MODULE 3 - Continued

GROSS PROFIT VARIANCE ANALYSIS

GP Variance Analysis is the systematic study of factors that caused the change in an entity's
gross profit, the first line indication of profitability.

Objectives:
1. To assess the efficiency and effectiveness of management in the areas of production, purchasing
and marketing (pricing and distribution).
2. To assist management in controlling costs (expenses) by motivating employees and maximizing
the use of resources.
3. To assist management in establishing the operational budget.

GP Analysis Summary:
Current year Last Year Variance
Sales (Q x P) P xx P xx P xx
Cost of Sales (Q x C) xx xx xx
Gross Profit Pxx P xx P xx

Illustrative 1:
MAD Inc. produces and sells cellular phone blaster, a gadget which explodes when activated with a
remote commander. This is used by cell phone owners when their unit is robbed from them. Actual
results of operations for the 1st 2 years of operations are as follows:

Year 1 Year 2
(80,000 units) (96,000 units)
Sales P8,000,000 P10,560,000
Cost of Sales 4,800,000 5,568,000
Gross Profit P3,200,000 P 4,992,000

Management wants a complete analysis of the results of operations for the 2 years just ended.

Required: Compute and analyze the gross profit variance for MAD Inc.
Suggested Answers:
From the given data above, the following can be computed:

Total Basis Year 2 - Year 1 = Variances

Sales P10,560,000 P8,000,000 P2,560,000 F
Cost of Sales 5,568,000 4,800,000 768,000 U
Gross Profit P 4,992,000 P3,200,000 P1792,000 F

Unit Basis Year 2 - Year 1 = Variance

Sales Price P110 P100 P10 F
Cost Price (58) (60) 2 F
Gross Profit P 52 P 40 P12 F

The pro-forma and actual GP analysis are shown on the next page.

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 3 Way GP Variance Analysis 4 way GP Variance Analysis 6 Way GP Variance Analysis
Sales Price (AP - SP) x SQ P xx
Sales Price (AP - SP) x AQ P xx Sales Price P xx
Sales Price - Volume (AP - SP) x (AQ - SQ) xx
Sales Volume (AQ - SQ) x SP
Sales Variance (A) xx Sales Volume xx
P xx Sales Variance (A) P xx

Cost Price (AC - SC) x AQ xx Cost Price Cost Price (AC - SC) x SQ P xx
P xx
Quantity (Volume) (AQ - SQ) x SGP xx Cost Price - Volume (AC - SC) x (AQ - SQ) xx
Cost Volume (AQ - SQ) x SC xx Cost Volume (AQ - SQ) x SC xx
Cost Variance (B) P xx Cost Variance (B) P xx

GP Variance P xx GPVariance P xx Gross Profit Variance (B) + (B) P xx

Note: The analysis follows the same as that of the Variance Analysis for each Production Cost element as shown in Chapter 8. The only difference is that the revenue side
(Sales) is added in the analysis such that the 2 way analysis (Ch.8) becomes 3 way analysis (Ch.10) and the 3 way analysis (Ch.8) becomes 6 way analysis (Ch.10). And of
course, the production cost elements analyzed individually in Ch.8 are now grouped and analyzed as one, which is as product cost.

Applying the above principle, the actual Gross Profit Variance Analysis for Illustrative Problem will be as follows:
3 Way GP Variance Analysis 4 Way GP Variance Analysis 6 Way GP Variance Analysis
Sales Price (P10 x 80,000) P800,000 F
Sales Price (P10 x 96,000) P960,000 F Sales Price P960,000 F
Sales Price - Volume (P10 x 16,000) 160,000 F

Sales Volume (16,000xP100) 1,600,000 F Sales Volume 1,600,000 F

Sales Variance (A) P2,560,000 F Sales Variance (A) P2,560,000 F

Cost Price (P2 x 80,000) P160,000 F

Cost Price (P2 x 96,000) P192,000 F Cost Price P192,000 F
Cost Price - Volume (P2 x 16,000) 32,000 F
Quantity (Volume) (16,000 x P40) P640,000 F
Cost Volume (16,000 x P60) 960,000 U Cost Volume 960,000 U
Cost Variance (B) P768,000 U Cost Variance (B) P768,000 U

GP Variance P1,792,000 F GP Variance (A) + (B) P1,792,000 F GP Variance (A) + (B) P1,792,000 F

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 The preceding problem poses not much difficulty since all the needed data can be readily
computed. However, for examination purposes or where complete data cannot be obtained on a
firm's accounting records, an alternative shall be presented as follows:

4 Way Gross Profit Analysis

A. Sales Variances Mathematical Formula General Formula
20B Sales Pxx 20B P x 20B Q
20B Sales @ 20A Price (xx) 20A P x 20B Q
Sales Price Variance Pxx (20B P - 20A P) x 20B Q (AP - SP) x AQ

20B Sales @ 20A Price Pxx 20A P x 20B Q

20A Sales (xx) 20A P x 20A Q
Sales Volume Variance Pxx 20A P x (20B Q - 20A Q) (AQ - SQ) x SP

B. Cost Variances
20B Cost of Sales Pxx 20B P x 20B Q
20B Cost of Sales @ 20A Price (xx) 20A P x 20B Q
Cost Price Variance Pxx (20BP - 20A P) x 20B Q (AP - SP) x AQ

20B Sales @ 20A Price Pxx 20A P x 20B Q

20A Sales (xx) 20A P x 20A Q
Cost Volume Variance Pxx 20A P x (20B Q - 20A Q) (AQ - SQ) x SP

Gross Profit Variance Pxx

Notes: 20B Sales @ 20A Price = 20A Sales @ 20B Quantity.

Price can be sales price or cost price.
AQ = Actual Quantity SQ = Standard Quantity AP
= Actual Price SP = Standard Price

Gross Profit Volume Variance for Two or More Products

20B units @ 20A Gross Profit/unit Pxx
20B units @ 20A Average Gross Profit/unit (xx)
Sales Mix Variance Pxx F (U)

20B units @ 20A Average Gross Profit/unit Pxx

20A Gross Profit (xx)
Final Sales Volume Variance (B) Pxx F (U)

Gross Profit Volume Variance (A) + (B) Pxx F (U)

Illustrative Problem 2:
Presented below is a portion of AB Inc. income statement for years 2020 and 2021:
2021 2020
Sales P990,000 P800,000
Cost of Sales 760,000 640,000
Gross Profit P230,000 P160,000
The company's sales volume increased by 10% from 2020 to 2021.
Required: Present the Gross Profit Variance Analysis for AB Inc.

Suggested Answers:

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 Sales Price Variance
2021 Sales P990,000
2021 Sales @ 2020 Price P800,000 x 110% (880,000) P110,000 F

Sales Volume Variance

2021 Sales @ 2020 Price P880,000
2021 Sales (800,000) 80,000 F

Cost Price Variance

2021 Cost of Sales P760,000
2021 Cost of Sales @ 2020 Price P640,000 x 110% (704,000) 56,000 U

Cost Volume Variance

2021 Cost of Sales @ 20A Price P704,000
2020 Cost of Sales (640,000) 64,000 U

Gross Profit Variance P70,000 F

% change in Sales Price = Sales Price Variance = P110,000 F = 12.5% increase

2021 units @ 2020 Sales Price P880,000
% change in Cost Price = Cost Price Variance = P56,000 U = 7.95% increase
2021 units @ 2020 Cost Price P704,000

Sales Volume Variance P80,000 F

Cost Volume Variance 64,000 U
Gross Profit Volume Variance P16,000 F

Illustrative Problem 3:
MAD Inc. presented the following data regarding the 3 products it produced and sold:

2021 Faith Hope Love Total

Sales P12,000 P2,400 P12,800 P27,200
Cost of Sales 9,600 1,800 11,200 22,600
Gross Profit P 2,400 P 600 P 1,600 P 4,600

Units sold 600 200 800 1,600

2020 Faith Hope Love Total

Sales P19,200 P1,600 P14,400 P35,200
Cost of Sales P14,400 P1,280 12,000 27,680
Gross Profit P 4,800 P 320 P 2,400 P 7,520

Units sold 800 160 800 1,760

Required: Present the Gross Profit Variance Analysis for MAD Inc.

Suggested Answers:

Sales Price Variance

2021 Sales P27,200

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 2021 Sales @ 2020 Price
Faith (600 x P24) P14,400
Hope (200 x P10) 2,000
Love (800 x P18) 14,400 30,800 P3,600 U

Sales Volume Variance

2021 Sales @ 2020 Price P30,800
2020 Sales (35,200) 4,400 U

Cost Price Variance

2021 Cost of Sales P22,600
2021 Cost of Sales @ 2020 Price
Faith (600 x P18) P10,800
Hope (200 x P15) 1,600
Love (800 x P8) 12,000 24,400 1,800 F

Cost Volume Variance

2021 Cost of Sales @ 20A Price P24,400
2020 Cost of Sales (27,680) 3,280 F

Gross Profit Variance P2,920 U

The change in profit due to change in volume is computed as follows:

Sales Volume Variance P4,400 U
Cost Volume Variance 3,280 F
Gross Profit Volume Variance P1,120 U

The Gross Profit Volume Variance is then analyzed as follows:

Sales Mix Variance
2021 units @ 2020 Gross Profit/unit
Faith (600 x P6) P3,600
Hope (200 x P2) 400
Love (800 x P3) 2,400 P6,400
2021 units @ 2020 Average Gross Profit/unit
(1,600 units x (P7,520/1,760 units) 6,836 P436 U

Final Sales Volume Variance

2021 units @ 2020 Average Gross Profit/unit P6,836
2020 Gross Profit (7,520) 684 U
Gross Profit Volume Variance P1,120 U

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