Gross profit is defined as the difference between the sales and cost of goods sold. The actual gross profit is equal to or almost equal to the budgeted or standard gross profit figure in most of the chances. Therefore a careful analysis of sudden changes in gross profit is helpful for company's management. These changes are in most cases are due to one or a combination of the following:
- Due to changes in sales prices of the products.
- Changes in volume that has sold.
a. Due to changes in number of physical units sold.
b. or changes in the types of products sold, that are often called as product mix.
- Due to changes in cost elements like materials, labors etc.
Analyze gross profit
The finding of the various causes for an increase or decrease in gross profit is generally similar to the calculation of standard cost variances, even though gross profit analysis is sometimes possible without the use of standard costs or budgets. In such cases, costs and prices of the last year, or any year chosen as the basis for the comparison, provides as the basis for the computation of the variances. But when standard costs and budgetary methods are put in use there is a high degree of accuracy and more effective outcomes are achieved.
What are the uses of gross profit analysis?
The gross profit analysis which was based on standards costs and budgets depict weak spots in the year’s performance of the company and thus make the management able to outline the remedies that are required to correct the situation.
The planned gross profit is the duty of the marketing as well as the manufacturing department. So gross profit analysis brings these two major functional areas together and points to the requirement for additional study by both these departments. Marketing department explains the decrease in units sold, changes in the sales prices and the shift in the sales mix, while the production department must responsible for the increase in cost. To determine real value, cost price variance should be further analyzed to determine variances for labor, materials, and factory overhead.
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