Home page     Downloads      Privacy policy     Disclaimer & terms of use     Contact us     Advertise with us     About us      Link to us

Home Gross Profit Analysis Gross profit analysis based on the previous year's figures

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




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 the cost of goods sold figure can be broken down as follows:


19A Sales

19A Cost of goods sold

Product Quantity Unit Price Total Unit Cost Total
X 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
      =======   =======

19B Sales

19B Cost of goods sold

Product Quantity Unit Price 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
      ======   =====

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 a final 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   $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

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   $110,000
Actual 19B sales at 19A 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 19B sales at 19A cost   $97,500
Cost of goods sold in 19Aused as standard   $100,000
Favorable cost volume variance   $2,500

The result of the preceding computations might explain the 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
Less unfavorable cost price variance   $12,500
Increase in gross profit   10,000

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 determined―the 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   $118,000
Actual 19B sales at 19A cost   $  97,500
Difference   $20,500
19B sales at 19A average gross profit   $19,427
Favorable sales mix variance   $  1,073
19B sales at 19A average gross profit   $19,427
Total 19A sales (used as standard) $120,000  
Cost of goods sold in 19A (used as standard) 100,000  
  --------- 20,000
Unfavorable final sales volume variance   $573

Recapitulations of Variances:

The variances identified in the preceding calculations are summarized below:




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

  --------- ---------
Total $23073 $13073
Less $13073  

Net increase in gross profit

New Page 3

You may also be interested in other articles from "Gross Profit Analysis" chapter:

  1. Gross Profit Analysis Based on the Previous Years Figures
  2. Gross Profit Analysis Based on Budgets and Standard costs
  3. Discussion Questions and Answers about Gross Profit Analysis
  4. Gross Profit Analysis Solved Problems
  5. Gross Profit Analysis Case Study


Downloadable Materials

Learn Accounting Easily With AccountingCoach Pro

View Online or Download all of the materials to Your Computer and Print Immediately

What is Included in Accounting Book
Downloadable Self-Study Materials ( Available in Word Editable Format)
Help in preparation of Online Exams (Available in Word Editable Formatt)
Solved Accounting Problems
Bookkeeping and Financial Statements

Back to Home Page | Back To Gross Profit Analysis Page

Managerial Accounting

Introduction to Managerial Accounting
Business and Quality Improvement Programs
Cost Terms, Concepts and Classification
Job Order Costing system
Process Costing System
Process Costing System - Addition of Materials & Beginning Inventory
Controlling and Costing Materials
Materials and Inventory Cost Control
By Products and Joint Products Costing
Variable Costing System
Activity Based Costing System
Budgeting and Planning
Standard Costing and Variance Analysis
Gross Profit Analysis
Linear Programming Technique
Segment Reporting and Transfer Pricing
Capital Budgeting Decisions
Service Department Costing
Cash Flow statement
Financial statement Analysis
Pricing Products and Services
Managerial Accounting Terms and Definitions
Managerial / Cost Accounting Formulas

Financial Accounting

Bookkeeping and Bookkeeping Terms
Accounting Principles and Accounting Equation
Accounting For Bills of Exchange
Subdivision of Journal
Final Accounts
Capital and Revenue Items
Single Entry System/Accounting From Incomplete Records
Accounting For Non-Trading Concerns
Accounting for Consignment / Consignment Accounts
Accounting for Joint Ventures
Accounting for Depreciation

About us !

Also see formula of gross margin ratio method with financial analysis, balance sheet and income statement analysis tutorials for free download on Accounting4Management.com.Accounting students can take help from Video lectures, handouts, helping materials, assignments solution, Online Quizzes, GDB, Past Papers, books and Solved problems. Also learn latest Accounting & management software technology with tips and tricks.

Home page   Download Material   Privacy policy   Disclaimer & terms of use   Contact us   Advertise with us   About us   Useful links   Link to us

Copyrights of all content on this web site are owned by Accounting For Management except where indicated in source or copyright statements. Accounting For Management must be contacted for permission to copy or redistribute any material published on this website.
Copyright 2014 Accounting For Management. All rights reserved.