Relative Sales Value Method

The Relative Sales Value Method allocates joint production costs among products in proportion to their selling prices at the split-off point—the moment they become separately identifiable. Unlike the net-realizable-value-method, it ignores any costs incurred after split-off, making it simpler but sometimes less economically precise.

The simplified premise

When oil, chemicals, or meat are first separated into distinct products, each has an immediate market value. Gasoline has a spot price; fresh hamburger has a wholesale price; sulphur from crude has a quoted rate. The relative sales value method says: allocate the joint cost-of-production according to these split-off prices, and leave it at that.

If a joint process costs $100,000 and yields Product A (market value $200,000 at split-off), Product B ($150,000), and Product C ($80,000), the total value is $430,000. Product A’s share of the $100,000 joint cost is simply $100,000 × ($200,000 ÷ $430,000) = $46,512. Product B receives $34,884; Product C receives $18,604. The allocation is transparent, replicable, and immune to accounting judgment about future processing costs.

Why further processing costs are ignored

This is the method’s defining choice. Product B might require $25,000 of hydrotreating; Product C might need $10,000 of blending. Under the relative sales value method, those separable costs are not deducted from split-off prices before allocation. They are treated as period expenses or capitalized separately.

The reasoning is pragmatic: at split-off, only the joint costs have been incurred. Beyond that point, each product’s path is independent. Blending additives into Product C is a choice made after separation; the joint process bears no responsibility for it. Therefore, the joint cost should not be adjusted for it.

This creates a clean boundary between the allocation phase (which is mechanical) and post-split-off costing (which is product-specific).

Comparison with net realizable value

The net-realizable-value-method deducts separable costs before calculating allocations. This makes NRV theoretically stronger if you believe the joint process’s value is fully realized only after all work is done. But NRV introduces more subjectivity: estimating future separable costs, managing volatility, and reconciling budget versus actual.

The relative sales value method is operationally cleaner. You look up today’s spot price for Product A, Product B, and Product C at split-off. You divide the joint cost. Done. No estimation of future costs, no sensitivity to processing assumptions.

Trade-off: NRV is more economically sophisticated; relative sales value is more administratively robust.

When spot prices define the margin

Many commodity producers favour relative sales value because their products are actively traded at split-off. Copper refineries get cathodes (99.99% pure) that trade on the London Metal Exchange. Oil refineries produce gasoline, diesel, and fuel oil on major exchanges. Grain elevators create wheat, corn, and oats, each with published futures prices.

When a market price exists, using it is objective. When post-split-off processing costs vary or are uncertain, relative sales value avoids the estimation risk. A sugar mill can allocate joint costs by the market price of raw sugar at crystallisation; it does not need to forecast the cost of packaging or transport.

A worked example

A dairy processes 10,000 litres of milk into:

• Yogurt: 6,000 litres sold for $3/litre at split-off = $18,000
• Cheese curds: 3,000 litres (weight equivalent) sold for $5/litre at split-off = $15,000
• Whey powder: 1,000 litres equivalent sold for $2/litre at split-off = $2,000

Total split-off value = $35,000.

Joint processing cost (heating, separation equipment, labour) = $14,000.

Yogurt receives: $14,000 × ($18,000 ÷ $35,000) = $7,200; unit cost = $7,200 ÷ 6,000 = $1.20/litre. Cheese curds receive: $14,000 × ($15,000 ÷ $35,000) = $6,000; unit cost = $6,000 ÷ 3,000 = $2.00/litre. Whey powder receives: $14,000 × ($2,000 ÷ $35,000) = $800; unit cost = $800 ÷ 1,000 = $0.80/litre.

The yogurt is packaged (additional $0.50/litre). Cheese curds are aged in separate vats (additional $1.00/litre). Whey powder is spray-dried (additional $0.30/litre). These are separable costs and do not affect the initial allocation.

Accounting and reporting

Under Generally Accepted Accounting Principles, products allocated costs via relative sales value are carried on the balance-sheet at that allocated amount. When sold, the allocated cost flows through cost-of-goods-sold on the income-statement. Separable costs are expensed or capitalized as distinct line items.

The method is stable and does not require restatement if market prices fluctuate—only future allocations are affected. A switch from relative sales value to net-realizable-value or physical-quantity methods is a change in accounting estimate, requiring disclosure.

When relative sales value breaks down

No spot market: If a product has no published price at split-off (e.g., a highly specialized intermediate good), the method becomes impractical. In such cases, net realizable value or physical quantity are alternatives.

Price distortion: If split-off prices are manipulated or unstable (thin markets, low trading volume), the allocation becomes unreliable. A commodity with sporadic spot quotes may have prices that swing 20% week-to-week, making the method too volatile for management decisions.

Byproducts: If a joint process yields a minor byproduct with negligible value, allocating it a full share of joint costs seems wasteful. Many firms instead use the byproduct-costing method, where the byproduct’s revenue offsets the main product’s cost.

Practical appeal

The simplicity of relative sales value—use the price, do the division—has made it popular in practice, especially in industries where split-off prices are transparent and separable costs are either small or industry-standard. Many commodity chemical plants, grain elevators, and oil refineries use it as their baseline, switching to NRV only for products with unusual post-split-off processing.

See also