Constant Gross-Margin Percentage NRV Method

The constant gross-margin percentage NRV method allocates joint costs to joint products produced during the accounting period in such a way that each individual product achieves an identical gross-margin percentage. The method works backward by first computing the overall gross margin. Then, for each product, the gross-margin percentage and any separable costs are deducted from the final sales value of production to back into the joint-cost allocation for that product. Exhibit 17-7, Panel A, shows the three steps for allocating the $400,000 joint costs between buttercream and condensed milk in the Farmland Dairy example using this method. Refer to the panel as we describe each step.

  1. Step 1: COMPUTE THE OVERALL GROSS-MARGIN PERCENTAGE. This step calculates the overall gross-margin percentage for all joint products together based on the final sales value of total production during the accounting period, not the total revenues of the period. Accordingly, Exhibit 17-7, Panel A, uses $1,600,000, the final expected sales value of the entire output of buttercream and condensed milk, not the $1,290,000 in actual sales revenue for the month of May.
  2. Step 2: COMPUTE THE TOTAL PRODUCTION COSTS FOR EACH PRODUCT. The gross margin (in dollars) for each product is computed by multiplying the overall gross-margin percentage by the product’s final sales value of total production. For each product, subtracting the gross margin from the final sales value of total production yields the total production costs of the product.
  3. Step 3: COMPUTE THE ALLOCATED JOINT COSTS. For each product, the total production costs minus separable costs equal the joint cost allocated to that product.

Exhibit 17-7

Joint-Cost Allocation and Product-Line Income Statement Using Constant Gross-Margin Percentage NRV Method: Farmland Dairy for May 2020

Spreadsheet screenshot shows the joint-cost allocation and product line income statement using constant gross-margin percentage NRV method of Farmland dairy for May 2020.

The spreadsheet shows two panels depicting the data for the products buttercream and condensed milk.

  1. Panel A: Allocation of joint costs using net realizable value method: Step 1

    1. Final sales value of total production during accounting period (sum of 20,000 gallons multiplied by $25 per gallon and 50,000 gallons multiplied by $22 per gallon): $1,600,000

    2. Deduct joint and separable costs (sum of $400,000, $280,000, and $520,000): 1,200,000

    3. Gross margin: $400,000

    4. Gross margin percentage ($400,000 divided by $1,600,000): 25%

  2. Panel A: Allocation of joint costs using net realizable value method: Step 2

    1. Final sales value of total production during accounting period

      • Buttercream (product of 20,000 gallons and $25 per gallon): $500,000

      • Condensed milk (product of 50,000 gallons and $22 per gallon): $1,100,000

      • Total: $1,600,000

    2. Deduct gross margin, using overall gross-margin percentage

      • Buttercream (25% of $500,000): $125,000

      • Condensed milk (25% of $1,100,000): $275,000

      • Total: $400,000

    3. Total production costs

      • Buttercream: $375,000

      • Condensed milk: $825,000

      • Total: $1,200,000

  1. Panel A: Allocation of joint costs using net realizable value method: Step 3

    1. Deduct separable costs

      • Buttercream: $280,000

      • Condensed milk: $520,000

    2. Total: $800,000

    3. Joint costs allocated

      • Buttercream: $95,000

      • Condensed milk: $305,000

      • Total: $400,000

  1. Panel B: Product-line income statement using constant gross-margin percentage NRV method for May 2017

    1. Revenues

      • Buttercream (12,000 gallons multiplied by $25 per gallon): $300,000

      • Condensed milk (45,000 gallons multiplied by $22 per gallon): $990,000

      • Total: $1,290,000

    2. Joint costs of goods sold (from panel A)

      • Buttercream: 95,000

      • Condensed milk (0.725 multiplied by $400,000): $305,000

      • Total: $400,000

    3. Cost of goods sold: Separable costs

      • Buttercream: $280,000

      • Condensed milk: $520,000

      • Total: $800,000

    4. Cost of goods sold: Production costs

      • Buttercream: $375,000

      • Condensed milk: $825,000

      • Total: $1,200,000

    5. Cost of goods sold: Deduct ending inventory

      • Buttercream (8,000 gallons multiplied by $18.75 per gallon): $150,000

      • Condensed milk (5,000 gallons multiplied by $16.50 per gallon): $82,500

      • Total: $232,500

    6. Total cost of goods sold

      • Buttercream: $225,000

      • Condensed milk: $742,500

      • Total: $967,500

    7. Gross margin

      • Buttercream: $75,000

      • Condensed milk: $247,500

      • Total: $322,500

    8. Gross margin percentage

      • Buttercream ($75,000 divided by $300,000): 25%

      • Condensed milk ($247,500 divided by $990,000): 25%

      • Total ($322,500 divided by $1,290,000): 25%

Note 1: Total production costs of buttercream divided by Total production of buttercream equals $375,000 divided by 20,000 gallons equals $18.75 per gallon.

Note 2: Total production costs of condensed milk divided by Total production of condensed milk equals $825,000 divided by 50,000 gallons equals $16.50 per gallon.

Exhibit 17-7, Panel B, presents the product-line income statement for the constant gross-margin percentage NRV method.

The constant gross-margin percentage NRV method is the only method where products can receive negative allocations. This may be required to bring gross-margin percentages of relatively unprofitable products up to the overall average. The constant gross-margin percentage NRV method is also the only method that allocates both joint costs and profits—the same gross-margin percentage is allocated to each product to determine the joint-cost allocations. Neither the sales value at splitoff method nor the NRV method takes account of profits earned either before or after the splitoff point when allocating joint costs.

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