May 24, 2022/ Steven Bragg
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. Cost Accounting FundamentalsWhat is the Relative Sales Value Method?
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METHODS TO APPORTION JOINT COST
Proper apportionment of joint cost over the joint products is of considerable importance. The commonly used methods for apportioning total process costs up to the point of separation over the joint products are as follows:
- Physical Units Method
Joint costs are apportioned on the basis of Physical Volume of the joint products at the spilt off point. Any processing loss is also apportioned over the products on the same basis. This method is not applicable where the physical units of joint products are different. The main defect under this method is equal importance is given to all joint products
- Average unit cost method
Joint costs are apportioned on the basis of Average Cost Per Unit which is obtained as follows:
Average Cost Per Unit = Total Joint Cost_____________
Total number of units of Joint Products
In this method customers of high quality items are benefitted because they have to pay lower price. This method cannot be applied where physical units of joint products are different.
- Using Technical Estimates: This method uses technical estimates to apportion the joint costs over the joint products. This method is used when the result obtained by the above methods does not match with the resources consumed by joint products or the realizable value of joint products is not readily available.
- Survey Method / Points Value Method
This method is based on technical survey of all the factors involved in the production and distribution of products. Under this method joint costs are apportioned over the joint products, on the basis of percentage/point values, assigned to the products according to their relative importance. This method is considered to be more appropriate than other methods.
- Market value at the point of separation or relative market value method
Joint costs are apportioned in the ratio of Market value of the Joint Products at the separation point. This method can only be followed if joint products can be sold at Split off point which indirectly means it cannot be followed if market value of joint products is not available at split off point.
- Market value after further Processing Method
Joint costs are apportioned in the ratio of Market value of the Joint Products after further processing. This method is suitable only when products are subjected to further processing.
- Contribution Margin Method
Here joint costs are segregated into two parts-variable and fixed. The variable costs are apportioned over the joint products on the basis of units produced [average method] or physical quantities. In case the products are further processed after the point of separation, then all variable costs incurred will be added to the variable costs determined earlier. In this way total variable cost is arrived at which is deducted from their respective sales values to ascertain their contribution. The fixed costs are then apportioned over the joint products on the basis of the contribution ratios.
- Net Realizable Value Method / Reversal Method
From the sales value of the joint products [at finished stage] the followings are deducted: [a] Estimated profit margins.
[b] Selling and distribution expenses, if any, and
[c] Post-split off costs.
The resultant figure so obtained is known as net realisable value of joint products. Joint costs are apportioned in the ratio of net realisable values. This method is extensively used in many industries.
- Constant Gross Margin Percentage Method
Joint costs are apportioned in the ratio of Joint Cost Value at Separation Point.
Here first we calculate the Constant Gross margin of the company which is calculated as follows:
= Total Final Sales Value of all products – Total Joint & Further Processing costs x 100
Total Final Sales Value of all products
After this Joint cost is calculated as follows
Particulars Product X Product Y
Final sales value[after further processing] x x
- Constant gross margin [x] [x]
- Further Processing costs [x] [x]
- Selling & Distribution costs [x] [x]
Joint Cost Apportioned x x
This method is not suitable when all the Joint Products do not yield constant gross margin %. There may be negative cost allocation to a product.
- Notional Sales Value Method
Joint costs are apportioned in the ratio of Notional Sales value of the Joint Products at the separation point. Notional Sales value is computed as follows:
Sales Value after Further Processing – Further Processing Cost
This method is suitable where joint products are subjected to further processing and market value at separation point is not available.