sales Value Method to allocate the joint cost of $10,000 between lumber and wood chips.

Step-by-Step Allocation:

  1. Determine the Total Sales Value of Each Product:
    • Lumber: $15,000
    • Wood Chips: $5,000
    • Total Sales Value: $15,000 + $5,000 = $20,000
  2. Calculate the Relative Sales Value Percentage:
    • Lumber: $15,000 / $20,000 = 75%
    • Wood Chips: $5,000 / $20,000 = 25%
  3. Allocate the Joint Costs:
    • Lumber’s share of joint cost: 75% of $10,000 = $7,500
    • Wood Chips’ share of joint cost: 25% of $10,000 = $2,500

Conclusion:

Using the Relative Sales Value Method, ForestryCorp will allocate:

  • $7,500 of the joint cost to lumber
  • $2,500 of the joint cost to wood chips

This allocation reflects the proportionate value that each product has in relation to the total sales value of all joint products. It gives ForestryCorp a basis for assessing the profitability of each product after considering the shared production costs.

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