I have covered Price Volume Mix (PVM) analysis for Revenue Variance in the earlier article. I recommend that you take a look at it first because PVM for Revenue variance analysis is much easier to understand as there are fewer moving parts to think about in the calculations.
Assuming that you are now well versed in the PVM for Revenue analysis, let’s jump in to PVM for Gross Margin analysis. Again, I will save you a lot of reading time by having only the essentials of the material in this post and coving most of the content in a YouTube video.
I mentioned before that PVM for Gross Margin is a lot more complicated than PVM for Revenue. The reason it is more complicated is because Revenue is a result of two variables, Volume and Price, whereas to do a similar analysis for Gross Margin we also have to account for Unit Cost.
Let us start with basic definitions and assumptions. Let us say that we will be analyzing Gross Margin This Year (or Actual) and comparing it to Gross Margin Last Year (or Target)
|GMTY||– Gross Margin This Year|
|GMLY||– Gross Margin Last Year|
|RTY||– Revenue This Year|
|RLY||– Revenue Last Year|
|COGSTY||– Cost of Goods Sold This Year|
|COGSLY||– Cost of Goods Last Year|
|VTY||– Volume This Year|
|VLY||– Volume Last Year|
|PTY||– Price This Year|
|PLY||– Price Last Year|
|CTY||– Unit Cost This Year|
|CLY||– Unit Cost Last Year|
Our goal is to arrive at a formula where Gross Margin variance (RTY – RLY) (I will explain all buckets of the PVM in my video) is represented by
GMTY – GMLY = PriceImpact + VolumeImpact + MixImpact
In addition, our goal is to implement the calculation in such a way that the PriceImpact of the Revenue PVM is the same as PriceImpact in the Gross Margin PVM.
Let us begin!
if GMTY = RTY – COGSTY = PTY*VTY – CTY*VTY
and GMLY = RLY – COGSLY = PLY*VLY – CLY*VLY
then GMTY – GMLY = PTY*VTY – CTY*VTY – (PLY*VLY – CLY*VLY)
if ΔP = PTY – PLY (change in price) and ΔV = VTY – VLY (change in volume) and ΔC = CTY – CLY (change in unit cost)
then GMTY – GMLY = (PLY + ΔP)*(VLY + ΔV) – (CLY + ΔC)*(VLY + ΔV) – (PLY*VLY – CLY*VLY)
or GMTY – GMLY = PLY*VLY + ΔP*VLY + PLY*ΔV + ΔP*ΔV – CLY* VLY – ΔC*VLY – CLY*ΔV – ΔC*ΔV – PLY*VLY + CLY*VLY
items in RED cancel each other out
so GMTY – GMLY = ΔP*VLY
+ PLY*ΔV + ΔP*ΔV– ΔC*VLY – CLY*ΔV – ΔC*ΔV
or GMTY – GMLY = ΔP*VLY + ΔV*(PLY– CLY) + ΔV*(ΔP – ΔC) – ΔC*VLY
From the formula above, we can now define our Gross Margin PVM calculations as the following:
|= ΔV*(PLY– CLY)|
|= ΔV*(ΔP – ΔC) – ΔC*VLY|