Gross Market Value Method

The Relative Sales Value at Split off method is also called the Gross Market Value method, the Sales Value at Split off method, or, more simply, just the Sales Value method.

Under the Relative Sales Value at Split off method, joint costs are allocated on the basis of the sales values of each product at the split off point, relative to the total sales value of all the joint products.

The formula to allocate the costs between or among the products is as follows, for each of the joint products:

The Relative Sales Value at Split off method can be used only if all the joint products can be sold at the split off point (in other words, with no further processing). Management may decide it would be more profitable to the company to process some of the joint products further; but the Relative Sales Value at Split off method can still be used to allocate joint costs up to the split off point, as long as sales prices at the split off point do exist for all the joint products

Benefits of the Relative Sales Value at Split off (Gross Market Value) Method

• Costs are allocated to products in proportion to their expected revenues, in proportion to the individual products’ ability to absorb costs.
• The method is easy to calculate and is simple, straightforward, and intuitive.
• The cost allocation base is expressed in terms of a common basis—amount of revenue—that is recorded in the accounting system.
• It is the best measure of the benefits received from the joint processing. It is meaningful because generating revenues is the reason for the company to incur the joint costs.
• It can be used when further processing is done, as long as selling prices exist for all the joint products.

Limitations of the Relative Sales Value at Split off (Gross Market Value) Method

• Selling prices at the split off point must exist for all the products in order to use this method.
• Market prices of joint products may vary frequently, but this method uses a single set of selling prices throughout an accounting period, which can introduce inaccuracies into the allocations.