GROSS PROFIT VARIATION ANALYSIS

Time Duration and Allotment: Week 2; 6 hours

Abstract:
This study of gross profit variation analysis focuses on the various factors that affect the changes in the gross profit.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Compute the increase or decrease of gross profit during periods, as well as the different factors comprising such increase or decrease;
 Evaluate the factors affecting the changes in gross profit.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

2. Answer the seven (7) exercises presented after the topic content below. (EXCERCISES)

TOPIC CONTENT

Gross Profit Variance

Analysis of variation in gross profit is an indispensable tool in controlling operations; the adequacy or inadequacy of gross profit determines the final results of operations (net income).
Gross profit must be adequate to cover operating expenses, financing, income taxes and a desired amount of profit. At times, the gross profit figure is also being used as a basis for
performance evaluation.

Sales = Sales Volume X Unit Selling Price

Less: Cost of Goods Sold = Sales Volume X Unit Cost
Gross Profit = Sales Volume X (Unit Selling Price – Unit Cost)

Gross Profit Variance Analysis

The gross profit (GP) variance analysis is viewed as a modified form of FS analysis (i.e., trend analysis). GP variance may be analyzed through the following:
 GP (Actual) vs GP (Budget)
 GP (Current Period) vs. GP (Last Period)
Gross Profit Variance = GP (Actual or Current Period) – GP (Budget or Prior Period)
Note: Favorable, if actual (current) GP is greater than budgeted (last year) GP.
Unfavorable, if actual (current) GP is less than budgeted (last year) GP.
 Analysis:

Sales price (factor) variance = Actual Quantity X Change in Selling Price

Cost price (factor) variance = Actual Quantity X Change in Unit Cost
Volume (factor) variance = Change in Quantity X Budgeted GP/Unit

Sales volume variance = Change in Quantity X Budgeted Selling Price

Cost volume variance = Change in Quantity X Budgeted Unit Cost

Alternative analysis:

Sales price factor = Current Sales – Current Volume @ Budgeted Selling Price
Sales variance
Sales volume factor = Current Volume @ Budgeted Selling price – Budgeted Sales

Cost price factor = Current Cost of Goods Sold – Current Volume @ Budgeted Unit Cost
Cost variance
Cost volume factor = Current Volume @ Budgeted Unit Cost – Budgeted Cost of Goods Sold

Gross profit variance analysis (for multi-product companies)

Analysis:

Sales price (factor) variance = Actual Quantity X Change in Selling Price (individual products)
Cost price (factor) variance = Actual Quantity X Change in Unit Cost (individual products)
Volume (factor) variance = Change in Quantity X Average Budgeted GP/unit
Mix (factor) variance
Average GP/u based on actual volume at budgeted prices P XX
Less: Average Budgeted GP/unit ( XX)
Increase (decrease) in average GP/unit P XX
Multiplied by: Total actual quantity sold XX
Increase (decrease) in gross profit P XX

Where: Average GP/u = GP (all products) / Total quantity (all products)

EXERCISES:

Exercise 1. Gross Profit Analysis with a Single Product (Full Exercise 5.

Information) The management of PG-13 Co. asked you to submit an analysis of the
Maria Co. prepared the following budgetary information for January of 2021 increase in the gross profit in 2021 based on the past two-year comparative
for its toy gun: income statements, which are shown below:

Sales (12,000 units) P 432,000 2021 2020

Cost of Goods Sold 288,000 Net Sales P 1,237,500 P 1,000,000
Gross Profit 144,000 Cost of Sales 950,000 800,000
Gross Profit P 287,500 P 200,000
In January, actual operations resulted in the production and sale of 13,000
units at an average selling price of P34 per unit. The cost of goods sold per The selling price increased by 12.5% beginning January 2021.
unit increased by P3.
1. The increase in gross profit due to increase in volume is (volume
Required: factor)
1. Overall GP variance a. 20,000 c. 50,000
2. Sales price variance b. 35,000 d. 100,000
3. Sales volume variance
4. Cost price variance 2. Gross profit decline due to increase in cost in the amount of (cost
5. Cost volume variance factor)
a. 70,000 c. 88,000
b. 80,000 d. 97,500
Exercise 2. Gross Profit Analysis with a Single Product (Incomplete
Information) 3. The increase in sales prices caused an increase in gross profit by
Federer Co. has requested you to determine the cause of the difference (price factor)
between its 2020 and 2021 gross profit based on the following data: a. 100,000 c. 137,500
b. 110,000 d. 237,500
2020 2021
Sales (12,000 units) P 200,000 P 252,000 4. The percentage change in volume is
Cost of Goods Sold 120,000 180,000 a. 15.125% c. 11%
Gross Profit P 80,000 P 72,000 b. 12.75% d. 10%

No additional data was made available except that units sales increased by 5. The percentage change in cost is
20% in 2021. a. 10.8% c. 8.675%
b. 10% d. 7.95%
Required:
 1. Overall GP variance
2. Price factor
3. Cost factor
4. Volume factor

Exercise 3. Gross Profit Analysis (Multi-Product Company) Exercise 6.

The following data are given for Nadal Co.: Boston Co. had the following results in June:

2021 2020 Planned Actual

Product A Product B Product A Product B Sales P 70,000 P 68,900
Sales Volume 6,000 u 4,000 u 3,000 u 5,000 u Variable costs 40,000 38,500
Unit selling price P 10 P6 P9 P5 Contribution margin P 30,000 P 30,400
Unit cost 6 3 4 3
Planned sales were 10,000 units, actual sales were 9,700 units. The sales
Required: price variance is
1. Overall GP Variance a. P 1,100 U c. P 900 U
2. Price factor b. P 1,000 F d. P 400 F
3. Cost factor

Exercise 4. Gross Profit Analysis Exercises Exercise 7.

GP Variants Co. had the following results in August: Atom Co. had the following results in June:

Planned Actual Planned Actual

Sales P 160,000 P 162,500 Sales P 70,000 P 68,900
Cost of Goods Sold 100,000 102,500 Variable costs 40,000 38,500
Gross Profit P 60,000 P 60,000 Contribution margin P 30,000 P 30,400

Actual sales were 500 units higher than the planned sales. Planned sales were 10,000 units, actual sales were 9,700 units. The sales
volume variance is
Which of the following statements is false? a. P 1,100 U c. P 900 U
a. The sales price variance is P1,500 unfavorable. b. P 1,000 F d. P 400 F
b. The sales volume variance is P4,000 favorable.
c. The cost price variance is zero (0).
d. The cost volume variance is P2,500 favorable.
 Activities, Resources, and Assessment
Online Modular (Learning Materials and Assessment Portals thru SCHOOLOGY)

Resources: Resources:
Schoology App/Messenger Schoology App/Messenger
Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita
Balatbat Cabrera. Balatbat Cabrera.

Activities: Activities:
Read the reference textbook for the comprehensive details of the chapter topic Read the reference textbook for the comprehensive details of the chapter topic
coverage. coverage.

Topic discussion will be through GoogleMeet App. Answer the Exercises given above. The answer/solutions are to be written on a clean
sheet of paper and should be compiled in a plastic envelope. This will be due for
submission on the date set by the teacher.

Assessment: Assessment:
Topic quiz will be publish at Schoology App. Instructions as to the time allocated Topic quiz will be publish at Schoology App. Instructions as to the time allocated
for answering and deadline for submission of quiz will be announced via Messenger for answering and deadline for submission of quiz will be announced via Messenger
Group Chat. Group Chat.