Topic 10: Gross Profit Variance Analysis

Topic Learning Outcomes

After this topic, you should be able to:
1. Understand the concept of Gross Profit Variance Analysis
2. Explain the benefits that can be derived from Computing the Gross Profit Variances
3. Understand the different methods of computing the Gross Profit Variances
4. Know and apply the different methods of commutating the Gross profit variance of a firm
5. Compute and analyze Gross profit variances a firm offering multiple products

Let’s Discuss
1. Objectives of Gross Profit Variation Analysis.
2. Factors causing the Gross Profit Variation.
3. Techniques in Analyzing Gross Profit Variation.
4. Calculate and analyze the change in gross profit of a company with:
I. Single product
A. the six-factor analysis for:
Change in sales due to
a. volume factor or variance
b. price factor
c. volume- price factor
Change in cost of sales due to
a. volume
b. cost variance
c. volume- cost variance
B. the four-factor analysis
Change in sales due to
a. volume factor or variance
b. price factor
Change in cost of sales due to
a. volume variance
b. cost variance
C. the three-factor analysis
a. volume factor or variance
b. price factor
c. cost variance
II. Multiple products
Change in gross profit due to:
a. volume factor or variance
b. price factor
c. cost variance
d. sales mix factor
Gross Profit Variance Analysis
• Can also be called as Profit variance analysis or Gross profit analysis
• deals with how to analyze the profit variance that constitutes the difference between actual gross
profit and the base data gross profit
• Base data for gross profit can either be any of the following:
o Budgeted gross profit
o Standard gross profit
o Previous year gross profit
• The primary goal of profit variance analysis is to improve performance and profitability in the future. so
that management can take steps to bring the gross margin in line with expectations.
• The gross profit analysis reported to management must describe the variances from expectations or
base data, itemize the reasons for the deviations, and should contain actionable item.

Limitation of Gross Profit Variance Analysis

• It only covers product-related costs. To have a comprehensive review of company's financial
performance, costs of selling and administration, financing and other non-operational expenses must
also be evaluated.
• It also ignores the amount of investment in working capital and fixed assets and it does not account for
the efficiency of usage of such assets in arriving the gross profits.

A change in gross profit can be caused by any of the following events:

• Sales prices have changed
• The unit volume of items sold have changed
• The mix of products sold has changed
• The purchase price of direct materials have changed
• The amount of direct materials required has changed, which in turn can be due to
o Altered scrap levels
o Altered spoilage levels
o Altered amounts of rework
o Changes in the design of the product
• The amount of direct labor has changed, due to altered efficiency levels
• The cost of direct labor has changed, which in turn can be due to
o Altered overtime levels
o Changes in the mix of employees having different pay rates
o Changes in the amount of shift differentials paid
o Changes in the equipment used
o Changes in the design of the product
• The amount of fixed overhead incurred has changed
• The amount of variable overhead incurred has changed

In summary, gross profit is affected by at least three factors

o sales price
o costs price
o volume or quantity (sales volume)
• In addition, in a multi-product company, if not all products are equally profitable, the mix of the
products sold affects the gross profit
Guides for Gross Profit Variance Analysis

1. Gross Profit Variance Analysis – Single Product

• Profit variance analysis in a single-product firm involves only one product whose gross profit is
being analyzed.
• A gross profit variance either favorable or unfavorable can be broken down into different
component such as sales price variance, a cost price variance, a sales volume variance, and a cost
volume variance.

Guide no. 1
Where:
200B Actual Data
200A Base year Data
• Budgeted
• Standard
• Previous year

A. 4-WAY ANALYSIS
Sales Variance:
• Price factor (Sales Price Variance or SPV) = difference in selling prices x 200B units
• Volume or quantity factor (Sales Volume Variance or SVV) = difference in units x 200A selling
price
Cost Variance:
• Price factor (Cost Price Variance or CPV) = difference in cost prices x 200B units
• Volume or quantity factor (Cost Volume Variance or CVV) = difference in units x 200A cost price

B. 3-WAY ANALYSIS
• Price factor (Sales Price Variance or SPV) = difference in selling prices x 200B units
• Cost factor (Cost Price Variance or SPV) = difference in cost prices x 200B units
• Volume or quantity factor (Volume Variance or VV) = difference in units x 200A gross profit per
unit

C. 6-WAY ANALYSIS
Sales Variance:
• Price factor = difference in selling prices x 200A units
• Volume or quantity factor = difference in units x 200A selling price
• Sales Price-Volume factor (SP-VF) = difference in selling prices x difference in units
Cost Variance:
• Price factor = difference in cost prices x 200A units
• Volume or quantity factor = difference in units x 200A cost price
• Cost Price Price-Volume factor (Cp-VF) = difference in cost prices x difference in units
The Variances under 4-way

Sales Price Variance or SPV

• measures the impact on the firm’s gross profit of changes in the unit selling price
• unfavorable
o If the actual sales price is lower than the base sales price
• favorable
o If the actual sales price is higher than the base sales price

Sales Volume Variance or SVV

• the amount by which sales would have varied from the base sales if only the sales volume had changed
• unfavorable
o If actual sales volume is less than base sales volume
• favorable
o If actual sales volume is greater than base sales volume

Cost Price Variance or CPV

• measures the impact on the firm’s gross profit of changes in the unit cost price or cost of sales
• unfavorable
o If the actual cost price is higher than the base cost price
• favorable
o If the actual cost price is lower than the base cost price

Cost Volume Variance or CVV

• the amount by which cost of sales would have varied from the base cost of sales if only the sales
volume had changed
• unfavorable
o If actual sales volume is greater than base sales volume
• favorable
o If actual sales volume is less than base sales volume
Guide no. 2

Where,
A = Actual
B = the base data: budgeted, prior year, or standard
Price = must be per unit
Quantity = no. of units
 2. Gross Profit Variance Analysis – Multiple Product
• There is an additional component of the profit variance under multi-product analysis called the
sales mix variance
o the effect on profit of selling a different proportionate mix of products than that of the
“base” product mix.
• In a multi-product firm, actual sales volume can differ from that of the base data in two ways
o The total number of units sold could differ from the target, budgeted, or prior year
aggregate sales.
o The mix of the products actually sold may not be proportionate to the target, budgeted or
prior year mix.
• The total volume variance is divided into the two that is usually used to evaluate the marketing
department of the firm:
1. the sales mix variance
shows how well the department has done in terms of selling the more profitable
products
2. the sales quantity variance
measures how well the firm has done in terms of its overall sales volume.

Where:
200B Actual Data
200A Base year Data
• Budgeted
• Standard
• Previous year

4-WAY ANALYSIS
Sales Mix Variance:
200B units @ 200A sales price xx
Less 200B units @ 200A cost price xx
Difference xx
Less 200B units @ 200A average
xx
gross profit per unit
Sales Mix Variance xx

Final Sales Volume Variance:

200B units @ 200A average
xx
gross profit per unit
Less 200A gross profit xx
Final Sales Volume Variance xx
SAMPLE PROBLEM: Gross Profit Variance Analysis – Single Product

Practical Corp. prepares the static master budget and the actual result of its operation for the month of July:

Budget (in Peso) - 8,000 units Actual (in Peso) - 9,600 units
Sales 800,000 1,056,000
Cost of Goods Sold 480,000 556,800
Gross Profit 320,000 499,200
The Managers of Practical Corp. demands explanation of the Php 179,200 computed favorable gross profit
variance.

Compute for the following:

1. Sales Price Variance (SPV) 96,000 Favorable (F)
2. Sales Volume Variance (SVV) 160,000F
3. Cost Price Variance (CPV) 19,200F
4. Cost Volume Variance (CVV) 96,000 Unfavorable (U)
5. Percentage Change in sales price 10% increase
6. Percentage Change in volume 20% increase
7. Percentage Change in cost price 3.33% decrease
8. Sales Price – Volume factor (SP-VF) 256,000F
9. Cost Price – Volume factor (CP-VF) 76,800U

Solution:
1.
Actual Total Sales 1,056,000.00 / 9,600 = 110/ unit
Less: Actual Units @ budgeted sales price
(9,600 units * (800,000/8,000)) (960,000.00) 800,000/8,000=100/unit
Sales Price Variance 96,000.00 F 110-100 = 10 x 9,60
2. = 96,000
Actual Units @ budgeted sales price (from no. 1) 960,000.00 9,600 - 8,000 = 1,600
Less: budgeted sales price (800,000.00)
1,600 x 100 = 160,000
Sales Volume Variance 160,000.00 F
3.
Actual cost of Sales 556,800.00 /9,600 = 58
Less: Actual Units @ budgeted cost price
(9,600 units * (480,000/8,000)) (576,000.00) 480,000/8,000 = 60
Cost Price Variance 19,200.00 F (58-60)x 9,600
4. = 19,200 F
Actual Units @ budgeted cost price (from no. 3) 576,000.00
Less: budgeted cost of sales (480,000.00)
Cost Volume Variance 96,000.00 U

(9,600 - 8,000) x 60 = 96,000 U

 Summary:
Sales Price Variance 96,000.00 F
Sales Volume Variance 160,000.00 F
Cost Price Variance 19,200.00 F
Cost Volume Variance 96,000.00 U
Net Gross Profit Variance 179,200.00 F

5.
SPV 96,000
Percentage change in sales price = = = 10% 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒
𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑎𝑡 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑖𝑐𝑒 960,000 9,600 units x P100= 960,000
Actual SP−Budgeted SP 110−100
Percentage change in sales price = = 100
= 10% 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑆𝑃

6.
Actual Units−Budgeted units 9,600−8,000
Percentage change in volume = = = 20% 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑈𝑛𝑖𝑡𝑠 8,000
SVV 160,000𝐹
Percentage change in volume = = 800,000
= 20% 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑆𝑎𝑙𝑒𝑠
CVV 96,000𝑈
Percentage change in volume = = = 20% 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 480,000

7.
Actual cost price−Budgeted cost price 58−60
Percentage change in cost price = = 60
= 3.33% 𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑆𝑃
CPV 19,200𝐹
Percentage change in cost price = = 576,000
= 3.33% 𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒
𝐵𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑎𝑡 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑐𝑜𝑠𝑡 𝑃𝑟𝑖𝑐𝑒

8. Actual sales minus base data sales = sales price-volume factor

difference in selling prices * difference in units, or (110-100) x (9,600-8,000) =10 x1,600=16,000
Actual Sales 1,056,000.00
Budgeted Sales (800,000.00)
Sales Price-Volume factor 256,000.00 F
9. Actual cost of sales minus base data cost of sales = cost price-volume factor
difference in cost prices 8*difference in units, or (58-60) x (9,600-8,000) = 2 x 1,600 = 3,200 U
Actual Cost of Sales 556,800.00
Budgeted Cost of Sales (480,000.00)
Cost Price-Volume factor 76,800.00 U
You may also use this template to answer the Single-Product GPV analysis
SAMPLE PROBLEM: Gross Profit Variance Analysis – Multiple Product

Hogwarts Trader, Inc. sells the following products for 2019 and 2020. The following sales and cost of sales
details were obtained from the records of the company:

2020
Products Sales (in peso) Cost of Sales (in peso) Units Gross Profit
Elder Wand (EW) 12,000 /600 = 20 9,600 / 600= 16 2,400
Resurrection Stone (RS) 12,800 /800 = 16 11,200 / 800 = 14 1,600
Invisibility Cloak (IC) 2,400/ 200 = 12 1,800 / 200= 6 600
27,200 22,600 1,600 4,600

2019
Products Sales (in peso) Cost of Sales (in peso) Units Gross Profit
Elder Wand (EW) 19,200 /800 = 24 14,400 / 800= 18 4,800
Resurrection Stone (RS) 14,400 /800 = 18 12,000 / 800= 15 2,400
Invisibility Cloak (IC) 1,600 /160 =10 1,280 / 160= 8 320
35,200 27,680 1,760 7,520 /1760 = 4.27

Determine the following: (20-24) x 600 = 2,400 U (600-800) x 24 = 4,800 U

1. Gross Profit Variance (GPV) 2,920U (16-18) x 800 = 1,600 U (800-800) x 18 = 0
2. Sales price variance (SPV) 3,600U (12-10) x 200 = 400 F (200-160) x 10 = 400 F
3. Sales volume variance (SVV) 4,400U 4,400 U (3)
4. Cost price variance (CPV)1,800F 3,600 U (2)
5. Cost volume variance (CVV) 3,280F
6. Net gross profit volume variance (VV) 1,120U
7. Sales Mix Variance 436U
8. Final Sales Volume Variance 684U

Solution:
1.
200B gross profit 4,600.00
200A gross profit (7,520.00)
Gross Profit Variance (2,920.00) U

2.
200B Total Sales 27,200.00
Less: 200B units @ 200A sales prices
EW (600*24) 14,400.00
RS (800*18) 14,400.00
IC (200*10) 2,000.00 (30,800.00)
Sales Price Variance 3,600.00 U
3.
200B units @ 200A prices (from no. 2) 30,800.00
Less: 200A Total Sales (35,200.00)
Sales Volume Variance 4,400.00 U

4.
200B Total Cost of Sales 22,600.00
Less: 200B units @ 200A sales prices
EW (600*18) 10,800.00
RS (800*15) 12,000.00
IC (200*8) 1,600.00 (24,400.00)
Sales Price Variance 1,800.00 F

5.
200B units @ 200A cost prices (from no. 4) 24,400.00
Less: 200A Total Cost of Sales (27,680.00)
Cost Volume Variance 3,280.00 F

6.
Sales Volume Variance 4,400.00 U
Cost Volume Variance 3,280.00 F
Net GP Volume Variance or Volume Variance 1,120.00 U

7.
200B units @200A sales price from no. 2 30,800.00
Less: 200B units @ 200A cost price from no. 4 (24,400.00)
Difference 6,400.00
Less: 200B units @ 200A average gross profit per unit
(1,600 units * (7,520/1,760)) (6,836.00)
Sales Mix Variance 436.00 U

8.
200B units @ 200A average gross profit per unit from no. 7 6,836.00
Less: 200A gross profit (7,520.00)
Final Sales Volume Variance 684.00 U

Sales Mix Variance 436.00 U

Final Sales Volume Variance 684.00 U
Gross Profit Volume Variance 1,120.00 U
Note: Adding Sales Mix Variance and Final Sales Volume Variance will give you the Gross Profit Volume
Variance
References
Roque, R. S. (2013). Reviewer in Management Advisory Services.
(n.d.). Retrieved from https://www.accountingtools.com/articles/what-is-gross-profit-analysis.html
(n.d.). Retrieved from http://accounting-financial-tax.com/2008/10/how-does-profit-variance-gross-profit-
analysis-work/