Sometimes figuring the cost of your products is simple. You spend $500 to make 200 identical $5 items for sale. As they're all the same, you allocate $2.50 in costs to each item when it's time to do the accounting. If you have 50 $5 items, 67 $10 items and 83 $3 items, the allocation is more complicated. The market value method of joint cost allocation is one way to figure it out. Show
TipSay you have $200 in manufacturing costs to create three items worth $200, $250 and $350. As the $200 item accounts for 25 percent of the total sale price, you'd allocate it 25 percent of the costs, or $50. Apportionment of Joint CostManufacturing and processing frequently produce multiple products, The Strategic CFO points out. A poultry plant, for example, may turn chickens into breasts, drumsticks and byproducts that go into dog food. To figure out profit margins on the different products, you need a method for apportionment of joint costs: How much labor, chicken prices and overhead do you credit to the breasts? Accounting Tools explains that this method is more an accounting exercise than a practical one. If your ironworks turns raw ore into two dozen different cast-iron products, it's unlikely you can figure exactly how much labor and overhead went into each. This uncertainty is an advantage: You don't have to worry about getting it perfect, just finding a formula that's meets accounting standards. The Smeal College of Business describes several acceptable methods for apportionment of joint costs. One is by physical measure. If you have 10 pounds of drumsticks and 100 pounds of chicken breasts, you allocate 10 times as much cost to the breasts. Another is the relative sales value or market value method of joint cost allocation, where you divide up joint costs based on the price of the products. Relative Sales Value MethodThe first step in the relative sales value method is identifying the split-off point at which the various products accumulate separate costs. For example, you run a chemical plant where the same process turns a mixture into multiple different chemical products. In the early stages, when you mix chemicals and process them, you generate joint costs. Once you can identify the products separately, you've reached the split-off point. Subsequent spending no longer creates joint costs. Suppose the end result of your manufacturing creates 10 $50 items – $500 total – and 20 $30 items totaling $600. The production costs prior to the split-off point are $600. The $500 of items is 45 percent of the total sale price, so you assign 45 percent of the costs, or $270, to them. The $600 set of items is 55 percent of the sale price, so you apportion 55 percent of the cost, or $330, to them. You can also use this method if you're buying and developing real estate, Accounting Coach advises. If you buy $10 million of residential land and sell the lots for different prices, you can use the market value method of joint cost allocation to determine how much of the purchase price should be credited to each lot. If you're debating what price to set for your products, the relative sales value method is not a tool to use for that. Allocating joint costs doesn't suggest what the price should be. Costs after the split-up point are more important because they're tied to each specific product.
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 Fundamentals Recommended textbook solutions
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Essentials of Investments9th EditionAlan J. Marcus, Alex Kane, Zvi Bodie 689 solutions Which method allocates joint product costs on the basis of each product's expected final sales value less any separable costs?The estimated net realizable value method allocates joint costs on the basis of the expected final sales value in the ordinary course of business less the expected separable costs of production and marketing.
How does the sales value at Splitoff method allocate joint costs?The sales-value-at-split-off method allocates joint cost based on each product's proportionate share of market or sales value at the split-off point. b. In this method, the higher the market value, the greater the joint cost assigned to the product.
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. 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.
Which method allocates joint costs on the basis of each product's relative sales value at the Splitoff point?The sales value at splitoff method allocates joint costs to joint products produced during the accounting period on the basis of the relative total sales value at the splitoff point. The estimated net realizable value method is used when the market selling prices at the splitoff point are NOT available.
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Which method allocates joint costs on the basis of each products relative sales value at the Splitoff point?
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