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
		=======

 

Confidentiality Notice This email is intended only for the individual/s to whom, it is addressed and may contain information that is confidential or privileged. If you are not the intended recipient/s, or the employee or person responsible for delivering it to the intended recipient/s you are hereby notified that any dissemination, distribution, copying or use is strictly prohibited. If you have received this communication in error, please notify the sender immediately by telephone and return the original email to the sender.