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I. GROSS PROFIT VARIANCE ANALYSIS (aka PROFIT VARIANCE ANALYSIS; GROSS PROFIT

ANALYSIS)

a. Variance Analysis

i. Budgets are used to communicate to employees what an organizations

operational and strategic goals are

ii. Variance analysis is the foundation of any performance evaluation system

based on a budget

iii. Favorable variance income

1. Actual Selling Price> Standard Selling Price

2. Actual Cost Price < Standard Cost Price

3. In relation to Sales, Actual Units > Budgeted Units

iv. Unfavorable variance income

1. Actual Sales < Standard Sales

2. Actual Costs > Standard Costs

3. In relation to Costs, Actual Units < Budgeted Units

v. Management by exception is the practice of giving attention primarily to

significant deviations from expectations (whether favorable or unfavorable);

variance analysis enables this.

vi. Goal: assignment of responsibility for the variance to those who most likely

have information that will enable management to find solutions

i. A decline in gross profit can be an indicator of serious problems, so the figure

is closely watched.

ii. This 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.

iii. It involves comparing the gross profit for the period being reviewed to either

the budgeted level or the historical average.

iv. It describes the total variance from expectations, and then itemizes the exact

reasons for the differences so that management can identity specifically what

is wrong and proceed to fix it.

v. Disadvantage of using gross profit for profit variance analysis: Only covers

product-related costs (excludes costs of selling and administration, all

financing and other non-operational expenses; does not account for the

efficiency of asset usage in creating gross profits)

vi. Examples of causes for change in gross profit:

1. Sales prices have changed

2. The unit volume of items sold has changed

3. The mix of products sold has changed, assuming that different

products have different gross margins

4. The purchase price of direct materials has changed

5. The amount of direct labor has changed, due to altered efficiency

levels

6. The cost of direct labor has changed

7. The amount of fixed overhead incurred has changed

8. The amount of variable overhead incurred has changed

vii. Contribution Margin vs Gross Profit

1. Contribution Margin = Sales Variable Costs

2. Gross Profit = Sales Variable Costs Fixed Costs

3. Contribution margin is considered a better measure of product

profitability because it deducts from sales revenue only the variable

costs that are controllable in terms of fixing responsibility.However, this

does not preclude the company from using the gross profit, especially

when it uses an absorption costing system than a direct costing

system.

1

II. VARIANCES

a. Sales Variances

i. If sales differ from the amount budgeted, the difference could be attributable

to either:

1. Sales Price Variance is the change in the contribution margin/gross

profit attributable solely to the change in selling price while holding

quantity constant

2. Sales Volume Variance which is the sum of

a. Sales Quantity Variance - is the difference between (1) the

budgeted contribution margin/gross profit based on actual unit

sales and (2) the budgeted contribution margin/gross profit

based on budgeted unit sales assuming that the budgeted sales

mix is constant.

b. Sales Mix Variance(applicable to companies with more than 1

products) is the difference between (1) the budgeted

contribution/gross profit for the actual mix and actual total unit

sales and (2) the budgeted contribution margin/gross profit for

the budgeted mix and actual total unit sales.

i. If cost of goods sold differs from the amount budgeted, the difference could be

attributable to either:

1. Cost Price Variance

2. Cost Volume Variance

Last year = Standard or Budgeted or Average Industry Data

Difference = Current year Last year

Average Gross Profit Rate = Gross Profit / Total Quantity Sold

1. Volume or Quantity

= (Difference in units) X (Last years gross profit per unit)

Factor

2. Price Factor = (Difference in selling prices) X (Current years units

3. Cost Factor = (Difference in cost prices) X (Current years units)

1

4-way analysis formulas (R. Roque) or 2-way analysis (F. Agamata)

Sales Variance:

= (Difference in selling prices) X (Current years units)

1. Price Factor

= Sales this year Sales this year @ USP last year

2. Volume or Quantity = (Difference in units) X (Last years selling price)

Factor = Sales this year @ USP last year Sales last year

Cost Variance:

= (Difference in Cost Prices) X (Current years units)

1. Price Factor

= Cost this year Cost this year @ UC last year

2. Volume or Quantity = (Difference in units) X (Last years cost price)

Factor = Cost this year @ UC last year Cost last year

Only Quantity Factors/Variances are the same under the 4-way (R.Roque) or 2-way

(F. Agamata) analysis.

Sales Variances:

1. Price Factor = (Difference in selling prices) X (Last years units)

2. Volume or Quantity

= (Difference in units) X (Last years selling price)

Factor

3. Price-Volume Factor

(R. Roque)

= (Difference in selling prices) X (Difference in units)

or Joint Variance

Factor (F. Agamata)

Cost Variances:

1. Price Factor = (Difference in cost prices) X (Last years units)

2. Volume or Quantity

= (Difference in units) X (Last years cost price)

Factor

3. Price-Volume Factor

(R. Roque)

= (Difference in cost prices) X (Difference in units)

or Joint Variance

Factor (F. Agamata)

Multi-product Profit

Analysis

1. Net Profit Price

Variance

(F. Agamata) made = Total Sales Price Variance Total Cost Price Variance

under 2- way

analysis (F. Agamata)

= Gross Profit this year Actual Gross Profit this year at last

years prices

= Actual gross profit this year at last years prices Actual

2. Sales Mix Variance

gross profit this year at last years average gross profit rate

(R. Roque)

= [ (Last years sales prices Last years cost prices) X

or Mix Variance

(Current years units) ] [ (Current years units) X (Last years

(F. Agamata)

average gross profit per unit) ]

3. Final Sales Volume

Variance (R. Roque

= Actual gross profit this year at last years average gross

and F. Agamata) or

profit rate) Gross Profit Last year

Yield

Variance (F. Agamata)

= [ (Current years units) X (Last years average gross profit

per unit) ] Last years gross profit

1

IV. Problems

1. Sales and Cost Variances. The gross profit of M Corporation for 2016 and 2017 are

given below

2016 2017 Change

Sales P 8,000,000. P 12,000,000. P 4,000,000.

Less: Cost of Goods 6,000,000. 10,800,000. 4,800,000.

Sold

Gross Profit 2,000,000. 1,200,000. P (800,000)

Unit Sales Price P 160. P 250. P 90.

Unit Cost P 120. P 225. P 105.

Units Sold 50,000. 48,000. (2,000)

a. Two-way variance analysis (F. Agamata)

b. Three-way variance analysis (F. Agamata)

Gross Profit Variance?

Sales Variance?

Costs Variance?

Sales Quantity Variance?

Sales Price Variance?

Cost Quantity Variance?

Cost Price Variance?

Quantity Factor?

Price Factor?

Sales Quantity Variance?

Cost Quantity Variance?

Sales Price Variance?

Cost Price Variance?

Joint Sales Variance?

Joint Cost Variance?

2. Sales Variance Ratios. Sales last year of P6 million decreased to P5.4 million but

sales price increased by 20%.

Required:

Sales Price Variance?

Sales Quantity Variance?

Sales Quantity Variance Ratio?

3. Cost Variance Ratios. Cost of goods sold this year amounting to P9.6 million is

20% higher than that of last year. On the average, cost prices increased by 25%

Required:

1 Cost Price Variance?

Cost Quantity Variance?

Cost Quantity Variance Ratio?

4. Sales and Costs Variances with Incomplete Data. The contribution margin of

Mel Corporation for 2016 and 2017 are given below:

2016 2017

Sales P 8,000,000. P 12,000,000.

Less: Variable Costs 6,000,000. 8,000,000.

Contribution Margin 2,000,000. 4,000,000.

Required:

Sales Price Variance?

Sales Price Variance Ratio?

Sales Quantity Variance?

Variable Cost Price Variance?

Variable Cost Price Variance Ratio?

Variable Cost Quantity Variance?

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