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Gross Profit Variation Analysis

Gross profit variation analysis compares a company's current gross profit to a previous period or target to identify factors causing changes. These factors include changes in sales volume, price, cost of goods sold, or product mix. Techniques like 6-way, 4-way, and 3-way analysis break down gross profit variance into its components like quantity, price, and cost to pinpoint reasons for increases or decreases.

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Joey Wassig
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95 views1 page

Gross Profit Variation Analysis

Gross profit variation analysis compares a company's current gross profit to a previous period or target to identify factors causing changes. These factors include changes in sales volume, price, cost of goods sold, or product mix. Techniques like 6-way, 4-way, and 3-way analysis break down gross profit variance into its components like quantity, price, and cost to pinpoint reasons for increases or decreases.

Uploaded by

Joey Wassig
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Gross Profit Variation Analysis

Gross profit variation (variance) analysis (GPVA) is the


systematic study of factors that caused the change in an entity’s
gross profit, the firm’s first indication of profitability
GPVA can be performed to compare this year’s gross profit
against last year’s gross profit, or actual gross profit against
standards gross profit.

Factors causing gross profit variance


Changes in GP can be traced to any one or combinations of the
following:
1. Change in volume or quantity of product sold
2. Change in selling price
3. Change in purchase prices of product sold
4. Changes in sales mix (for multiple products)

Techniques in Analyzing Gross Profit Variation


Single product
6-way analysis – breaks down gross profit in to six factors
Increase in sales
Quantity factor (Δ in quantity x price last year) xx
Price factor (Δ in price x quantity sold last year) xx
Quantity-price factor (Δ in quantity x Δ in price) xx xx
Less: Increase in cost of sales
Quantity factor (Δ in quantity x cost last year) xx
Cost factor (Δ in cost x quantity sold last year) xx
Quantity-cost factor (Δ in quantity x Δ in cost) xx xx
Net increase (decrease) in gross profit xx

4-way analysis – breaks down gross profit in to four factors.


Increase in sales
Quantity factor (Δ in quantity x price last year) xx
Price factor (Δ in price x quantity sold this year) xx xx
Less: Increase in Cost of sales
Quantity factor (Δ in quantity x cost last year) xx
Cost factor (Δ in cost x quantity sold this year) xx xx
Net increase (decrease) in gross profit xx
4-way analysis can also be computed from 6-way analysis by
adding price factor and quantity-price factor for both sale and
cost of sales

3-way analysis – breaks down gross profit in to three factors.


Quantity factor (Δ in quantity x gross profit last year) xx
Price factor (Δ in price x quantity sold this year) xx
Cost factor (Δ in cost x quantity sold this year) xx
Net increase (decrease) in gross profit xx
3-way analysis can also be computed from 4-way analysis by
adding quantity factors in sales and cost of sales section.

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