how to calculate gross margin
RevenuesCost of goods sold:Beg. inventory Var. Manuf. costsAllocated fixed manuf. costsCost of goods available for saleLess: Ending inventoryAdjustment for production-volume varianceCost of goods soldGross margin
Calculating gross margin involves calculating the difference between the revenue from sales and the cost of goods sold (COGS), then expressing that difference as a percentage of revenue. Here are the steps to calculate gross margin:
1. Determine the revenue from sales: This is the total amount of money generated from sales of products or services. This can be found in the income statement.
2. Determine the cost of goods sold: COGS covers the expenses directly associated with creating a product or delivering a service. This includes the cost of materials, labor, and overhead.
3. Calculate the gross profit: Subtract the COGS from the revenue from sales to obtain the gross profit.
Gross Profit = Revenue from sales – Cost of Goods Sold
4. Calculate the gross margin: To determine the gross margin, divide the gross profit by the revenue from sales and multiply by 100 to get the percentage.
Gross Margin = Gross Profit / Revenue from Sales x 100%
For example, if a company had sales revenue of $500,000 and COGS of $300,000, the gross profit would be $200,000. To calculate the gross margin, divide the gross profit by the revenue from sales and multiply by 100:
Gross Margin = $200,000 / $500,000 x 100%
Gross Margin = 40%
Therefore, in this example, the gross margin is 40%. This would indicate that the company is making a 40% markup on its products or services over and above the COGS.
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