Generating Effective Gross Margin Analysis

How to generate effective gross margin
analysis for product‐based companies
Produced By
Chase Morrison
http://www.profitwyse.com | (818) 436‐0781 | Info@Profitwyse.com

Agenda
• Review the questions a GM bridge must answer
• Go over variance calculations
• Review model architecture
• Review the requirements for GM bridge
• Review implementation of each variance category
• Take a look at approach used to calculate variances
• Display a GM bridge schedule
• Display basic dashboard schedule
• Wrap Up

What questions should a GM bridge answer?
• Is our pricing strategy working as planned?
• What is the GM impact of new products?
• How are volume differences within a product family or
group impacting GM%?
• Are assumptions regarding standard costs (or prices)
correct?
• How is volume vs. price vs. mix impacting total GM
profits?
• Which products/families are having the greatest
impact to GM?
• What actions will have the greatest “bang for the
buck”?

GM Bridge Variances
Though this isn’t the only way to produce a GM Bridge, our
bridge will be split into three components:
Price Variance (ASP and cost)  ‐‐ The price variances reflect the
differences between the planned or historical ASP/standard cost
and the actual.  There is a separate calculation for both.
Volume Variance (ASP and cost) – The volume variances also affect
both revenue and cost by comparing the planned/historical units to
the actual.
Mix Variance – GM variances generally contain a mix component.
Mix variance generally occurs when there are material volume
differences between products that also have different gross
margins.

Sales & Cost Price Variances
Purpose: Quantifies the impact of differences between planned
prices and the actual prices incurred.
Applicability: Applies to both average selling prices (ASP) and
standard costs to compute both ASP variances and cost
variances.
Indications: Sales price variances – differences between planned
prices and actual invoice price indicates
inconsistencies between marketing price assumptions
and implemented pricing policies.
Cost price variance – Should be minimal given that
standard costing is under business’ complete control.
Differences may indicate operational changes effected
to standard costing.
Calculation: ASP Variance = (ASP Actual – ASP Plan) * Actual
Volume
Cost Var. = (Unit Cost Plan – Unit Cost Act) * Act
Volume

Sales & Cost Volume Variances
Purpose: Quantifies the impact of differences between planned
and actual shipment volumes.  Only used at a product
level.
Applicability: Applies to both average selling prices (ASP) and
standard costs to compute both sales‐related and cost
related volume variances.
Indications: Sales volume variances – differences between planned
volume and actual volume indicates inconsistencies
between plan shipments vs. actual shipments.
Cost volume variance – Should be minimal given that
standard costing is  under business’ complete control.
Differences are the same as with the above.  Material
variances are indicative of variances between planned
and actual shipment volume.
Calculation: Sales Volume Variance = (Units Actual – Units Plan) *
Plan Unit ASP
Cost Volume Var. = (Units Plan – Units Actual) * Plan
Unit Costhttp://www.profitwyse.com | (818) 436‐0781 | Info@Profitwyse.com

Final Volume & Mix Variances
Purpose: Segregates the net sales and cost volume variances
into final volume and mix variances (i.e., Sales + Cost
Volume Variances = Final Volume + Mix Variances)
Applicability: Adding the product level volume variances will not
correctly allocate the GM variance due to GM%
differences between products; the mix variance
quantifies the impact of volume changes between
products. (For example, a business may achieve a unit shipped
target, as well as the dollar revenue target; but if that
achievement was based on under delivering a high GM% product
by over delivering on a low GM% product, that would produce an
unfavorable mix variance. )
Indications: Mix variance – If positive, indicates that the volume
mix of products is biased toward higher GM%
products, with the inverse being true if negative.
Final volume variance – Variance coincides with
volume variance at a summary level (e.g., family,
product line, total, etc.) at per unit GM $s.

Final Volume & Mix Variances (Continued)
Calculation: Both variances are computed at a summary level (e.g.
family, product line, etc.), as follows:
Final Volume Var. = Actual UnitsSUMMARY * Average Per
Unit Plan GM$SUMMARY ‐ Σ Planned GM$SUMMARY
Mix Variance = Σ Expected GM $s1 – Computed
GM $s2
1 Σ Expected GM $s = (Unit Plan GM$sProduct 1 * Actual
UnitsProduct 1) + (Unit Plan GM$sProduct 2 * Actual
UnitsProduct 2) + (Unit Plan GM$sProduct N * Actual
UnitsProduct N)
2 Computed GM $s = Summary Planned Per Unit GM$
* Actual Units For Total Product Category

Why bother with mix variance?
• Mix variance pertains to volume variances within a
product group (or type, product line, family, etc.)
• Mix is important if products are categorized into a group
and there is a need to bridge GM variance at group level
• If there are no groups, then there is no mix variance
• If using groups, adding up the individual product price and
volume variances will not bridge the computed group
variance.
• Will review in more detail in spreadsheet discussion

Workbook Model Requirements
• Separate sales, cost of goods and gross margin on to individual
worksheets
• Create a set of three worksheets for each category to be
analyzed (e.g. plan, actual, prior year, forecast, etc.)
• Structure each worksheet the same (e.g., planned revenue,
cost of goods, gross profit for Product A is referenced at row
10 on each worksheet)
• The gross margin worksheet is function of sales & cost of
goods worksheets
• Per unit prices on actual worksheets should be a function of
sales|cost of goods divided by units shipped
• Similar products should be grouped together to reflect
• Add an Adj./Other section for misc. adjustments, if needed

Plan Worksheet Structure
Revenue Plan Worksheet (Name: Pln_RV)
• Reflects planned revenue $s invoiced by month
• Revenue plan $ = ASP X Units
• Per unit metric is ASP
• Considerations: Include free goods, warranty
replacements, returns, etc.
Cost of Goods Plan Worksheet (Name: Pln_CG)
• Reflects planned cost of goods shipped
• COGs plan $ = Per Unit Stnd Cost X Units
• Per unit metric is unit standard cost
• Plan standard costs should be reconciled to final
costs basis
Gross Margin Plan Worksheet (Name: Pln_GM)
• GM plan $ = Revenue Plan – COGs Plan
• Added GM% in place of units
• Per unit metric is Per Unit GM $s

Actual Worksheet Structure
Revenue Actual Worksheet (Name: Act_RV)
• Reflects actual revenue $s invoiced by month
• ASP $ = Revenue / Units
• Per unit metric is ASP
• Considerations: Consistent handling of free
goods, warranty replacements, returns, etc.
Cost of Goods Actual Worksheet (Name: Act_CG)
• Reflects actual cost of goods shipped
• Per Unit Stnd Cost $ = Act Cost of Goods / Units
• Per unit metric is unit standard cost
• Plan to actual per unit standard costs variance
should be minimal to nonexistent
Gross Margin Act Worksheet (Name: Act_GM)
• GM plan $ = Revenue Plan – COGs Plan
• Added GM% in place of units
• Per unit metric is Per Unit GM $s

Requirements for Margin Bridge
• Want the user to be able to select comparison
period
• Want to include a graphical bridge to display
variances
• Want to have simple dashboard to help users
identify any persistent trends
• Want simple macro to print dashboard for all
products, families and total business

1Q Gross Margin Summary ‐‐ $683K Unfavorable
• Summarizes 1Q variance
(e.g., Jan. Through Mar.)
• Note family subtotals
• Need to parse $683K
variance into price,
volume & mix variances,
by product family
• Total Variance = Actual ‐
Plan

Sales & Cost Price Variances
• Sales Price Variance
( Actual Unit Sales Price –
Plan Unit Sales Price)
* Actual Units Shipped
• Cost Price Variance
( Plan Unit Cost –
Actual Unit Cost)
* Actual Units Shipped

Product‐Level Volume Variances
• Sales Volume Var.
( Actual Sales Volume –
Plan Sales Volume)
* Planned ASP
• Cost Volume Var.
( Plan Sales Volume –
Actual Sales Volume)
* Planned Unit Cost1
1 Or standard cost

Final Volume & Mix Variance
• Final Volume Var.
Actual UnitsSUMMARY *
Avg Unit Plan GM$SUMMARY –
Planned GM$SUMMARY
• Mix Variance
Σ Expected GM $s1 –
Computed GM $ s1
1 At actual volume

How to change analysis time settings

Gross Margin Bridge

Dashboard Schedule

If interested in getting a copy of the
accompanying workbook, contact Chase
Morrison at Info@Profitwyse.com

Generating Effective Gross Margin Analysis

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