Gross Profit Analysis (GP Analysis)

Gross Profit Analysis (GP Analysis):

After studying this chapter you should be able to:

Gross profit is the difference between the cost of goods sold and sales. Since the adherence of the actual to the budgeted or standard gross profit figure is highly desirable, a careful analysis of unexpected changes in gross profit is useful to a company’s management. These changes are the result of one or a combination of the following.

  1. Changes in sales prices of the products.
  2. Changes in volume sold.
    a. Changes in number of physical units sold.
    b. Changes in the types of products sold, often called the product mix or sales mix.
  3. Changes in cost elements, i.e., materials, labor, and overhead costs.

Procedures for analysing gross profit:

The determination of the various causes for an increase or decrease in gross profit is similar to the computation of standard cost variances, although gross profit analysis is often possible without the use of standard costs or budgets. In such a case, prices and costs of the previous year, or any year selected as the basis for the comparison, serve as the basis for the calculation of the variances. When standard costs and budgetary methods are employed, however, a greater degree of accuracy and more effective results are achieved.

Uses of Gross Profit Analysis:

The gross profit analysis based on budgets and standards costs depicts the weak spots in the year’s performance. Management becomes able to outline the remedies that should correct the situation. The planned gross profit is the responsibility of the marketing as well as the manufacturing department. The gross profit analysis brings together these two major functional areas of the firm and points to the need for further study by both of these department. The marketing department must explain the changes in the sales prices, the shift in the sales mix, and the decrease in units sold, while the production department must account for the increase in cost. To be of real value, the cost price variance should be further analysed to determine variances for materials, labor, and factory overhead.

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