Gross Profit Analysis-Questions and Answers:

Questions:

1. Why is the gross profit figure significant?
2. What causes changes in the gross profit?
3. Explain “product mix” or “sales mix.”
4. By what methods can a change in the gross profit figure be analyzed?
5. Describe how the sales price variance is determined. If the sales price variance were journalized in the books, how would such an entry vary from the entry for the materials purchase price variance?
6. How are the sales mix and the final sales volume variance computed?
7. What is the significance of the average gross profit figure of the base or standard year?
8. The gross profit analysis based on budgets and standards makes on a product basis?
9. What important information is revealed by gross profit analysis on a product basis?
10. whose task is it to see that the planned gross profit is met?

1. The gross profit figure is usually a good index of the adherence of a company’s operation to its budget plan. No preferential treatment should be afforded to any expenses, whether above or below the gross profit figure. The gross profit figure is merely a convenient and conventional checkpoint.
2. Changes in the gross profit are caused by changes in sales price, changes in sales volume, and changes in various cost elements.
3. Products mix or sales mix refers to the composition of the products sold. Prices and costs, and the gross profit per product, are different. A shift from one product to another may influence the gross profit figure because of changes in sales mix or product mix.
4. A change in the gross profit figure can be analyzed by two methods: (1) using last years figures or any other year selected as the base for comparison or (2) using this year’s budget, standard costs, and prices.
5. The sales price variance is the difference between the actual sales made this year at this year’s prices and the actual sales volume times standard prices. If a journal entry were made, the actual sales figure would be debited to accounts receivable  and the standard figure credited to sales, with the variance offsetting the difference. For the materials purchase price variance, the actual cost is credited to accounts payable, and the standard cost is debited to materials, with the variance offsetting the difference.
6. The sales mix variance is computed by comparing the difference between actual sales at base (standard) prices and the actual sales at the base (standard) costs with the actual sales volume times the average standards gross profit figure. Comparing the actual sales volume times the average standard gross profit with the budgeted gross profit yields the final sales volume variance.
7. The average gross profit of the base or standard year aids the determination of the sales mix and the final sales volume variance.
8. The three statements: the budgeted income statement; the actual income statement; an income statement using actual units or quantities multiplied by the standard (or budgeted) costs and prices.
9. An analysis of the gross profit figure based on individual product permits at recognition of their contribution to total profit. In other words, it indicate their profitability.
10. Meeting the planned gross profit is the task of the entire organization. The sales department should hold fast to prices, volume, and product mix; the manufacturing departments should control costs and quantities; the production supervisors should control their budgetary allowances; the purchasing department should buy at budgeted costs; the personnel department should employ qualified people.