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.

19A 
19B 
Changes 
Sales (net)
Cost of goods soldGross profit 
$120,000
$100,000

$20,000
======= 
$140,000
$110,000

$30,000
======= 
+$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 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 


 


$22,500 



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:

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 


======= 

