Gross Profit Analysis (GP Analysis):
After studying this chapter you should be
Gross profit is the difference between the
cost of goods sold
and sales. Since the adherence of the actual to the
budgeted or standard gross profit figure is highly desirable, a careful analysis
of unexpected changes in gross profit is useful to a company's management. These
changes are the result of one or a combination of the following.
Changes in sales prices of the products.
Changes in volume sold.
a. Changes in number of physical units sold.
b. Changes in the types of products sold, often called the product mix or
Changes in cost elements, i.e., materials, labor, and overhead costs.
Procedures for analyzing gross profit:
The determination of the various causes for an increase or decrease in gross
profit is similar to the computation of standard cost variances, although gross
profit analysis is often possible without the use of standard costs or budgets.
In such a case, prices and costs of the previous year, or any year selected as
the basis for the comparison, serve as the basis for the calculation of the
variances. When standard costs and budgetary methods are employed, however, a
greater degree of accuracy and more effective results are achieved.
Uses of Gross Profit Analysis:
The gross profit analysis based on budgets and standards costs depicts the
weak spots in the year's performance. Management becomes able to outline the
remedies that should correct the situation. The planned gross profit is the
responsibility of the marketing as well as the manufacturing department. The
gross profit analysis brings together these two major functional areas of the
firm and points to the need for further study by both of these department. The
marketing department must explain the changes in the sales prices, the shift in
the sales mix, and the decrease in units sold, while the production department
must account for the increase in cost. To be of real value, the cost price
variance should be further analyzed to determine variances for materials, labor,
and factory overhead.