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I. GROSS PROFIT VARIANCE ANALYSIS (aka PROFIT VARIANCE ANALYSIS; GROSS PROFIT
ANALYSIS)
a. Variance Analysis
i. Budgets are used to communicate to employees what an organizations
operational and strategic goals are
ii. Variance analysis is the foundation of any performance evaluation system
based on a budget
iii. Favorable variance income
1. Actual Selling Price> Standard Selling Price
2. Actual Cost Price < Standard Cost Price
3. In relation to Sales, Actual Units > Budgeted Units
iv. Unfavorable variance income
1. Actual Sales < Standard Sales
2. Actual Costs > Standard Costs
3. In relation to Costs, Actual Units < Budgeted Units
v. Management by exception is the practice of giving attention primarily to
significant deviations from expectations (whether favorable or unfavorable);
variance analysis enables this.
vi. Goal: assignment of responsibility for the variance to those who most likely
have information that will enable management to find solutions
II. VARIANCES
a. Sales Variances
i. If sales differ from the amount budgeted, the difference could be attributable
to either:
1. Sales Price Variance is the change in the contribution margin/gross
profit attributable solely to the change in selling price while holding
quantity constant
2. Sales Volume Variance which is the sum of
a. Sales Quantity Variance - is the difference between (1) the
budgeted contribution margin/gross profit based on actual unit
sales and (2) the budgeted contribution margin/gross profit
based on budgeted unit sales assuming that the budgeted sales
mix is constant.
b. Sales Mix Variance(applicable to companies with more than 1
products) is the difference between (1) the budgeted
contribution/gross profit for the actual mix and actual total unit
sales and (2) the budgeted contribution margin/gross profit for
the budgeted mix and actual total unit sales.
IV. Problems
1. Sales and Cost Variances. The gross profit of M Corporation for 2016 and 2017 are
given below
2016 2017 Change
Sales P 8,000,000. P 12,000,000. P 4,000,000.
Less: Cost of Goods 6,000,000. 10,800,000. 4,800,000.
Sold
Gross Profit 2,000,000. 1,200,000. P (800,000)
Unit Sales Price P 160. P 250. P 90.
Unit Cost P 120. P 225. P 105.
Units Sold 50,000. 48,000. (2,000)
2. Sales Variance Ratios. Sales last year of P6 million decreased to P5.4 million but
sales price increased by 20%.
Required:
Sales Price Variance?
Sales Quantity Variance?
Sales Quantity Variance Ratio?
3. Cost Variance Ratios. Cost of goods sold this year amounting to P9.6 million is
20% higher than that of last year. On the average, cost prices increased by 25%
Required:
1 Cost Price Variance?
Cost Quantity Variance?
Cost Quantity Variance Ratio?
4. Sales and Costs Variances with Incomplete Data. The contribution margin of
Mel Corporation for 2016 and 2017 are given below:
2016 2017
Sales P 8,000,000. P 12,000,000.
Less: Variable Costs 6,000,000. 8,000,000.
Contribution Margin 2,000,000. 4,000,000.
Required:
Sales Price Variance?
Sales Price Variance Ratio?
Sales Quantity Variance?
Variable Cost Price Variance?
Variable Cost Price Variance Ratio?
Variable Cost Quantity Variance?