Gross Margin Influencing Factors

Gross Margin Influencing Factors

Gross margins are an important ratio for evaluating the performance of the organization. An increase in gross profit margin ration is regarded as good performance, while a decrease in such ratio is regarded as bad performance. Gross margin influencing factor includes sales price and cost of sales, or both.

1.    Sale price

Gross margin first influencing factor is selling price. Gross margin factor will fluctuate with the fluctuation of sales price (keeping the cost of sales constant). It means an increase in sales price would increase the gross margin; similarly a decrease in price would adversely affect the gross margin.

2.    Cost of Product

Gross margin second influencing factor is cost of product or sales. If we decrease the cost of sales, it would improve the gross margin (keeping the sale price constant). Similarly a decrease in increase in cost of product would lower the gross margin.

3.    Sales & Cost of Sales

Gross margin can be effect by both at the same time, so we can study both influencing factor at same time. Practical both of these factors are required to be student at the same time.

Sales growth Rate Factor

Sales growth Rate Factor

There are two important factors for sales growth rate i.e. Sales price & sales volume.

1.    Sales Price

If sales price is decreasing, it will probably have negative impact on the sales growth. For example 10,000 @ 10 per unit = 100,000 (last year) & 11,000 @ 9 per unit = 99,000 (this year). Example clearly shows that despite an increase in sales volume due to cut in sales price; the total sales growth is negative.

2.    Sales Volume

Sales volume is another important factor for sales growth. An increase in sales volume would normally result in sales growth (except in deflation), similarly an decrease in volume would squeeze the total sales (except in inflation).

It is therefore important to remember that both sales price & sales volume has fundamental role in the sales growth , and organization would love to increase both sales volume & sale price ( both has direct relationship with Sales growth).

Advantages of Variance Analyses

Advantages of Variance Analyses

Advantages of Variance can be expressed in term of controlling expenditure, budget estimate adjustment, evaluate performance, setting roles & responsibility and setting a system of accountability.

1.    Indicate Departure

First advantage of variance or variance analyses is indication of departure from the standard or expected. This departure gets management attention for investigation. Management is get the relevant fact for this departure, especially for adverse departure or variance (cost is more than expected).

2.    Controlling Expenditure

Second advantage of variance is its role in controlling expenditure. Management takes appropriate controlling action in case of adverse variance result.  In first place explanation of adverse variance is studied, in case there is no appropriate explanation offered, and then appropriate controlling action is taken.

3.    Adjust Budget Estimates

Third advantage of variance or variance analyses is future adjustment of budget estimates .When there is no appropriate reason for variance other than wrong budget estimate, budgeted estimate for future are adjusted or corrected.

4.    Evaluate Performance

Fourth advantage of variance or variance analyses to evaluate performance of individual and especially the controlling manager. Favorable variance indicates good performance of a department or manger, while adverse variance is indication of poor performance.

5.    Roles & Responsibility

 Fifth Advantage of Variance or variance analysis is setting of a system of roles and responsibility within the organization. Due to the setting of roles and responsibility, efficiency and controls within organization improves.

6.    Accountability

Variance calculation or variance analyses set a system of accountability within organization. Everyone is accountable for adverse variances results, (material or labour cost is more than expected).