Chapter No 20

CONVENTIONAL GROSS
PROFIT ANALYSIS
 Chapter Discussion Point
 Before talking about gross profit analysis, we need to briefly explain
what is gross profit.
 Gross profit is the difference between net sales and cost of goods sold
and is computed as a part of income statement or profit and loss
account of a business. It is computed for a specific period by
deducting the cost of goods sold (COGS) from net sales revenue
realized during that period.
 In equation form, it can be presented as follows:
 Gross profit = Nets sales revenue – Cost of goods sold
 Any deviation from the predetermined standard cost is normally shown
as an increase or decrease in the gross profit.
 careful analysis of unexpected changes in gross profit is advantageous
to a company's management.
 CAUSES OF GROSS PROFIT CHANGES
A change in the gross profit is due to one or a combination of
the following:
 1.Changes in selling prices of products
 2.Changes in volume sold
 1. Changes in volume (physical units)
 2. Changes in types of products sold, often called
product mix (change in the composition of goods sold)
or sales mix
 3.Changes in cost elements
GROSS PROFIT ANALYSIS
 1. Gross profit analysis
based on prices and
costs of the previous
year, or any year
selected as the basis for
the comparison, for the
computation of the
variances where
standard cost not found.
 2. Where standard costs
and budgetary methods
are employed, a greater
degree of accuracy and
more effective results
are achieved in GPA.
Where standard costs and budgetary methods are employed, a
greater degree of accuracy and more effective results are
achieved in GPA.
The Analysis is based
on three statements:
 1. The budget
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
priced at budgeted
sales prices and
standard costs.
Uses of Gross Profit analysis
 Gross profit analysis is the procedure of finding the causes of changes in gross
profit percentage from budgeted to actual or from one period to another
period. The major purpose of gross profit analysis is to reveal the unexpected
changes in gross profit and their causes so that they can be brought to the
attention of management in a timely manner. A change in gross profit usually
occurs due to one or more of the following reasons:
1. Changes in total revenue for the period due to changes in selling prices of
goods and services.
2. Changes in total revenue for the period due to changes in quantity of goods
and services sold during the period.
3. Changes in proportion in which a multi-product company sells its products
(usually termed as shift in sales mix or product mix).
4. Changes in basic manufacturing cost elements i.e., direct materials, direct
labor and manufacturing overhead.
 Required: Using the
data of Steward
Company given above,
compute:
 sales price variance and
sales volume variance
 cost price variance and
cost volume variance
 sales mix variance and
final sales volume
variance
 Solution
 1. Sales price variance and sales volume variance
 2. Cost price variance and cost volume variance
Interim recapitulation:
 3. Sales mix variance and final sales volume variance Final recapitulation: