Constant Gross Profit Percentage Method

Cost Accounting

Constant Gross Profit (Gross Margin) Percentage Method

The Constant Gross Profit Percentage method allocates the joint costs in such a way that all of the joint products will have the same gross profit margin percentage. It is done by “backing into” the amount of joint cost to be allocated to each of the joint products.

  1. Step 1: Calculate the gross profit margin percentage for the total of both (or all, if more than two) of the joint products to be included in the allocation by subtracting the total joint and total separable costs from the total final sales value and dividing the remainder by the total final sales value. This calculation should be done for all the joint products produced during the period, not for all the joint products sold during the period. The result is the total gross profit margin percentage.
  2. Step 2: Calculate the gross profit for each of the individual products by multiplying the total gross profit margin percentage calculated in Step 1 by each individual product’s final sales value.
  3. Step 3: Subtract the gross profit calculated in Step 2 and any separable costs from each individual product’s final sales value. The result of this subtraction process will be the amount of joint costs to allocate to each product.

Under the Constant Gross Profit method, the gross profit percentage for each of the joint products must be the same, and the total joint cost allocated to each product must be an amount that will create that same gross profit percentage for each of the joint products.

If other costs for a particular product (excluding the allocation of the joint costs) are so high that even without any allocation of the joint cost, that product’s gross profit percentage is already lower than the gross profit percentage for all of the joint products, then the joint cost allocated to that product needs to be less than zero (a negative amount) in order to decrease the cost of that product and create a gross profit percentage for that product that is equal to the gross profit percentage for all of the joint products.

As a result, one or more of the joint products may receive a negative allocation of the joint cost

Benefits of the Constant Gross Profit (Gross Margin) Percentage Method

  • The Constant Gross Profit method is the only method for allocating joint costs under which products may receive negative allocations.
  • This method allocates both joint costs and gross profits. Gross profit margin is allocated to the joint products to determine the joint cost to be allocated to each one so that the resulting gross profit margin percentage for each product will be the same.
  • The method is relatively easy to implement, so it avoids the complexities of the NRV method.

Limitations of the Constant Gross Profit (Gross Margin) Percentage Method

  • It assumes that all products have the same ratio of cost to sales value, which is probably not the case.
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