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: Show
$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. Businesses involved in producing goods use tools to determine how much their production methods cost and how much their products will earn. The relative sale method, also known as the relative sales value method, is a process for tracking the costs of multiple products. It is essential for companies that want to know where the money they invest in operations goes, and how likely it is to come back as profit. Definition
Controlling Costs
Setting Financial Strategy
Accounting Advantages
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