Final answer:
When a contract includes additional goods or services that are treated as separate performance obligations, the contract price needs to be allocated based on their estimated standalone selling prices.
Step-by-step explanation:
In accounting, when a contract includes additional goods or services that are treated as separate performance obligations, the contract price needs to be allocated based on their estimated standalone selling prices. This is required by the revenue recognition standards, such as ASC 606 in the United States.
For example, if a software company sells a package that includes both software licenses and technical support, these would be considered separate performance obligations. The company would need to estimate the standalone selling prices of each component and allocate the contract price accordingly.
Allocating the contract price based on estimated standalone selling prices ensures that revenue is recognized in a way that reflects the company's relative performance in fulfilling the different obligations under the contract.