Relative Sales Value Method: How to Allocate a Basket Purchase

The relative sales value method splits the cost of a basket purchase (different items bought for one lump-sum price) based on each item’s share of total expected sales value. Formula: allocated cost = total cost × (item’s sales value ÷ total sales value). Divide each group’s allocated cost by its units to get unit cost.

A single invoice can cover items that command very different prices. If a bookstore buys paperback and illustrated editions together, assigning every book the same cost can make the paperbacks look unprofitable and inflate the margin on the illustrated editions. The total invoice would be right, but the profit reported as each type sells could be misleading.

Key takeaways

• The relative sales value method splits one lump-sum cost in proportion to expected sales value, not in proportion to the number of units.
• Formula: allocated cost = total cost × (group’s sales value ÷ total sales value).
• Weight each group by units × price. The price tag alone is not enough.
• The allocated costs must add back to the amount actually paid.
• The split is made once, at purchase. Later price changes affect gross profit, not the assigned cost.
• The same math is used for land divided into lots, joint products, and land and buildings bought together.

Video: Lump-Sum (Basket) Purchase Explained

In this 5-minute video, Professor Farhat discusses the lump-sum purchase, also called a basket purchase. Watch it first for the big picture. Then work through the bookstore example below, which applies the same idea to inventory, meaning goods held for resale.

Watch Lump Sum Purchase or Basket Purchase on YouTube

How Does the Relative Sales Value Method Work?

A basket purchase, also called a lump-sum purchase, gives the buyer one total acquisition cost. Start with that known amount. Use reasonable selling prices for the items in their present condition to determine how to divide it.

Here is the formula in one line:

Allocated cost = Total cost of the basket × (Sales value of the group ÷ Total sales value of all groups)

Then divide each group’s allocated cost by its number of units to get the cost per unit. The three steps below walk through it.

1. Find each group’s total selling value. Multiply the units in each group by that group’s expected selling price per unit. Accountants call the result the extended value.
2. Find each group’s weight. Divide its total selling value by the total selling value of everything acquired. The weights should add to 100%.
3. Assign cost. Multiply each weight by the actual basket cost. Divide by the units in that group to get its unit cost.

Think of each percentage as that group’s slice of the whole purchase. A 40% weight means the group makes up 40% of the basket’s expected sales value, so it receives 40% of the cost. The weight does not tell you how many units have been sold.

Relative Sales Value Method Example: A Bookstore Allocates a $3,600 Invoice

Suppose Marlow Books buys a publisher’s clearance lot for $3,600. There are 120 paperbacks expected to sell for $15 each, 60 hardcovers at $40 each, and 20 illustrated editions at $90 each. All are ready for sale. The listed prices are supportable estimates, and the invoice does not assign a separate cost to any title.

The paperbacks contribute $1,800 of the $6,000 expected selling value, so their share is 30%. Apply that percentage to the $3,600 paid: $1,080. Divide by 120 paperbacks to obtain $9 per book. Notice that just 20 illustrated editions receive the same total allocation as 120 paperbacks. The groups have equal expected selling value despite their different quantities.

At purchase, the shop debits Inventory and credits Cash or Accounts Payable for $3,600. (A shop that uses a periodic inventory system, which updates the Inventory account only at the end of the period, would debit Purchases instead.) Its inventory records divide that total among the three groups. The $2,400 difference between total expected sales and invoice cost is potential gross profit if all books sell at the estimated prices. Buying the books does not create any revenue. Profit shows up only as the books are sold.

Carry unit costs into gross profit and ending inventory

Assume the shop sells 30 paperbacks at $15 each and 10 hardcovers at $40 each. Sales revenue is $450 + $400 = $850. Cost of goods sold is 30 × $9 + 10 × $24 = $510. Gross profit is therefore $340, and the inventory still on hand carries $3,090 of the original invoice cost.

A second check uses the cost-to-sales ratio, which is the total cost divided by the total expected sales value: $3,600 ÷ $6,000 = 60%. Every group carries a cost equal to 60% of its expected selling price, so every group earns the same 40% gross profit rate when it sells at that price. Because these books sold at the estimated prices used in the allocation, 60% of $850 is the same $510 cost of goods sold. If Marlow later discounts a hardcover to $30, its assigned unit cost remains $24. Applying 60% to the discounted sale would produce $18 and overstate gross profit by $6.

Want to keep going after this example? This topic is part of the full Intermediate Accounting course.

Three ways to check a basket allocation

Each check below catches a common mistake.

1. Use extended values. Weight each group by units × price, not by the price tag alone. Dividing $15 by the sum of the three price tags ($15 + $40 + $90 = $145) gives about 10% for paperbacks instead of the correct 30%, because it ignores quantities.
2. Reconcile to the invoice. Add up the group costs. They should equal the $3,600 paid.
3. Keep unsold units in inventory. Only the cost assigned to books that have been sold goes to cost of goods sold.

One rounding tip: keep the percentages unrounded while you work, and round only at the end so the total still ties to the invoice.

Real companies use the same reasoning when one cost benefits properties with different sales prospects. Green Brick Partners, a publicly traded homebuilder and land developer, says in its annual report that it spreads land development and other community-wide costs over individual lots or homes using relative sales value. Read its real estate inventory policy in the annual report filed with the SEC.

Here, selling prices are used only as weights to split the cost. The inventory itself is still recorded at cost. The separate lesson on measuring qualifying inventory at net realizable value explains the limited cases where inventory is reported at its expected net selling proceeds instead of cost.

Where Else Is the Relative Sales Value Method Used?

The bookstore lot is just one place you will see this method. The same math shows up in three other situations.

Land divided into lots. A developer pays one price for a tract of land and then sells lots at different prices. Lots that will sell for more get a bigger share of the cost. The Woodland Developers quiz below uses this setup.

Joint products in cost accounting. Joint products are two or more products that come out of one shared process, like cream and skim milk from raw milk. The cost of that shared process is called a joint cost. The split-off point is where the products first become separately identifiable. When selling prices are available at that point, the joint cost can be allocated in proportion to each product’s total sales value at split-off.

Here is a quick example. A dairy spends $20,000 on a shared process. The cream can be sold for $30,000 and the skim milk for $10,000, for a total of $40,000. Cream receives $20,000 × ($30,000 ÷ $40,000) = $15,000. Skim milk receives $20,000 × ($10,000 ÷ $40,000) = $5,000.

Land and a building bought together. When a company buys long-lived assets for one price, the cost is split by relative fair value. Fair value is the price an asset would sell for in an orderly sale between market participants. For example, a company pays $900,000 for land appraised at $250,000 and a building appraised at $750,000. The land receives 25% of the cost, or $225,000. The building receives 75%, or $675,000. The split matters because the building is depreciated and the land is not.

Where the rules come from. U.S. GAAP, short for generally accepted accounting principles, is found in the Accounting Standards Codification (ASC) published by the Financial Accounting Standards Board (FASB). For a mixed lot of merchandise, relative sales value is a long-standing textbook and practice method that keeps inventory at cost, which is the basic rule in ASC 330, Inventory. For real estate projects, ASC 970 covers how project costs are assigned to lots and units. For a group of long-lived assets bought in one transaction, ASC 805-50 calls for allocating the cost by relative fair value.

Where you will be tested on it. Basket purchases of inventory are covered in Intermediate Accounting, and inventory is part of the FAR section of the CPA Exam. Joint cost allocation is covered in cost accounting and in Part 1 of the CMA exam.

Practice questions and answers

1. A $12,000 lot contains two groups with expected sales of $9,000 and $6,000. What cost goes to the smaller group?

$4,800. Its $6,000 expected sales are 40% of $15,000. Multiply that weight by the $12,000 acquisition cost.

2. Would allocating the books at $18 apiece reconcile to the invoice?

Yes. The lot has 200 books, and 200 × $18 equals $3,600. But it would assign a paperback costing $9 under relative sales value the same cost as an illustrated book costing $54. At $18 each, every paperback would show a $3 loss on a $15 sale, and every illustrated edition would show a $72 profit instead of $36. A total that balances does not prove the allocation is reasonable.

3. Marlow sells two illustrated editions for $80 each. What gross profit does it recognize?

$52. Revenue is $160 and the assigned cost is 2 × $54 = $108. The lower selling price reduces the actual margin. It does not change the original allocation.

4. A Developer Pays $600,000 for Land and Creates 10 Premium Lots Expected to Sell for $60,000 Each and 20 Standard Lots Expected to Sell for $20,000 Each. What Cost Goes to Each Premium Lot?

$36,000. The premium lots have a sales value of 10 × $60,000 = $600,000. The standard lots have a sales value of 20 × $20,000 = $400,000. The total is $1,000,000, so the premium lots get 60% of the $600,000 cost, or $360,000. Divide by 10 lots to get $36,000 per premium lot. Each standard lot gets $240,000 ÷ 20 = $12,000. An equal split would have put $20,000 on every lot.

Frequently asked questions

What Is the Formula for the Relative Sales Value Method?

Allocated cost = total lump-sum cost × (sales value of the item or group ÷ total sales value of everything purchased). In the Marlow Books example, the paperbacks receive $3,600 × ($1,800 ÷ $6,000) = $1,080, or $9 per book.

When Do You Use the Relative Sales Value Method?

Use it when you pay one price for a group of items that differ in value and the seller’s invoice does not price them separately. Common cases are a mixed lot of merchandise, land divided into lots, and joint products that come out of one production process.

Is the Relative Sales Value Method the Same as the Relative Fair Value Method?

The math is the same. Relative sales value is the usual name when the items are inventory held for sale. Relative fair value is the usual name when a company buys long-lived assets, such as land and a building, for one price. In both cases, each item gets a share of the cost equal to its share of the total value.

Does the Allocation Change if Selling Prices Change Later?

No. The cost is split once, at purchase, using reasonable price estimates at that date. If prices rise or fall later, the assigned cost stays the same and the difference shows up in gross profit. If expected selling prices fall so far that the items can no longer recover their cost, the usual inventory write-down rules apply as a separate step.

What if every unit has the same selling price?

Then relative sales value produces equal unit costs because each unit contributes the same estimated value. Different quantities across groups still give those groups different total costs.

Does a markup belong in inventory?

The allocation distributes the amount paid. Expected markup stays outside the inventory balance. It becomes gross profit as units sell at prices above their allocated costs.

What if the buyer has signed for the lot but will receive it next month?

It depends on whether the buyer already owns the goods. If ownership has passed to the buyer, record the purchase and allocate the cost now. If it has not, there is nothing to allocate yet. The deal is a purchase commitment, which is a signed agreement to buy goods in the future. If that contract is firm and a loss is expected, see the journal entries for a purchase commitment.

About the author. Mansour Farhat is the instructor behind Farhat Lectures, an online learning platform for accounting students and CPA, CMA, and EA exam candidates. The Farhat Lectures YouTube channel has more than 280,000 subscribers.