Question

Describe the relative sales value approach and when firms would use it.

Answer 1

Relative Sales Value Approach: It is a technique or a process by which we calculate all cost of multiple product produce at the same time in the factory or we can say this method is used to allocate joint costs based on the prices at which the products will be sold. This method also helps in analyzing and tracking the profit. For example:

if a business produces men's shirt to sell for $60 per pair, and women's shirt that it sells for $40 per pair, it would need to allocate the cost of a new packaging machine that places the shirts in boxes and seals them. Since this machine boxes every shoe that the company produces, the relative sales method would use the $40 and $60 prices to assign 40 percent of the cost of the machine to women's shirt and 60 percent to men's shirt, assuming that the company produces an equal number of each type of shirt

Uses of Relative Sales Value Approach:

a) Allocation of Cost: This method is used to allocate the cost of joint products

b) Control of Cost: The businesses can control the cost especially the larger cost like building and machinery.

c) Financial decision: It helps to take better decisions for sale price as the cost are distributed on the products in a better way

d) Record Keeping: Business can track the expenditure and life of asset based on usage of asset as depreciation is also allocated between all the product.