Budgeting Basics and Beyond

8.11. Profit Variance Analysis

Gross profit analysis is determining the causes for the change in gross profit. Any variances that have an impact on gross profit are reported so corrective steps may be taken.

Causes of Profit Variance

• Changes in unit sales price and cost

• Changes in the volume of products sold

• Changes in sales mix

Analysis of the changes furnishes data needed to bring actual operations in line with budgeted expectations. Comparisons should be made between budgeted and actual operations for the current year or between actual operations for the previous year and those for the current year. Changes in gross profit may be looked at in terms of the entire company or by product line.

In an effort to improve profitability, the change in character of sales or mix of sales is just as important as the increase in total volume. For example, if the total volume in the budget is constant, but a larger proportion of high-margin products is sold than was budgeted, then higher profits will result. For instance, in the furniture business, there is an increasing trend toward more expensive and durable pieces carrying a higher margin per unit, although volume may not be all that great. Computations and analysis of sales mix variances are a very important part of profit analysis. It provides an additional insight into (a) what caused the increase or decrease in profit over the previous year and (b) why the actual profit differed from the original expectation.

Gross profit (or contribution ...