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GROSS PROFIT VARIATION

ANALYSIS
By:
MHARZAN
MARIA

ANDRES &

LOURDES COMTIAG-AGMATA

GROSS PROFIT MARGIN/


GROSS PROFIT RATIO
SALES

COST OF GOODS SOLD


GROSS PROFIT

It provides the balance for


operating expenses, income tax and
return of the capital employed.

What causes change in the


Gross Profit?
1.

Changes in sales prices of the products.

2.

Changes in volume sold.


a. Changes in number of physical units
sold.
b. Changes in the types of products sold, often
called the product mix or sales mix.

3.

Changes in cost elements, i.e., materials, labor,


and overhead costs.

GROSS PROFIT MARGIN/


GROSS PROFIT RATIO

It indicates the efficiency of the operation


and the price policy of the management.

An indication of the extent of average


mark-up on cost of goods

A test of efficiency of purchase and sales


management.

Uses of

Gross Profit Analysis


The

gross profit analysis based on budgets and standards costs


depicts the weak spots in the year's performance.
The

gross profit analysis brings together the two major


functional areas of the firm (Marketing & manufacturing
department) and points to the need for further study by both
departments.
The

marketing department must explain the changes in the


sales prices, the shift in the sales mix, and the decrease in units
sold, while the production department must account for the
increase in cost. To be of real value, the cost price variance
should be further analyzed to determine variances for materials,
labor, and factory overhead.

Procedures for analyzing gross


profit:
1.

Gross Profit Analysis Based


on the Previous Years Figures

2.

Gross Profit Analysis Based


on Budgets and Standard costs

1. Gross Profit Analysis based


on the Previous Years Figures
Sales
Cost of goods sold
Gross profit

19A
(net)$120,000
$100,000
---------$20,000
=======

19B
$140,000
$110,000
--------$30,000
=======

Changes
+$20,000
+$10,000
---------+$10,000
=======

Additional data taken from various records indicate


that the sales and the cost of goods sold figure can be
broken down as follows:
19A Sales
Product Quantity Unit Price Total

19A Cost of goods sold


Unit Cost Total

8,000 Units $5.00

$40,000 $4.000 $32,000

7,000 Units $4.00

$28,000 $3.500 $24,500

20,000 Units$2.60

$52,000 $2.175

$43,500

---------$120,000

---------$100,000

=======

=======

19B Sales
Unit
Product Quantity
Price
X

Y
Z

Total

19B Cost of goods sold


Unit
Cost Total

10,000 Units $6.60 $66,000


4,000 Units $3.50 $14,000

$4.00 $40,000
3.50 $14,000

20,000 Units $3.00 $60,000


-------140,000
======

2.80 $56,000
------110,000
=====

Calculation of sales price and sales volume


variance:
Actual 19B sales

$140,000

Actual 19B sales at 19A price:


X: 10,000 units @ $5.00

$50,000

Y: 4,000 units @ $4.00

$16,000

Z: 20,000 units @ $2.60

$52,000
-------

$118,000
-------

Favorable sales price variance

$22,000
=======

Actual 19B sales at 19A price

$118,000

Total 19A sales (used as standard)

$120,000
------

Unfavorable sales volume variance

$2,000
======

In analyzing: Sales and Costs in 19A will


serve as basis for all comparisons
1.

compute sales price variance and sales


volume variance

2.

compute cost price variance and cost volume


variance

3.

analyze the sales volume variance and cost


volume variance

4.
5.

computation of the sales mix variance

computation of the final sales volume


variance

Calculation of Cost Price and Cost Volume


Variance:
The cost price and cost volume variances are calculated as follows.
Actual 19B cost of goods sold
Actual 19B sales at 19A cost:
X: 10,000 units @ $4.000
Y: 4,000 units @ $3.500
Z: 20,000 units @ $2.175

Unfavorable cost price variance


Actual 19B sales at 19A cost
Cost of goods sold in 19Aused as
standard
Favorable cost volume variance

$110,000
$40,000
$14,000
$43,500
---------

$97,500
--------$12,500
========
$97,500
$100,000
--------$2,500
========

The result of the preceding computations might explain the reason


for the $10,000 increase in gross profit.

Favorable sales price variance


Favorable volume variance (net)
consisting of:
Favorable cost volume variance
$2,500
Less unfavorable sales volume variance $2,000
-------Net favorable volume variance

$22,000

Less unfavorable cost price variance

$12,500
------10,000
=====

Increase in gross profit

$500
-------$22,500

Calculation of the sales mix and final


sales volume variance:
Total gross profit Total number of units sold
= $20,000 35,000
= $0.5714
The $0.5714 average gross profit per unit sold in 19A is multiplied by the total number
of units sold in 19B (34,000 units). The resulting $19,427 is the total gross profit that
would have been achieved in 19B if all units had been sold at 19A's average gross profit
per unit.

The sales mix and final sales volume variance


can now be calculated:
Actual 19B sales at 19A sales price
Actual 19B sales at 19A cost
Difference
19B sales at 19A average gross profit
Favorable sales mix variance
19B sales at 19A average gross profit
Total 19A sales (used as standard)
$120,000
Cost of goods sold in 19A (used as
100,000
standard)
--------Unfavorable final sales volume
variance

$118,000
$ 97,500
------------$20,500
$19,427
--------$ 1,073
======
$19,427

20,000
--------$573
======

Recapitulations of Variances:
The variances identified in the preceding calculations are summarized below:
Gains
Gain due to increased sales price
$22,000
Loss due to increased cost
Gain due to shift in sales mix
$1073
sold Loss due to decrease in units
--------$23073
Total
$13073
Less
--------profit Net increase in gross$10,000
=======

Losses
$12,500
$573
--------$13073

2. Gross Profit Analysis Based on Budgets and Standard Costs:


As the basis for illustrating the analysis of gross profit using budgets
and standard costs, three financial statements for a company are presented:
1. The budgeted income statement prepared at the beginning of the period
2. The actual income statement prepared at the end of the period.
3. An income statement prepared at the end of the period on the basis of actual
sales at budgeted sales prices and at standard costs.

Statement 1:
Income Statement (Budgeted)

ProductUnits
A
B
C

6,000
3,500
1,000
------10,500
=====
*Weighted average

Sales
Unit price
$15.00
$12.00
$10.00
------$13.52*
=====

Amount
$90,000
$42,000
$10,000
-------$142,000
=====

Cost
Unit cost
$12.00
$10.00
$8.75
------$11.02*
=====

Amount
$72,000
$35,000
$8,750
------$115,750
=====

Gross Profit
Per unit Amount
$3.00 $18,000
$2.00 $7,000
$1.25 $1,250
------- -------$2.50* $26,250
===== =====

Statement 2: Income Statement

ProductUnits
A
B
C

5,112
4,208
1,105
------10,425
=====

Sales
Unit price
$15.00
$12.00
$10.00
------$13.26*
=====

*Weighted average

Amount
$76,680
$50,496
$11,050
-------$138,226
=====

Cost
Unit cost
$12.00
$10.00
$8.75
------$10.85*
=====

Amount
$61,344
$42,080
$9,669
------$113,093
=====

(actual)

Gross Profit
Per unit Amount
$3.00 $15,338
$2.00 $8,416
$1.25 $1,381
------- -------$2.41* $25,133
===== =====

Statement 3:
Income Statement (Actual units at budgeted prices and costs)
ProductUnits
A
B
C

5,112
4,208
1,105
------10,425
=====

Sales
Unit price
$15.00
$12.00
$10.00
------$13.26*
=====

*Weighted average

Cost
Amount Unit cost
$76,680 $12.00
$50,496 $10.00
$11,050 $8.75
-------------$138,226 $10.85*
===== =====

Gross Profit
Amount Per unit Amount
$61,344 $3.00
$15,338
$42,080 $2.00
$8,416
$9,669 $1.25
$1,381
-------------------$113,093 $2.41*
$25,133
===== ===== =====

Calculation of sales price variance and sales volume variance:


Using the figures from the statements above, the sales price variance and
sales volume variance for the company are calculated as follows:
Actual sales
Actual sales at budgeted price
Favorable sales price variance
Actual sales at budgeted price
Budgeted sales
Unfavorable sales volume variance

$142,233
$138,226
----------$4,007
=======
$138,226
142,000
-----------$3,774
========

Calculation of Cost Price Variance and Cost Volume Variance:


Using the figures from the statements above, the cost price variance and cost
volume variance for the company are calculated as follows:
Cost of goods sold - Actual
Budgeted cost of actual units sold
Unfavorable cost price variance
Budgeted cost of actual units sold
Budgeted cost of budgeted units sold
Favorable cost volume variance

$122,125
$113,093
----------$9,032
=======
$113,093
115,570
-----------$2,657
========

Calculation of the Sales Mix and Final


Sales Volume Variance:

In the above calculation two volume variances appear:


Unfavorable sales volume variance
Favorable cost volume variance
Net unfavorable volume variance

$3,774
$2,657
-------$1,117
=====

The net volume variance should be further


analyzed to determine the sales mix and
final sales volume variance.
Actual sales at budgeted prices
Budgeted cost of actual units sold

$138,266.00
113,093.00
-------------$25,133.00

Difference
Budgeted gross profit of actual units sold
10,425 actual units $2.50 budgeted gross profit per unit

$26062.50
--------------$929.50
=======
$26062.50

Unfavorable sales mix variance


Budgeted gross profit of actual units sold
Budgeted sales
Budgeted cost of budgeted units sold
Unfavorable final sales volume variance

$142,000
$115,750
-------------

26,250.00
--------------$187.50
========

Check:
Unfavorable sales mix variance
Unfavorable final sales volume variance

$929.50
187.50
----------1,117.00
======

Net unfavorable volume variance

Recapitulation of Variances:
Gain due to increased sales prices
Loss due to increased cost
Loss due to shift in sales mix
Loss due to decrease in units sold
Total
Less
Net decrease in gross profit

Gains
$4,007

Losses
$9,032.00
929.50
187.50
--------------$10,149.00
4,007.00
--------------$6,142.00
=======