The relative sales value method is a technique used to allocate joint costs based on the prices at which products will be sold. 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
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.