gross profit analysis
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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
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