Gross Profit Analysis-Questions and Answers

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?

Answers:

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.

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Gross Profit Analysis Based on Budgets and Standard Costs

Gross Profit Analysis Based on Budgets and Standard Costs:

As the basis for illustrating the analysis of gross profit using budgets and standard costs, three financial statements for a company are presented:

1. The budgeted income statement prepared at the beginning of the period
2. The actual income statement prepared at the end of the period.
3. An income statement prepared at the end of the period on the basis of actual sales at budgeted sales prices and at standard costs.

Statement 1:

Income Statement (Budgeted)
Product	Units	Sales		Cost		Gross Profit
		Unit price	Amount	Unit cost	Amount	Per unit	Amount
A	6,000	$15.00	$90,000	$12.00	$72,000	$3.00	$18,000
B	3,500	$12.00	$42,000	$10.00	$35,000	$2.00	$7,000
C	1,000	$10.00	$10,000	$8.75	$8,750	$1.25	$1,250
	-------	-------	--------	-------	-------	-------	--------
	10,500	$13.52*	$142,000	$11.02*	$115,750	$2.50*	$26,250
	=====	=====	=====	=====	=====	=====	=====
*Weighted average

Statement 2:

Income Statement (Actual)
Product	Units	Sales		Cost		Gross Profit
		Unit price	Amount	Unit cost	Amount	Per unit	Amount
A	5,112	$16.00	$81,792	$13.98	$71,466	$2.02	$10,326
B	4,208	$12.00	$50,496	$9.72	$40,902	$2.28	$9,594
C	1,105	$9.00	$9,945	$8.83	$9,757	$0.17	$188
	-------	-------	--------	-------	-------	-------	--------
	10,425	$13.64*	$142,233	$11.71*	$122,125	$1.93*	$20,108
	=====	=====	=====	=====	=====	=====	=====
*Weighted average

Statement 3:

Income Statement (Actual units at budgeted prices and costs)
Product	Units	Sales		Cost		Gross Profit
		Unit price	Amount	Unit cost	Amount	Per unit	Amount
A	5,112	$15.00	$76,680	$12.00	$61,344	$3.00	$15,338
B	4,208	$12.00	$50,496	$10.00	$42,080	$2.00	$8,416
C	1,105	$10.00	$11,050	$8.75	$9,669	$1.25	$1,381
	-------	-------	--------	-------	-------	-------	--------
	10,425	$13.26*	$138,226	$10.85*	$113,093	$2.41*	$25,133
	=====	=====	=====	=====	=====	=====	=====
*Weighted average

According to statement 1, the company expected a gross profit of $26,250, based on an estimated production of 10,500 units and an average gross profit of $2.50 per unit. As shown in statement 2, the company actually made a gross profit of only $20,108, or $1.93 per unit. Statement 3 Indicates that the average gross profit for the actual units sold would have been $2.41 per unit if the budgeted sales price and costs per unit had been achieved.

The $6,142 difference between the budgeted gross profit and the actual gross profit is the result of changes in sales price, sales volume, sales mix, and costs. For example, on the basis of the budget, A is the most profitable product and C is the least profitable per unit. Due to variations in sales price and cost, B is actually the most profitable while C is the least profitable per unit. The dollar effect of such changes is shown by the calculation of the sales price, sales volume, cost price, cost volume, sales mix and final sales volume variances.

Calculation of sales price variance and sales volume variance:

Using the figures from the statements above, the sales price variance and sales volume variance for the company are calculated as follows:

Actual sales	$142,233
Actual sales at budgeted price	$138,226
	-----------
Favorable sales price variance	$4,007
	=======
Actual sales at budgeted price	$138,226
Budgeted sales	142,000
	------------
Unfavorable sales volume variance	$3,774
	========

Calculation of Cost Price Variance and Cost Volume Variance:

Using the figures from the statements above, the cost price variance and cost volume variance for the company are calculated as follows:

Cost of goods sold - Actual	$122,125
Budgeted cost of actual units sold	$113,093
	-----------
Unfavorable cost price variance	$9,032
	=======
Budgeted cost of actual units sold	$113,093
Budgeted cost of budgeted units sold	115,570
	------------
Favorable cost volume variance	$2,657
	========

Calculation of the Sales Mix and Final Sales Volume Variance:

In the above calculation two volume variances appear:

Unfavorable sales volume variance	$3,774
Favorable cost volume variance	$2,657
	--------
Net unfavorable volume variance	$1,117
	=====

The net volume variance should be further analyzed to determine the sales mix and final sales volume variance. These variances are computed as follows:

Actual sales at budgeted prices		$138,266.00
Budgeted cost of actual units sold		113,093.00
		--------------
Difference		$25,133.00
Budgeted gross profit of actual units sold
10,425 actual units × $2.50 budgeted gross profit per unit		$26062.50
		---------------
Unfavorable sales mix variance		$929.50
		=======
Budgeted gross profit of actual units sold		$26062.50
Budgeted sales	$142,000
Budgeted cost of budgeted units sold	$115,750
	-------------	26,250.00
		---------------
Unfavorable final sales volume variance		$187.50
		========

Check:

Unfavorable sales mix variance	$929.50
Unfavorable final sales volume variance	187.50
	-----------
Net unfavorable volume variance	1,117.00
	======

Recapitulation of Variances:

	Gains	Losses
Gain due to increased sales prices	$4,007
Loss due to increased cost		$9,032.00
Loss due to shift in sales mix		929.50
Loss due to decrease in units sold		187.50
		---------------
Total		$10,149.00
Less		4,007.00
		---------------
Net decrease in gross profit		$6,142.00
		=======

 

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