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Gross Profit Analysis

Gross profit is the difference between the cost of goods sold andsales. Since the proximity of the actual to the budgeted or standard

gross profit figure is highly desirable, a careful analysis of unexpectedchanges in gross profit is useful to a company's management. Thesechanges are the result of one or a combination of the following.

Changes in sales prices of the products.

Changes in volume sold.a. Changes in number of physical units sold.

b. Changes in the types of products sold, often called the product mixor sales mix.

Changes in cost.

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Procedures for analyzing gross

profit

Two types of procedures:

1. Gross Profit Analysis Based on thePrevious Year's Figures.

2. Gross Profit Analysis Based on Budgetsand Standard Costs.

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Gross Profit Analysis Based on

the Previous Year's Figures.

As the basis for illustrating the gross profit analysis using the previous year'sfigures, the following gross profit section of a company's operating statements for

2011 and 2012 are presented

2011 2012 Changes

Sales (net)Cost of goods sold

Gross profit

$120,000$100,000----------$20,000

=======

$140,000$110,000---------$30,000

=======

+$20,000+$10,000----------+$10,000

=======

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Contd

In comparison with 2011, sales in 2012 increased $20,000 and costsincreased $10,000, resulting in increase in gross profit of $10,000.

Additional data taken from various records indicate that the sales andthe cost of goods sold figure can be broken down as follows:

2011 Sales2011 Cost of goodssold

Product Quantity UnitPrice Total Unit Cost TotalX 8,000 Units $5.00 $40,000 $4.000 $32,000

Y 7,000 Units $4.00 $28,000 $3.500 $24,500

Z 20,000 Units $2.60 $52,000 $2.175 $43,500

---------- ----------

$1,20,000 $1,00,000

======= =======

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Contd

2012 Sales2012 Cost ofgoods sold

Product Quantity UnitPrice Total Unit Cost Total

X 10,000 Units $6.60 $66,000 $4.00 $40,000

Y 4,000 Units $3.50 $14,000 3.50 $14,000

Z 20,000 Units $3.00 $60,000 2.80 $56,000

-------- -------

140,000 110,000

====== =====

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Contd..

In analyzing the gross profit of the company, the salesand cost of 2011 are accepted as the basis (or

standard) for all comparisons. A sales price varianceand a sales volume variance are computed first.,followed by the computation of a cost price varianceand a cost volume variance. The sales volume

variance and cost volume variance are analyzed furtheras a third step, which result in the computation of asales mix variance and a final sales volume variance.

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Contd..

Actual 2012 sales $140,000

Actual 2012 sales at 2011 price:

X: 10,000 units @ $5.00 $50,000Y: 4,000 units @ $4.00 $16,000Z: 20,000 units @ $2.60 $52,000

------- $118,000

-------Favorable sales price variance $22,000

=======

Actual 2012 sales at 2011 price $118,000

Total 2011 sales (used as standard) $120,000

------

Unfavorable sales volume variance $2,000

======

Calculation of sales price and sales volume variance:

The sales price and sales volume variances from the above data are calculated as follows:

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contd

Actual 2012 cost of goods sold $110,000

Actual 2012 sales at 2011 cost:

X: 10,000 units @ $4.000 $40,000

Y: 4,000 units @ $3.500 $14,000

Z: 20,000 units @ $2.175 $43,500

--------- $97,500

---------

Unfavorable cost price variance $12,500

========

Actual 2012 sales at 2011 cost $97,500

Cost of goods sold in 2011 used as standard $100,000

---------

Favorable cost volume variance $2,500

========

Calculation of Cost Price and Cost Volume Variance:The cost price and and cost volume variances are calculated as follows.

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Contd.

The result of the preceding computations might explainthe reason for the $10,000 increase in gross profit.

Favorable sales price variance $22,000

Favorable volume variance (net) consisting of:

Favorable cost volume variance $2,500

Less unfavorable sales volume variance $2,000

--------

Net favorable volume variance $500

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

Less unfavorable cost price variance $12,500

-------Increase in gross profit 10,000

=====

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Contd

Calculation of the sales mix and final

sales volume variance: The net $500 favorable volume variance is a composite of the

sales volume and cost volume variance. It should be furtheranalyzed to determine the more significant sales mix and finalsales volume variances. To accomplish this analysis, one

additional figure must be determinedthe average gross profiton the units sold in the base (or standard) year. Thecomputations is:

Total gross profit Total number of units sold

= $20,000 35,000

= $0.5714

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Contd.

The $0.5714 average gross profit per unit sold in 2011 is multiplied bythe total number of units sold in 2012 (34,000 units). The resulting$19,427 is the total gross profit that would have been achieved in 2012if all units had been sold at 2011s average gross profit perunit.

The sales mix and final sales volume variance can now be calculated:

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Contd..Actual 2012 sales at 2011 sales price $118,000

Actual 2012 sales at 2011 cost $ 97,500

-------------

Difference $20,500

2012 sales at 2011 average gross profit $19,427

---------

Favorable sales mix variance $ 1,073

======

2012 sales at 2011 average gross profit $19,427

Total 2011 sales (used as standard) $120,000

Cost of goods sold in 2011 (used as standard) 100,000

--------- 20,000

---------Unfavorable final sales volume variance $573

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Contd

Recapitulations of Variances:

The variances identified in the preceding calculations are

summarized below:Gains

Losses

Gain due to increased sales price $22,000

Loss due to increased cost $12,500

Gain due to shift in sales mix $1073

Loss due to decrease in units sold $573

--------- ---------

Total $23073 $13073

Less $13073

---------

Net increase in gross profit $10,000

=======