Analysis of Changes in Gross Profit.

Abstract Many accounting textbooks fail to analyze completely the causes of a change in gross profit. Typically, any change is first divided into the change in sales and the change in cost of sales. Each of these is in turn split into the change due to volume and the change due to unit prices or cost. This last breakdown is pictured as clear cut, and as easily determinable. Actually, the split between volume and price, or between volume and cost is not so easily determined. A portion of the change may be due to a combination of these factors, which are impossible to separate. The failure to point this out to students, especially to good students, leaves them confused on the whole problem. They fail to see the logic of the textbook presentation, and understandably so. It is a practical short-cut which ignores the realities of the situation, and departs in a degree from a purely logical basis. It is not intended here that the traditional way is wrong from a practical analysis viewpoint. It is contended, however, that an effort should be made to show the student what the realities of the situation are, and why the practical approach is followed.