relative sales value method of allocating cost definition

The allocation of common costs based on the sales value of the products that emerge. For example, a company develops a large parcel of land at a cost of $5 million dollars. Individual lots will be sold for $100,000 to $300,000. A reasonable way to allocate the $5 million of common cost is on the basis of each lot’s expected selling price. As a result a $300,000 lot will have three times the cost allocated to it as will a $100,000 lot. This method will also result in a relatively uniform gross profit percentage on each lot sold.