GROUP MEMBERS

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 140000 +20000

C.G.S 100000 110000 +1000 G.P 20000 30000

10000

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 standardTotal number of units sold

GROSS PROFIT ANLYSIS BASED ON PREVIOUS YAR FIGURE

2000 2001 changesales $120000 S140000

$20000CGS 100000 110000 10000G.P $20000 30000

10000

EXAMPLES

2000 salesProductqty unit price totalX 8000 5 40000Y 7000 4 28000Z 20000 2.60 52000

TOTAL SALES 120000

FOR YEAR 2000sales CGS

Products Quantity Unit price Total Unit cost Total

X 8,000 units

5.00 40,000 4.000 32,000

Y 7,000 4.00 28,000 3.500 24,500

Z 20,000 2.60 52,000 2.175 43,500

Total sale 120,000 Total cost 100,0000

YEAR 2001

sales CGS

Products quantity unit price Total Unit cost Total

X 10,000units

6.60 66,000 4.00 40,000

Y 4,000 3.50 14,000 3.50 14,000

Z 20,000 3.00 60,000 2.80 56,000

Total sale 140,000 Total cost 110,000

actual 2001 sales………………………………………. 140,000

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

118,000

favorable sales price variance…………………………….22,000

Actual 2001 sales at 2000 price118000

Actual 2001(used as standard )……………………….....120,000

Unfavorable sales volume variance……………………………. 2,000

COST PRICE AND VOLUME VARIANCE

Actual 2001 cost of good sold ………………………………………110,000

Actual 2001 sales at 2000 costs:

X:10,000 units @4.000………………………………. 40,000

Y:4,000 @3.500………………………………..14,000

Z:20,000 @2.175………………………………..43,50097,500

Unfavorable cost price variances……………………………………. 12,500

Actual 2001 sales at 2000 costs ………………………………………….97,500

Cost of good sold in 2000 (used as standard)………………………….100,000

Favorable cost volume variance……………………………………… 2,50

SALES MIX AND FINAL VOLUME VARIANCE

Favorable sales prices variances ………………………….22,000

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

net favorable volume variances………………………….500

22,500

Less unfavorable cost price variances …………….. 12,500

Increase in gross profit 10,000

SALES MIX AND FINAL VARIANCE

2001sales at2000 sale price118000

2001 sales at standard cost 9750020500

2001sales at 2000 gross profit 19427favorable sales mix 10732001sales at 2000 gross profit 19427Total 2000 sales 120000

100000 20000unfavorable sales volume variance 573

CHECK

Favorable sales mix variance1073

Un favorable final volume variance 573

Net favor able volume 500

RECAPITULATION OF VARIANCE

Gain loss

Gain due to increased sale price 22000 Loss due to increased cost 12500 Gain due to shift in sales mix 1073 Loss due to decrease in units sold 573

------- -------23073 13073

Less:- 13073net increase in gross profit 10,000

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…………..138226Budgeted sale 142000UNFAVOURABLE 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…………………….115,750

Favorable cost volume variance…………………………….. 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……………………………… 138,226.00

Budgeted cost of actual units sold …………………………. 113,093.00

Differences……………………………………………………….. 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……………………………… 929.50

Budgeted gross profit of actual units sold …………………… 26,062.50

Budgeted sales ………………………………………….. 142,000 Budgeted cost of budgeted units sold …………………115,750 Budgeted gross profit……………………………………………….

26,250.00 Unfavorable final sales volume variances………………………..

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 ……………………………..

9,032.00 Loss due to shift in sale mix…………………………...

929.50 Loss due to decrease in unit sold………………………

187.50 Total ………………………………………………………... 4,007

10,149.00 Less……………………………………………………………

4,007.00 Net decreases in gross profit……………………………….

6,142.00