Accounting and Finance training and advice to help you land your accounting and finance job, and then not only keep that job, but get promoted quickly!

Learn how to use Excel XLOOKUP and what this function can do for you. In this video, I will share 7 practical ways in which you can use the new XLOOKUP function which serves as a perfect replacement for both VLOOKUP and XLOOKUP.

We start with a real life work situation where you have to respond with data requests quickly. The first situation being where the General Manager is asking for Sales for specific customers within 5 minutes. Not only do you provide him the information requested within 5 minutes, but you go above and beyond to provide additional information that he may be interested in. In the second example, your Manager is asking you to complete and send the sales commission file based on annual sales and commission plan. You use XLOOKUP Match mode functionality to quickly respond to the Manager with the completed sales commission report.

In the third example, you have been asked by the Purchasing Manager to provide him help with pulling the most recent purchase price from a long list of materials and purchase history. You use the Search Mode argument of the XLOOKUP function to reverse the order of the data and provide by material SKU, the most recent purchase price and earn bragging rights.

In the fourth example, the external auditors have asked you to provide information related to customers, in a layout which is the opposite of how your sales data is set up. Knowing well that XLOOKUP can replace horizontal lookup or HLOOKUP, you quickly pull the information in the requested format and respond to auditor’s request.

Finally I share a tip that I have personally been using since the VLOOKUP days which would help you avoid XLOOKUP error, when by mistake the data ranges (lookup array and return array) are not aligned. This tip actually saves a lot of time as well and has been one of my favorite tips.

If you have more questions, or would like to learn about advanced ways of using XLOOKUP, please leave a comment. If you enjoy the information provided in the video, please do not forget to press Thumbs Up

In this article, we will describe and explain some of the terms most commonly used during discussions of financial performance and business meetings. Understanding what these terms means is essential if you are a new or potential Corporate Finance professional such as a Financial Analyst in the FP&A department, or even a new Accounting and Finance professional. It helps significantly in the job interview process as well if you are interviewing for a job in such Finance roles as you are expected to know what they mean and demonstrate experience of their use.

The key financial and business terms we will discuss in this article are as follows:

MTD, QTD, YTD

Plan, Budget, Forecast, LE

Gross Profit, Net Profit, EBIT and EBITDA

Variance, Favorable and unfavorable variance

YoY, vs LY, vs Bud

MTD – represents Month to Date. The ‘To date’ captions are usually used to represent financial performance or activities for a period of time. MTD will always be followed by the name of a month e.g. “MTD August” means results or performance from the start of August (i.e. 1st August) to the current date of the month of August. However, MTD is more commonly used to refer to the entire month, and can also be used to refer to a month that has already finished. For example, if you are currently in the month of August, then ‘MTD April’ will represent the financial performance for the entire month of April.

QTD – represents Quarter to Date. QTD represents the performance from the start of the Quarter to the current date. E.g. if the company’s financial or fiscal year runs from January to December, and you are looking at the performance of Q4 (ie October to December), QTD would represent performance for the period starting from October 1st to the current date. If the current date is December 15th, then QTD will represent the period from Oct 1st to Dec 15th (roughly 2.5 months).

YTD – represents Year to Date. This term refers to the financial performance, KPIs or activities from the the start of the year to the current date. Again, most commonly, this term is used to refer to the period from the start of year to the end of the most recent month. Similar to MTD, YTD is also followed by month. So, for example, “YTD March” refers to the results related to the period starting from the 1st of January and finishing on March 31st. It is important to remember that the fiscal year or reporting year of some companies may not be the standard January to December period. For example, for a company, the financial reporting year may start from July and end in June of the next year. In this case, the YTD period will start from July, and in this case, YTD September will only reflect the performance for the three months period from July to September.

Note: If you would like to learn in detail, how to calculate sales variances and the impact they have on sales $, profit $ and profit margin %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel templates.

Plan or Budget – Most companies have an annual budget cycle, where well before the start of the year, an extensive and thorough exercise is conducted to plan and quantify the expected (or desired) financial results of the next year. The final outcome of the exercise is called “Budget” or “Plan”, and is represented in the form of budgeted income statement, budgeted balance sheet, and often a budgeted cash flow statement. However, a lot of detail may be available as back up to the numbers reflected in these budgeted financial statements. For budgeted income statement, it is common to start with YTD actual performance of the current year, and then add forecast for the rest of year. The full year forecast (including YTD actual numbers) for the current year then becomes the basis for the next year budget. Budgeted balance sheet and budgeted cash flow statements follow the budgeted income statement with additional assumptions for the budget year.

Forecast – The budget or plan is prepared usually once a year. However, things change quickly, therefore many organizations have forecasts in place as well. A forecast is an estimate of the financial performance, but is typically less extensive and thorough when compared with the budget exercise. The frequency of forecasting also varies. Some companies revise forecasts every month, while others may revise them every quarter or even every six months. It is important to note that while forecasts are revised frequently, the budget remains the same. Therefore, when comparing actual results, often the comparison is done both against the Plan (Budget) as well as the current forecast. This is because budget is not rendered completely irrelevant as a result of the availability of a Forecast. Some bonuses and commissions might still be linked to the original budget, and therefore keeping an eye on the performance vs budget is important.

LE – represents Latest Estimate. This term is used to define the most recently communicated or approved estimate of financial performance, specially related to sales. It is similar to a “forecast”, but different in that a forecast is usually submitted at the start of a quarter or a month, but latest estimate can be provided in the middle of a month or quarter as well. A typical example would be, for example at the start of the month of January, a sales forecast is submitted, lets say of $100,000 for the month. However, every Monday, the forecast is reviewed, and then based on new information, the forecast for the month is revised. Lets say, on the 15th of January, based on actual sales so far and information provided from Sales team, it now appears that sales for the month of January by the end of the month will be $120,000. This will be presented in the form of Latest Estimate (LE). So the forecast is still $100,000, but the latest estimate is now $120,000. Usually, a separate column is used to reflect latest estimate next to budget, forecast or prior year actual numbers.

Note: Not all organizations use Latest estimate, and often the term Forecast is used interchangeably with latest estimate.

Gross Profit – Gross Profit can be calculated with the following formula:

Gross Profit = Revenue – Cost of goods/services sold

where revenue represents the proceeds from the sale of products or services, and Cost of goods/services sold represents the cost of producing or procuring the goods, or in the case service, the cost of rendering the service related to the revenue earned.

What is important is that for the calculation of gross profit, other expenses required to operate the business (also known as Operating expenses) are not deducted from revenue. Gross profit only looks at the profit when considering costs of product or service, and not the operating costs of business. Here is a video I created explaining Gross profit, and the difference between Gross profit and Net profit in more detail…

Net Profit – Net Profit considers all the costs including cost of operating business such as selling, general and admin costs including taxes and interests etc. So, Net profit can be calculated with the formula below:

Net Profit = Gross Profit – Operating costs – interest and taxes

or Net Profit = Revenue – Cost of goods/services sold – Operating costs – interest and taxes

Net profit is also referred to as the bottom line, as this is literally found at the bottom of the income statement, and also reflects the overall net profitability of the business.

FYI: Revenue is often referred to as “Top line” as most income statements start with Revenue at the top.

EBIT – represents Earnings Before Interest and Tax, and is a very commonly used measure of the financial performance EBIT reflects the net profit or net income of a business excluding a) interest and b) tax expense, and can be represented with the formula:

EBIT = Net Profit plus (Interest and Tax expense)

What is the importance or use of EBIT? EBIT simply shows you the operational performance of a business before considering interest and tax expense. Think of it this way … if you are an investor looking to invest in a company, you are interested in knowing the EBIT from operations of a company because the interest and tax expenses may not remain the same when you buy the business. You may have extra cash available and might not need the same level of borrowing as the existing business, or the taxation rules that apply to you may be completely different. By looking at EBIT, you can tell exactly what a business can make from its operations on its own before factors such as interest and tax are taken into account.

EBITDA – represents Earnings Before Interest, Tax, Depreciation and Amortization. In calculating EBITDA, we remove depreciation and amortization expenses in addition to interest and tax expenses. Depreciation and amortization are often referred to as ‘non-cash’ expenses. This is because, the actual outlay of cash has often already taken place in the past. Depreciation is a systematic allocation of the cost of fixed assets over the useful life of the asset. So, for example, if a building is purchased at the cost of $1 million, and the useful life of the building is determined to be 25 years. Although the total cost of purchase ($1 million) may have been paid in year 1, a portion of the cost will be recorded in the income statement every year till the completion of the 25 years. Similarly, amortization is the allocation of cost of intangible periods over a pre-defined period of time.

Why is EBITDA important? When looking at the net profitability of a business, depreciation and amortization create two problems; 1) timing difference between the actual cash flow and the recording of expense in the income statement (as in the example above), and 2) different companies my use different methods or assumptions when calculating depreciation and amortization. As a result of these problems, it is often a good idea to take a look at EBITDA, specially when comparing two or more companies for their operational performance. EBITDA helps you compare the performance of companies by excluding the impact of financial, accounting and taxation decisions.

YOY – represents Year over Year. This usually represents a comparison of prior year to current year. You will hear the phrase ‘Year over year growth’ or ‘year over year decline’. A YoY growth of 2% in sales e.g, represents that sales have increased by 2% vs last year. The formula for this will be:

YoY Sales Growth = (Current year Sale – Prior year sale ) / Prior Year Sale

However, the calculation does not need to be for the entire 12 months period. You can also have YoY growth or decline for a period of three months, six months or any number of months or days. For example, you may compare the sales of January to March period of last year with the same period (January to March) of the current year. The key is to compare the same number of months, when doing this comparison.

Variance – Variance simply represents difference. It can represent difference from target, difference of previous performance, difference from estimate or expectation and difference from budget.

Unfavorable Variance – For example, if the target for a sales representative for a month was to make a 100 sales of a given product. but the actual sales he or she made in that month turned out to be 90, the variance in this case is -10. It is denoted by a minus or negative sign because it is an unfavorable variance. This is because the more a sales representative can sell, the better it is for the company as well as the sales representative. Therefore, selling less than target is an unfavorable variance and is a negative situation denoted by a negative sign.

Favorable Variance – If, however the actual sales were 105 units, this would be a favorable situation and the variance would be represented by a positive sign, being +5 units.

Note that the higher the sales or income vs target, the more favorable the variance is. However, the higher the expenses are vs target the more unfavorable the variance, as expenses have an unfavorable impact on the profitability of a company.

vs LY and vs Bud – vs LY represents Versus Last Year (often also referred to as versus prior year), and vs Bud represents Versus Budget. Both of these terms are used to compare against actual current year performance. So, for example, vs LY would represent the difference between actual results this year, and the results for the same period last year. Similarly, vs Bud will represent the difference between actual results this year, and the amount budgeted for the current year. As an example, if actual revenue for current year was $10,000, budgeted revenue for current year was $12,000 and revenue from last year was $7,000. Then, in this case variance vs last year is +$3,000 (because actual sales in the current year are higher) and variance vs budget is -$2,000 (because actual sales in the current year are below the budgeted amount).

Are you an accounting and finance professional looking to improve your financial analysis skills? Make sure you connect with us by subscribing to the email list. We will be sharing practical tips and advice that will help you transform you career this year. Click here to subscribe to our email list.

We also have a YouTube channel (called LearnAccountingFinance) with helpful accounting and finance, Microsoft Excel and Finance career related videos. You can find our channel by clicking on the link LearnAccountingFinance.

When I first started analyzing and presenting financial results to my organization’s leadership, I had no idea what I was doing wrong. I just felt something was not OK. I was not making a good impression. I would leave the meetings with this empty feeling. It was a little embarrassing, and painful at times. Can you relate?

This guilty feeling helped me, however, as I decided to learn and improve my financial analysis and presentation skills. That was a great decision, as things only got better from there. In this article, I will share with you four key mistakes that many beginner and often advanced finance professionals make when presenting financial results in management meetings. I will provide solutions as well, so that you can rectify these mistakes immediately, and become an indispensable and successful finance professional that you deserve to be.

#1: Presenting Numbers, Not telling Stories

The number 1 mistake that most beginner financial analysts, accountants, controllers and sometimes even CFOs make is present the results in the form of tables and numbers, year over variances and percentages. It is as if they are reading the results on the slides.

What is wrong with that, you ask? The problem with this approach is that it is much harder to comprehend. People loose focus quickly of what you are saying. They will not remember or even understand much of what you are saying. Even though, you may have provided some good information, your audience will not be able to absorb it. May be that is why, accountants and finance professionals are sometimes seen as boring. We do not leave an impression by sharing financial results in this format. Most of what we say during such meetings is forgotten before the meeting is over. The biggest problem with this approach is that the key message (if we had any) is lost in the details.

Note: If you would like to learn in detail, how to calculate sales variances and the impact they have on sales $, profit $ and profit margin %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel templates.

Solution:

Presenting results is your opportunity to shine. Each slide of your presentation should have a key message. That key message should also be the title of your slide. Your overall presentation should be a collection of key messages that can be narrated in the form of a story. If you structure your presentation this way, presenting it will be much easy. You will always know what to say and where you are going. It will be a coherent and thoughtful analysis with key takeaways for your audience. They will love what you have to say and remember it. Some may even get inspired!

#2: Too many Ideas in one Place

A lot depends upon the setting you are in. Is it a short, 15 minutes financial results update?, or a longer, more detailed business review? However, when we prepare our presentation slides, often we do not think carefully about what goes into each slide. Often, we lump multiple ideas or topics into one slide. This results in confusion, and our message is too broad. We seem to be jumping from one topic to another and then back quite frequently.

Solution:

To avoid this situation, always create one slide for each topic. If more than one topic or issues are to be discussed, create separate slides for each one of them. Your audience finds it difficult to comprehend more than 5 objects on one slide any way. This includes a combination of pictures, tables and text. So, try to limit the number of objects to 5.

Do not include long textual paragraphs and definitions. Use minimal amount of animations, only to emphasize key points. For example, if your key message in a slide is mainly about Sales price increase and its impact on profit margin, you are better off not including numbers for Selling, general and admin expenses. If you are comparing prior year vs current year, you do not need to include budget or plan numbers in that slide.

If you have a lot to cover but not much time available, rather than skimming through each slide quickly, skip a few slides, focus on hammering home the key message on a lesser number of slides instead of going through all of your material.

#3: Data Issues and related Disclaimers:

One of the most common problem that we accountants and finance professionals face is the availability of reliable data that can be used confidently to analyse and explain results. While your colleagues and leadership may appreciate that, the truth is they still expect you to come up with conclusive explanations regardless. I struggled with this one a lot initially. I thought that letting everyone know where the data has holes will help everyone understand that they cannot completely rely on the information. And therefore, should not make business decisions solely on the basis of the available analysis. The problem with this is that they still have to make decisions. They want you to provide them some conclusive guidance and you are not helping them by telling them that they cannot rely on the information you provided. It is like watching a movie without an ending. It can get pretty frustrating.

Solution:

Although there is no easy fix for this problem, the first step is to acknowledge the challenge your audience is facing. The next step is to identify what elements of the financial information can be relied upon to a reasonable degree. You can always look at the data available from multiple angles and validate so that you can conclude to a reasonable level of certainty.

You have to take this as a challenge, and deal with the uncertainty. This is a key area where accounting and finance professionals can and should add value. Anybody can look at reports and summaries. Where we add value, is that despite problems with data, we can validate the information and make suggestions. This comes with time and experience, but you have to start by taking on this challenge. Trust me! you will discover that you have not challenged yourself enough in the past. Even the incomplete and crappy data gives you some valuable insights that you can share with your leadership. You only get better as you practice this skill.

#4: Most credible source of financial results and analysis

This represents the other side of the balance for finance professionals, and is also a key job requirement. If you are in the accounting or finance profession, specially if you are involved in presenting financial results, this is an absolute must for you. When companies need new products or improvements in existing products, they look to engineers. When they need talented people to hire, they look to HR. Similarly, when they need accurate financial information and advice, they look to finance professionals like You and I to guide them and solve their problems. Do you provide accurate reports, analysis and commentary?

Your organization’s IT system may be generating automated reports for managers. Do the managers ask you if they have doubts on numbers in a system generated report? If it is not you, then may be, you have not established the credibility that is an absolute must.

Solution:

If you are not there yet, do not worry. You really need to upgrade your skills such as financial analysis, variance analysis, data analysis as well as Microsoft Excel. You need to develop a thorough and clear understanding of cost and management accounting. Once you get better with these skills, your quality of work improves. Quality reports and analysis combined with your presentation skills such as those discussed in points #1 and #2 will make you an exceptional Finance professional who becomes the Go To person for management.

By the way, if you are serious with honing all of these skills, I recommend that you connect with me. I will be sharing with you, much of what I learnt about detailed financial analysis, presenting financial results, profitability and variance analysis (sales and cost of sales) and lots of advanced Excel. In addition, I will also be sharing my experience on how to find and successfully interview for the right job, how to get promoted quickly and become indispensable finance resource for any organization you work for. Make sure to sign up by clicking here for my email list and receive career transforming tips and information.

Conclusion

When done correctly, analyzing financial results and business performance, and then presenting it can be an extremely rewarding experience. Especially, when you know you are adding value and making a difference. Your suggestions will be well respected. You will influence small and large business decisions. As you get better with this skill, you will find colleagues and business leaders from other functions relying more and more on you. You will be invited to more meetings and formal and informal discussions. Your advice will be sought. Even, your boss will value you more. Trust me! this is a great feeling.

If you do not already, you will begin to love your work. The fact that you become part of cross functional meetings and informal discussions will help you understand the business even better. You can gain operational insights which will generate more ideas in your head to analyse information differently and present new insights. It just keeps getting better. Your job will be secure and discussions around increment and promotion will become much easier, as everyone from HR to Sales, Operations and Finance functions will be seeing your contributions. No matter who the decision makers are, they will have only good things to say about you. You need to consider the advise given above, however, and start taking action on it immediately. Focus on development of your key skills such as variance analysis, accounting, Excel and presentation. I have seen a significant change in my income and accomplishments since making these improvements. I think I can help you with this. Make to sure to connect with me by signing up with your email address. Lets connect! Click here to subscribe to my email list.

Waterfall Chart (also known as Bridge Chart) is a highly effective visual method to present changes, both positive and negative, between a start and an end point. The values of the starting and end points are shown as bar graphs, and the gap or change between the two points is bridged by smaller, color coded bar graphs. The size of each bar graph is directly dependent on its value. Here is a great video tutorial on creating a fully automated waterfall chart in Excel 2013, or earlier.

Note: If you would like to learn in detail, how to calculate sales variances and the impact they have on sales $, profit $ and profit margin %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special discounted price for readers of this post) showing exactly how this is done. You also learn how to analyse and present the results of the variances to management.

Why use a Waterfall Chart?

Well, this is because it is one of the best visual representation of changes, growth or transition from a start point to end point. It clearly shows what items contributed the most to the change from a starting point and an end point. If color coded properly, it also shows, which items have impacted positively and the ones that have impacted negatively.

Be careful though, not to add too many items in the breakdown or bridge because it becomes complicated for the readers to distinguish the key items. The main point of the waterfall chart is to highlight key contributors to growth or change between two points. A good practice is to keep the items between 5 to 7, but certainly try not to let them exceed 10 items.

Are you an accountant or finance professional looking to improve your financial analysis and presentation skills? Make sure you connect with me by subscribing to my email list, Click here to subscribe to my email list.

How to explain the impact of Sales Variances on Profitability or Profit Margin of a business? In this article, I am going to explain with the help of an example, how to calculate sales variances, and how to understand the impact of these variances on the profitability of your business. Note that we are calculating the impact of Sales Variances on Profit. This is different from explaining sales variances on Sales $.

Note: If you would like to learn in detail, how to calculate sales variances and the impact they have on sales $, profit $ and profit margin %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel templates.

By the time, you are finished with the article, you will be able to understand clearly how to calculate these variances. I will try to be concise, so I assume you are already aware of terms like Sales, margin, profits and variance etc. If you are not fully aware, click on Commonly used financial terms every new Financial Analyst and Accountant should know! where I explain these and other commonly used terms. Also, start following our blog and YouTube channel LearnAccountingFinance, so that you can stay up to date with practical information and training (knowledge you can use immediately at your work).

What you will learn?

We will start with data in the following example. The example uses data for 2017 and 2018 (current year vs last year) to calculate the variances. However, if you are trying to calculate variances versus budget, simply replace last year (2017) with Budget data and the calculation will work just fine.

In this example, we are selling three products which are 1) Apples, 2) Bananas and 3) Oranges. We have data for Sales, Cost of Sales and Profit margins. We also have the quantity, or number of units sold. See Tables below

As this article is about calculating the impact of Sales variances on Profit margins, we have deliberately kept the cost per unit as same over the two periods to avoid confusion. However, when calculated correctly, it does not matter if cost per unit has changed. As you will see in the calculations, sales variance calculations do not take into account change in costs. The only thing to consider in that case would be that the profit margin change would have an element of variances from costs as well which needs to be calculated separately (cost variances). In our example however, the profit margin increased by $268 and all of it is resulting from Sales related variances. After performing all variance calculations, you will see the split of variances as follows:

Types of Sales Variances

Lets look at types of sales variances quickly. Broadly, there are only two types of Sales variances.

Price Variance (Change in Selling Price)

Volume Variance (Change in Volume)

The Volume variance is further sub-divided into Quantity and Mix Variances. Do you like acronyms. Here is a good one to remember. Its PV^{TM}

Sales Variance

where ‘P’ is for Price Variance, and ‘V’ is for Volume Variance. ‘T’ for Quantity and ‘M’ is for Mix.

If we calculate our variances correctly, the sum of Price and Volume variances should be equal to the total change in Profit Margin (excluding the impact of cost variances). Similarly the sum of Quantity and Mix variances should equal Volume variance. Its time to calculate each of these variances individually.

Selling Price Variance

Lets deal with Price variance first. Any change in price directly impacts Profit margin. From the data available, you can easily calculate the selling price per unit of each fruit (Amount of Sales ($) for each fruit sold divided by the number of units sold). So, for example for Apples, the selling price for 2018 is $11 ($660 Sales / 60 units sold). Similarly, the selling price of apples in 2017 was $10. Below is the table of selling prices per unit.

Looking at the table above, we can clearly see that the Selling price for apples and oranges have increased in 2018 compared to previous year, while that of bananas has decreased. This means, if we look at selling prices alone, we should see a favorable impact, or favorable variance from apples and oranges and unfavorable impact from bananas. Now, Selling Price variance will be calculated as follows:

(2018 Selling price – 2017 Selling price) x Units sold in 2018.

For apples, this can be calculated as:

($11 – $10) x 60 units = $60 Fav.

Why did we use 2018 number of units sold, and not 2017 units? The answer is that we are trying to determine the impact of change in Selling price. In other words, we are trying to see if the 60 apples sold in 2018 were sold at 2017 price, how would this compare with 2018 price. Therefore, the variance could also be calculated as follows:

Apples sold at 2018 Price – Apples sold at 2017 Price

which is …

($11 x 60) – ($10 x 60) = $60

Apply the same logic to bananas and oranges

Bananas – Sales Price variance = ($1.5 – $2) x 95 = -$48 Unfav. (numbers are rounded)

So, we can say out of total change in profit margin of $268, Price variance represents $113 (rounded), and we can also see that oranges are the largest contributors to the fav. price variance.

Volume Variance:

This leads to the calculation of our second variance; Sales Volume variance. Sales variances comprise of Price and Volume only. Since we have calculated Price variance already, we can already calculate the total volume variance which would be…

However, we need to still calculate it, as well as the two sub Volume variances, which are Quantity and Mix.

Lets start with Volume variance.

Sales Volume Variance =

(2018 Units Sold – 2017 Units Sold) x 2017 Profit Margin per Unit

Yes, I know you have some questions here.

Why did we use Profit Margin per unit, and not Selling Price?

OK, even if we use Profit Margin, why 2017 and not 2018.

See .. I can read your mind 🙂

Answer to Question 1. Remember we are trying to explain the impact of Sales variances on profit margin, not total Sales $. If we had taken Selling price instead of Profit margin, we would be explaining Sales $ variance (change in Sales $ from 2017 to 2018), but we are calculating the impact on Profit margin. For each increase or decrease in unit sold vs last year, the profit margin will be impacted only by the amount of profit margin per unit and not the total Sales value. Understanding this is important. Note that in the calculation of two sub Volume variances (Mix and Quantity) as well, we will use profit margin per unit and not Selling price per unit.

If you have understood answer to Q1, then you can also understand that when we calculated price variance, we took into account the change in profit margin per unit in 2018 (change in selling price directly impacts the profit margin). Now we are calculating the impact of change in volume (or number of units) and should exclude the impact of change in Profit margin in 2018. This is why we use 2017 Profit Margin. Think about it for a little while, internalize it and if you still do not understand, leave a comment and I will try to explain further.

Time to do the Math:

At this point, we have understood the impact of Sale price and volume on the $268 change in Profit Margin in 2018 vs 2017.

However, our analysis is not finished, and we need to understand the impact of Mix and Quantity.

Sales Mix Variance:

Sales Mix refers to the share of each product in total Sales, in terms of percentage. If you look at the number of units sold, you will see that in 2017, 50 apples were sold which is 28% of total sales of 180 units (50/180).

Sales Mix variance can be calculated as …

(2018 Mix % – 2017 Mix %) x Total units sold in 2018 x 2017 Profit Margin

So, our Sales Mix variance for each fruit will be as follows:

The share of apples in the overall product mix increased to 29% in 2018 (60/205). This change in mix of 1% multiplied by the total number of units sold in 2018 (205) will give us the number of apples sold that resulted in the increase in Mix %. In this case it is 3 apples (1% x 205 = 3). We know that the total number of apples increased by 10 (50 in 2017 and 60 in 2018). So out of the total Volume change of 10 apples, 3 apples represent Mix change and the remaining 7 represent Quantity change. We can see from the variances above that a drop in mix % of bananas by -9% has impacted the profit margin unfavorably by -$19 but this has been more than compensated by the increase in Mix % of Oranges by 8% (which has a higher Profit margin per Unit compared to bananas).

Calculating Mix variance separately in this way is important because each product has a different profit margin. Assuming the overall volume increased from 180 to 205 (just as in our example) but the mix remained the same as last year, then the change in total profit margin of the business would have been different, although we see the same quantity increase. This calculation of impact of increase in quantity while maintaining the same mix as last year is really our next variance, the Quantity Variance. Calculating Mix variance also helps when trying to explain Profit Margin % changes over the years, or vs budget because Quantity variance has neutral impact on % Profit Margin.

Sales Quantity Variance

As mentioned above, Sales Quantity variance measures the impact of increase in volume, or quantity while maintaining previous year’s mix.

Sales Quantity Variance

= (2018 Units sold @ 2017 Mix – 2017 Units Sold) x 2017 Profit Margin per unit

In our example fruit sales increased from 180 to 205. If the sale had increased maintaining the same product mix as 2017, our unit sales for 2018 would be as follows:

And the Sales Quantity Variance can be calculated as follows:

Conclusion:

We have calculated all the variances now. The overall increase of $268 in Profit margin can be clearly explained with Price increase resulting in fav. variance of $113 and Volume increase resulting in fav. variance of $155. The volume increase includes $79 due to change in Product Mix.

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