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TOPIC

GROSS PROFIT ANALYSIS

AGENDA FOR NEXT 30 MINUTES

INTRODUCTION TO SOME IMPORTANT TERMS USED IN THE PROCESS.
UNDER STANDING DEVELOPMENT WITH TWO MAIN BASES OF ANALYSIS. COMPREHENSIVE EXAMPLE WHICH WILL MADE YOU PEOPLE CLEAR TO ANALYSIS.

WHAT IS GROSS PROFIT
 Gross

profit or gross margin is the excess of sales over cost of goods sold.  Gross profit is calculated as: Gross

profit = Sales - direct materials direct labor - manufacturing overhead

WHAT IS GROSS PROFIT ANALYSIS…?????
 Gross

profit analysis is designed to pick apart the reasons why the gross profit margin changes from period to period, so that management can take steps to bring the gross margin in line with expectations.

IST YEAR

2ND YEAR

CHANGES

Sales

120000
100000 20000

140000
110000 30000

+20000
+1000 10000

C.G.S  G.P

MAIN CONCERN……………!!!

OUR CONCERN IN THIS ANALYSIS IS TO CHECK THAT NET INCREASE IN THE GROSS PROFIT Lies IN WHAT PORTION LIES IN SALES PRICE, COST,SALESMIX ,NO. OF UNITS SOLD.

WHY THE GROSS PROFIT IS SIGNIFICANT?

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.

REASONS FOR THE CHANGE IN GROSS PROFIT

Change in the sales price of product Change in the volume sold

Change in the cost elements.

WHAT ARE THE COST ELEMENTS?
Material  Labor  Factory over head

If one of them decreases it effects the gross profit margin.

STANDARD COST
 The

word standard means a benchmark or yardstick. The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances.

VARIANCE……?????

Variance is the difference between the estimated figure and the actual cost

FAVOR AND FAVORABLE VARIANCE???

* If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned. * If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit.

SALES PRICE VARIANCE

Difference between actual selling price per unit and the budgeted selling price per unit, multiplied by the actual number of units sold.

VOLUME VARIANCE

Difference between the actual number of units sold and the budgeted number, multiplied by the budgeted selling price per unit; also called sales quantity variance.

SALES MIX OR PRODUCT MIX?

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.

NET VOLUME VARIANCE

Net volume variance is the composition of sales volume variance and the cost volume variance.

FINAL SALES VOLUME VARIANCE

Final volume variance is the difference between the budgeted units and actual units sold multiplied by average of unit gross profit .

AVERAGE GROSS PROFIT BASED ON
STANDARD

Total gross profit of standard Total number of units sold

GROSS PROFIT ANLYSIS BASED ON PREVIOUS YAR FIGURE

sales CGS G.P

2000 $120000 100000 $20000

2001 S140000 110000 30000

change $20000 10000 10000

EXAMPLES

Product X Y Z

2000 sales qty unit price 8000 5 7000 4 20000 2.60 TOTAL SALES

total 40000 28000 52000 120000

FOR YEAR 2000
sales Products X Y Z Quantity 8,000 units 7,000 20,000 Unit price 5.00 4.00 2.60 Total sale Total 40,000 28,000 52,000 120,000 CGS Unit cost 4.000 3.500 2.175 Total cost Total 32,000 24,500 43,500 100,0000

YEAR 2001
sales Products X Y Z quantity 10,000units 4,000 20,000 unit price 6.60 3.50 3.00 Total sale Total 66,000 14,000 60,000 140,000 CGS Unit cost 4.00 3.50 2.80 Total cost Total 40,000 14,000 56,000 110,000

    

actual 2001 sales………………………………………. Actual 2001 sales at 2000prices: X:10,000 units @5.00…………………………….50,000 Y:4,000 Z:20,000 @4.00…………………………….16,000 @2.60……………………………52,000

140,000

118,000 22,000 118000 120,000 2,000

favorable sales price variance……………………………. Actual 2001 sales at 2000 price Actual 2001(used as standard )………………………..... Unfavorable sales volume variance…………………………….

COST PRICE AND VOLUME VARIANCE
Actual 2001 cost of good sold ……………………………………… Actual 2001 sales at 2000 costs: X:10,000 units Y:4,000 Z:20,000 @4.000………………………………. 40,000 @3.500………………………………..14,000 @2.175………………………………..43,500 97,500 110,000

Unfavorable cost price variances…………………………………….

12,500

Actual 2001 sales at 2000 costs …………………………………………. 97,500 Cost of good sold in 2000 (used as standard)…………………………. Favorable cost volume variance……………………………………… 100,000 2,50

SALES MIX AND FINAL VOLUME VARIANCE

      

Favorable sales prices variances ………………………….
Favorable volume variance(net)consisting of: favorable cost volume variances……………….. 2,500 less unfavorable sales volume variances………2,000 net favorable volume variances………………………….

22,000

500 22,500

Less unfavorable cost price variances ……………..

12,500

Increase in gross profit

10,000

SALES MIX AND FINAL VARIANCE
2001sales at2000 sale price  2001 sales at standard cost

2001sales at 2000 gross profit favorable sales mix 2001sales at 2000 gross profit Total 2000 sales 120000 100000 unfavorable sales volume variance

118000 97500 20500 19427 1073 19427 20000 573

CHECK Favorable sales mix variance  Un favorable final volume variance  Net favor able volume

1073 573 500

RECAPITULATION OF VARIANCE
Gain loss

Gain due to increased sale price  Loss due to increased cost  Gain due to shift in sales mix  Loss due to decrease in units sold

22000 12500 1073 ------23073 13073 10,000

573 ------13073

Less:net increase in gross profit

 Analysis

based on budgeted and standard cost

SALES PICE AND VOLUME VARIANCE
Actual sales …………………………….142233  Actual sales at budgeted price……….138226 favor able sales price variance 4007 actual sales at budgeted price…………..138226 Budgeted sale 142000 UNFAVOURABLE SALES VOLUME VARIANCE 3774

COST PRICE AND VOLUME VARIANCE
  

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……………………. Favorable cost volume variance…………………………….. 115,750 2,657

NET VOLUME VARIANCE
  

Unfavorable sales volume variance……………………………. 3,774
Favorable cost volume variance………………………………….2,657 Net favorable volume variance………………………………… 1,117

SALES MIX AND FINAL VARIANCE
   

Actual sale at budgeted prices………………………………
Budgeted cost of actual units sold …………………………. Differences………………………………………………………..

138,226.00
113,093.00 25,133.00

Budgeted gross profit actual units sold (10,425 actual units .2.50 budgeted gross profit per unit )……………………….. 26,062.50

Unfavorable sales mix variances………………………………
Budgeted gross profit of actual units sold …………………… Budgeted sales ………………………………………….. 142,000 Budgeted cost of budgeted units sold …………………115,750 Budgeted gross profit………………………………………………. Unfavorable final sales volume variances………………………..

929.50
26,062.50

    

26,250.00 187.50

RECAPITULATION OF VARIATION. THE VARIANCE IDENTIFIED IN THE PRECEDING COMPUTATION ARE SUMMARIZED BELOW:
gain
      

losses

Gain due to increase sales prices…………………… 4,007 Loss due to increased cost …………………………….. Loss due to shift in sale mix…………………………... Loss due to decrease in unit sold……………………… 9,032.00 929.50 187.50

Total ………………………………………………………... 4,007
Less…………………………………………………………… Net decreases in gross profit……………………………….

10,149.00
4,007.00 6,142.00

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