Gross Profit Analysis Based on the Previous Year's Figures:

As the basis for illustrating the gross profit analysis using the previous year's figures, the following gross profit section of a company's operating statements for 19A and 19B are presented.

Sales (net) Cost of goods sold Gross profit

19A $120,000 $100,000 ---------$20,000 =======

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

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

In comparison with 19A, sales in 19B increased $20,000 and costs increased $10,000, resulting in increase in gross profit of $10,000. Additional data taken from various records indicate that the sales and thecost of goods soldfigure can be broken down as follows: 19A Sales Unit Price Total $5.00 $40,000 $4.00 $28,000 $2.60 $52,000 ---------$1,20,000 ======= 19B Sales Unit Price Total $6.60 $66,000 $3.50 $14,000 $3.00 $60,000 -------140,000 ====== 19A Cost of goods sold Unit Cost Total $4.000 $32,000 $3.500 $24,500 $2.175 $43,500 ---------$1,00,000 ======= 19B Cost of goods sold Unit Cost Total $4.00 $40,000 3.50 $14,000 2.80 $56,000 ------110,000 =====

Product X Y Z

Quantity 8,000 Units 7,000 Units 20,000 Units

Product X Y Z

Quantity 10,000 Units 4,000 Units 20,000 Units

In analyzing the gross profit of the company, the sales and cost of 19A are accepted as the basis (or standard) for all comparisons. A sales price variance and a sales volume variance are computed first., followed by the computation of a cost price variance and a cost volume variance. The sales volume variance and cost volume variance are analyzed further as a third step, which result in the computation of a sales mix variance and afinal sales volume variance.

Calculation of sales price and sales volume variance:

The sales price and sales mix variances from the above data are calculated as follows: Actual 19B sales Actual 19B sales at 19A price: X: 10,000 units @ $5.00 Y: 4,000 units @ $4.00 Z: 20,000 units @ $2.60 $140,000 $50,000 $16,000 $52,000

------Favorable sales price variance Actual 19B sales at 19A price Total 19A sales (used as standard) Unfavorable sales volume variance

$118,000 ------$22,000 ======= $118,000 $120,000 -----$2,000 ======

Calculation of Cost Price and Cost Volume Variance:

The cost price and 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 $110,000 $40,000 $14,000 $43,500 ---------

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

$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 Less unfavorable sales volume variance Net favorable volume variance $22,000 $2,500 $2,000 -------$500 -------$22,500 $12,500 ------10,000 =====

Less unfavorable cost price variance Increase in gross profit

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 further analyzed to determine the more significant sales mix and final sales volume variances. To accomplish this analysis, one additional figure must be determinedthe average gross profit realized on the units sold in the base (or standard) year. The computations is:

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) Cost of goods sold in 19A (used as standard) $118,000 $ 97,500 ------------$20,500 $19,427 --------$ 1,073 ====== $19,427 $120,000 100,000 ---------

Unfavorable final sales volume variance

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

Recapitulations of Variances:
The variances identified in the preceding calculations are summarized below:

Gains Gain due to increased sales price Loss due to increased cost Gain due to shift in sales mix Loss due to decrease in units sold --------Total Less Net increase in gross profit $23073 $13073 --------$10,000 ======= $1073 $22,000

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

Gross Profit Analysis Based on Budgets and Standard Costs:

As the basis for illustrating theanalysis of gross profit using budgets and standard costs, threefinancial statementsfor a company are presented:

1. 2. 3.

The budgeted income statement prepared at the beginning of the period The actual income statement prepared at the end of the period. 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) Product Units Unit price A B C 6,000 3,500 1,000 ------10,500 ===== *Weighted average $15.00 $12.00 $10.00 ------$13.52* ===== Sales Amount $90,000 $42,000 $10,000 -------$142,000 ===== Unit cost $12.00 $10.00 $8.75 ------$11.02* ===== Cost Amount $72,000 $35,000 $8,750 ------$115,750 ===== Gross Profit Per unit $3.00 $2.00 $1.25 ------$2.50* ===== Amount $18,000 $7,000 $1,250 -------$26,250 =====

Statement 2:
Income Statement (Actual) Product Units Unit price A B C 5,112 4,208 1,105 ------10,425 ===== *Weighted average $16.00 $12.00 $9.00 ------$13.64* ===== Sales Amount $81,792 $50,496 $9,945 -------$142,233 ===== Unit cost $13.98 $9.72 $8.83 ------$11.71* ===== Cost Amount $71,466 $40,902 $9,757 ------$122,125 ===== Gross Profit Per unit $2.02 $2.28 $0.17 ------$1.93* ===== Amount $10,326 $9,594 $188 -------$20,108 =====

Statement 3:
Income Statement (Actual units at budgeted prices and costs) Product Units Unit price Sales Amount Unit cost Cost Amount Gross Profit Per unit Amount

A B C

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

$15.00 $12.00 $10.00 ------$13.26* =====

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

$12.00 $10.00 $8.75 ------$10.85* =====

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

$3.00 $2.00 $1.25 ------$2.41* =====

$15,338 $8,416 $1,381 -------$25,133 =====

*Weighted average

According tostatement 1,the companyexpected a gross profit of $26,250, based on an estimated production of 10,500 units and an average gross profit of $2.50 per unit. As shown in statement 2,the companyactually made a gross profit of only $20,108, or $1.93 per unit. Statement 3 Indicates that the average gross profit for the actual units sold would have been $2.41 per unit if the budgeted sales price and costs per unit had been achieved. The $6,142 difference between the budgeted gross profit and the actual gross profit is the result of changes in sales price, sales volume, sales mix, and costs. For example, on the basis of the budget, A is the most profitableproductand C is the least profitable per unit. Due to variations in sales price and cost, B is actually the most profitable while C is the least profitable per unit. The dollar effect of such changes is shown by the calculation ofthe salesprice, sales volume, cost price, cost volume, sales mix and final sales volume variances.

Calculation of sales price variance and sales volume variance:

Using the figures from the statements above, thesales price varianceandsales volume varianceforthe companyare calculated as follows:
Actual sales Actual sales at budgeted price $142,233 $138,226 ----------Favorable sales price variance $4,007 ======= Actual sales at budgeted price Budgeted sales $138,226 142,000 -----------Unfavorable sales volume variance $3,774 ========

Calculation of Cost Price Variance and Cost Volume Variance:

Using the figures from the statements above, thecost price varianceandcost volume varianceforthe companyare calculated as follows:
Cost of goods sold - Actual Budgeted cost of actual units sold $122,125 $113,093 ----------Unfavorable cost price variance $9,032 ======= Budgeted cost of actual units sold Budgeted cost of budgeted units sold $113,093 115,570 -----------Favorable cost volume variance $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 $3,774 $2,657 -------Net unfavorable volume variance $1,117 =====

The net volume variance should be further analyzed to determinethe salesmix and final sales volume variance. These variances are computed as follows:
Actual sales at budgeted prices Budgeted cost of actual units sold $138,266.00 113,093.00 -------------Difference Budgeted gross profit of actual units sold 10,425 actual units $2.50 budgeted gross profit per unit $26062.50 --------------$25,133.00

Unfavorable sales mix variance

$929.50 =======

Budgeted gross profit of actual units sold Budgeted sales Budgeted cost of budgeted units sold $142,000 $115,750 -------------

$26062.50

26,250.00 ---------------

Unfavorable final sales volume variance

$187.50 ========

Check:
Unfavorable sales mix variance Unfavorable final sales volume variance $929.50 187.50 ----------Net unfavorable volume variance 1,117.00 ======

Recapitulation of Variances:
Gains 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 $4,007 $9,032.00 929.50 187.50 --------------Total Less $10,149.00 4,007.00 --------------Net decrease in gross profit $6,142.00 ======= Losses