Chapter 3: Analysis of Changes in Sales, Cost of Sales, and Gross Margin

Analysis of Variation in Gross Profit

Gross Profit Variance Analysis
Gross profit is the difference between sales and cost of goods sold. It is very
important figure in the income statement because it is one of the factors that
determine the final result of the operations.
To conduct a meaningful analysis of the variation in gross profit, the actual
gross profit during a given period may be compared with any of the following:
a. The immediately preceding periods figures or any previous periods selected
as the base for comparison.
b. Changes in gross profit may be attributed to the change in any, or a
combination of the following factors:
1. Selling price(s) of the product(s)
2. Volume or quantity of product(s) sold which, in turn, may be due to
change in:
i. Number of physical units sold (when the company sells only one
product line), and
ii. Product mix or sales mix which refers to the composition of the
products sold (this is applicable to companies selling more than
one product line)
3. Cost of the product sold:
i. For merchandising firms, cost refers to the net purchase cost of
the product
ii. For manufacturing firms, cost includes the three manufacturing
cost elements, namely, materials, labor and factory overhead.
Procedures for Analyzing Gross Profit Variations
4-Way Analysis

Sales Variance:
Price Factor = Difference in selling price x 20B units
Volume or Quantity Factor = Difference in units x 20A selling price
Cost Variance:
Price Factor = Difference in cost prices x 20B units
Volume of Quantity Factor = Difference in units x 20A cost price

6-Way Analysis
Sales Variance:
Price Factor = Difference in selling price x 20A units
Volume or Quantity Factor = Difference in units x 20A selling price
Price-Volume Factor = Difference in Selling Price x Difference in Units
Cost Variance:
Price Factor = Difference in cost prices x 20B units
Volume or Quantity Factor = Difference in units x 20A cost price
Price-Volume Factor = Difference in Cost Price x Difference in Units
3-Way Analysis
Quantity or Volume Factor = Difference in units x 20A Gross profit per unit
Price Factor = Difference in selling price x 20B units
Cost Factor = Difference in Cost Price x 20B units
ILLUSTRATIVE EXAMPLE:

Gross Profit Variance Analysis for Two or More Products

ILLUSTRATIVE EXAMPLE

S
SalesVolumein Units
SellingPrices per Unit
Cost per Unit

400
4.00
1.60

2015

2015
H
350
5.00
2.00

E
1000
3.00
1.20

S
500
4.20
1.68

2014
H
200
4.50
1.80

E
1000
2.80
1.12

2014

Sales:
S
H
E

1,600.00
1,750.00
3,000.00

2,100.00
900.00
2,800.00

Total Sales

6,350.00

5,800.00

Less: Cost of Sales

S
H
E

640.00
700.00
1,200.00

840.00
360.00
1,120.00

Total Cost of Sales

2,540.00

2,320.00

220.00 U

3,810.00

3,480.00

330.00 F

SalesMixvariance:
2015 Sales
2015 units@ 2014 salesprice
S
H
E

550.00 F

6,350.00
1,680.00
1,575.00
2,800.00

QuantityFactor:
2015 units@ 2014 sellingprices:
2014 Sales

6,055.00

295.00
F

6,055.00
5,800.00

255.00
F

Cost of SalesVariance:
Price Factor:
2015 Cost of Sales
2015 units@ 2014 cost Price
S
H
E
QuantityFactor:
2015 units@ 2014 cost prices:
2014 Cost of Sales

550.00
F

2,540.00
672.00
630.00
1,120.00

2,422.00

118.00
U

2,422.00
2,320.00

102.00
U

220.00
U

Net Gross Profit Variance

330.00
F