MANAGEMENT ADVISORY SERVICES: GROSS PROFIT VARIANCE ANALYSIS

Gross profit is the difference between sales and cost of goods sold. It is a very
important figure in the income statement because it is one of the factors that determines
the final result of operations.
To conduct a meaningful analysis of the variation in gross profit, the actual gross
profit during a given period may be compared with any of the following:
a. the immediately preceding period’s figures or any previous period’s figures
selected as the base for comparison.
b. The same period’s budgeted or standard figures.

Changes in gross profit may be attributed to the change in any, or a combination of the
following factors:

1. Selling prices of the products

2. Volume or quantity of product(s) sold which, in turn, may be due to change in:
a. Number of physical units sold (when the company sells only one product line),
and
b. Product mix or sales mix which refers to the composition of the products
sold (this is applicable to companies selling more than one product line)
3. Cost of the product sold:
a. For merchandising firms, cost refers to the net purchase cost of product
b. For manufacturing firms, cost includes the three manufacturing cost elements,
namely, materials, labor and factory overhead.

4-Way Analysis:

Sales Variance
Sales Price Factor:
2018 Sales xx
Less 2018 Sales @ 2017 Sales Price xx xx
Sales Volume Factor:
2018 Sales @ 2017 Sales Price xx
Less 2017 Sales xx xx xx
Cost Variance
Cost Price Factor:
2018 Cost of Sale xx
Less 2018 Cost of Sale @ 2017
xx xx
Cost Price
Cost Volume Factor:
2018 Cost of Sale @ 2017 Cost Price xx
Less 2017 Cost of sales xx xx xx

Net Changes in Gross Profit xx

4-Way Analysis Simplified:

Sales Variance:
Prices Factor = Difference in selling prices x 20CY units
Volume or Quantity Factor = Difference in units x 20BY selling price
Cost Variance:
Prices Factor = Difference in cost prices x 20CY units
Volume or Quantity = Difference in units x 20BY

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6-Way Analysis

Sales Variance:
Price Factor = Difference in selling prices x 20BY units
Volume or Quantity
= Difference in units x 20BY units
Factor
Price-volume Factor = Difference in selling prices x Difference in units
Cost Variance:
Price Factor = Difference in cost prices x 20BY units
Volume Factor = Difference in units x 20BY cost price
Price-volume Factor = Difference in cost prices x Difference in units

3-way Analysis:

Quantity or Volume Factor = Difference in units x 20BY Gross Profit per unit
Price Factor = Difference in selling prices x 20CY units
Cost Factor = Difference in cost prices x 20CY units

Sample Problem 1

Consider the following data for JAM CORPORATION:

2018 2017
Sales Volume in units 5,000 8,000
Selling price per unit P10 P8
Cost per unit 7 6

Required: Gross profit variation analysis, using the following:

a. Four-way analysis
b. Two-way analysis
c. Three-way analysis
d. Six-way analysis

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GROSS PROFIT VARIANCE ANALYSIS FOR TWO OR MORE PRODUCTS

When two or more products of different gross profit figures are being sold, the 6-way
analysis may be used. The sales price, sales volume, cost price and cost volume variances
are first computed using the approach similar to the one used for 4-way analysis in the
foregoing discussions. Then, the sales volume and cost volume variances are analyzed
further, which results in the computation of a sales mix variance and final sales volume
variance. The formulas for these last two variances are as follows:

Sales Mix Variance:

20CY units @ 20BY sales price XX
Less 20CY units @ 20BY cost prices XX

Difference XX
Less 20CY units @ 20BY average gross profit XX

Sales Mix Variance XX

Final Sales Volume Variance:

20CY units @ 20BY ave. gross profit XX
Less 20BY gross profit XX

Final Sales Volume Variances XX

Sample Problem 2-(GP Variance Analysis for Two or More Products)

Use the following data for White JAM Corporation:

2018 2017 (base year)

PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT
J A M J A M
Sales volume in units 400 350 1,000 500 200 1,000
Selling price per P4 P5 P3 P4.20 P4.50 P2.80
unit
Costs per unit 1.6 2 1.20 1.68 .180 1.12

Required: compute for the following

a. Price and volume variance for sales

b. Price and volume variance for costs
c. Sales mix variance
d. Final sales volume variance

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 Multiple choice questions

1. In analyzing company operations, the controller of the FM Corporation found a

P250,000 favorable flexible budget revenue variance. The variance was calculated
by comparing the actual results with the flexible bdget. This variance can be
wholly explained by
A. The total flexible budget variance.
B. The total static budget variance.
C. Changes in unit selling prices.
D. Changes in the number of units sold.

2. In gross profit analysis, if the cost variance is zero, such variance indicates
that;
A. Manufacturing management was unable to keep production costs at budgeted
costs.
B. Manufacturing management was able to control production cost below budgeted
costs.
C. Manufacturing management was able to control production cost at budgeted
costs.
D. Manufacturing management was not able to control production at budgeted
costs but purchasing was able to keep at budgeted price.

3. DUST Corporation, which sells a single product, provided the following data from
its income statements for the calendar years, 2018 and 2017:
2018
Sales (150,000 units) P750,000
Cost of goods sold (525,000)
Gross profit P225,000

2017 (base year)

Sales (180,000) P720,000
Cost of goods sold (575,000)
Gross profit P145,000

In an analysis of variation in gross profit between the two years, what would be
the effects of changes in sales price and sales volume?

Sales Price Sales Volume

A. P150,000 favorable P120,000 unfavorable
B. P150,000 unfavorable P120,000 favorable
C. P180,000 favorable P150,000 unfavorable
D. P180,0000 unfavorable P150,000 favorable

4. The gross profit of MJP Company for each of the years ended December 31, 2017 and
2018 were as follows:
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 2017 2018
Sales P792,000 P800,000
Cost of goods sold 464,000 480,000
Gross profit P328,000 P320,000

Assuming that selling prices, were 10% lower during 2018, what would be the amount
of decrease in gross profit due to the change in selling price?
A. P8,000 B. P72,000 C. P79,2000 D. P88,000

For items 5 to 12:

The management of BITONG Corporation asks you to prepare an analysis of the gross
profit variance based on their comparative income statements for the 2017 and 2018:
2018 2017 Variance
Sales P990,000 P800,000 P190,000 F
Cost of goods sold 760,000 640,000 120,000 U
Gross profit P230,000 P160,000 P70,000 F

The only known information given to you is that volume increased from 2017 to 2018 by
10%.

5. The sales volume variance is

A. P80,000 favorable C. P110,000 favorable
B. P56,000 unfavorable D. P64,000 unfavorable

6. The sales price variance is

A. P80,000 favorable C. P110,000 favorable
B. P56,000 unfavorable D. P64,000 unfavorable

7. Assuming a variable cost rate of 40% for 2017 and 50% to 2018. What is the effect
of sales quantity variance on the contribution margin for 2018.
A. C.
B. D.

8. The percentage sales in sales price is

A. 12.5% increase C. 10% increase
B. 12.5% decrease D. 10% decrease

9. The cost volume variances

A. P80,000 favorable C. P110,000 favorable
B. P56,000 unfavorable D. P64,000 unfavorable

10. The cost price variance

A. P80,000 favorable C. P110,000 favorable
B. P56,000 unfavorable D. P64,000 unfavorable

11. The percentage change in cost

A. 7.95% increase C. 12.5% increase
B. 7.95% decrease D. 12.5% decrease

12. The variance in gross profit due to change in volume is

A. P80,000 favorable C. P16,000 favorable
B. P64,000 unfavorable D. P70,000 favorable

Item 13 to 19:

AMOR Traders, Inc. sells three consumer products. Sales and other information
pertaining to the three products are as follows:
2018
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 Product Units Sales Cost of sales Gross profit
TIC 600 P12,000 P9,600 P2,400
TAC 800 12,800 11,200 1,600
TOC 200 2,400 1,800 600
TOTAL 1,600 P27,200 P22,600 P4,600

2017
Product Units Sales Cost of sales Gross profit
TIC 800 P19,200 P14,400 P4,800
TAC 800 14,400 12,000 2,400
TOC 160 1,600 1,280 320
TOTAL 1,760 P35,200 P27,680 P7,520

13. The gross profit variance amounts to

A. P2,920 favorable C. P8,000 unfavorable
B. P2,920 unfavorable D. P12,120 favorable

14. The sales price variance is

A. P8,000 unfavorable C. P3,600 favorable
B. P4,400 unfavorable D. P3,600 unfavorable

15. The sales volume variance is

A. P4,400 unfavorable C. P8,000 unfavorable
B. P4,400 favorable D. P3,600 unfavorable

16. The cost price variance is

A. P1,800 favorable C. P5,080 favorable
B. P1,800 unfavorable D. P3,280 unfavorable

17. The cost volume variance is

A. P1,800 favorable C. P3,280 favorable
B. P3,280 unfavorable D. P5,080 favorable

18. The net gross profit volume amounts to

A. P7,680 unfavorable C. P1,120 unfavorable
B. P160 unfavorable D. P1,120 favorable

19. The net gross profit volume variance may be analyzed further into:
Sales Mix Variance Final Sales Volume Variance
A. P436 unfavorable P684 unfavorable
B. 436 favorable P684 favorable
C. 560 unfavorable P560 unfavorable
D. P960 unfavorable P160 unfavorable

“Every journey starts with a single step”

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