What is Gross Margin?

Gross margin is most used term in accounting area for showing the growth of companies. It is gross profit ratio. In simple words, it is gross profit divided by net sales. Gross profit is excess of net sales over cost of goods sold. More gross margin means more capacity to cover our all indirect cost.

Gross margin also tells, how much sale price do you expect for covering your operating expenses and getting profit on it?

For example, your cost of goods sold is 10$ and your expect 20% gross margin. With this margin, you can expect your sale price also.

Sale price = 10 + 10 X 20/80 = 12.5 $

Formula of Gross margin = Sales – Cost of Goods sold / Sales

Gross margin % on Sales = (Sales – Cost of Goods Sold) / Sales X 100

Gross margin % on Cost = (Sales – Cost of Goods Sold) / COGS X 100

Cost of Goods Sold = Opening stock of material + purchase + Direct Expenses – Closing stock

Showing of Gross Margin in Financial Reports
Following is the example for showing of Gross margin in financial reports
Gross margin of third quarter of 2011 of XYZ Company increased 62.4%. In previous accounting year 2010’s third quarter, gross margin increased just 61.6%.


Reason of Decreasing of Gross profit margin

There are many reasons of decreasing gross profit margin of any company. Some of them, we can include in following list.

1. Increase the cost of raw material.
2. High labour turnover ratio.
3. Adverse worker’s compensation problem.
4. Increase the rate of direct expenses.
5. Decreasing the sale prices due to hard competition.
6. Decreasing the quantity of sale.

Gross Margin Vs Markup

Gross margin = Markup / (1 + Markup)

Markup = Gross margin (1- gross margin)

For example

If a product costs the company $200 to make and they wish to make a 50% profit on the sale of the product (sale dollars) they would have to use a markup of 100%. To calculate the price to the customer, you simply take the product cost of $200 and multiply it by (1 + the markup), e.g.: 1+1=2, arriving at the selling price of $400.

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Accounting Education: What is Gross Margin?
What is Gross Margin?
Accounting Education
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