It should be noted that calculations of gross profit do not include fixed costs since such costs will have to be paid irrespective of the levels of output. Credit card fees chargeable to the business for customer purchases.Costs associated with utilities at the production site.Cost of equipment, usually accounting for usage-based depreciation.Costs associated with production supplies.Labor costs, especially those that consist of hourly payment terms (also known as billable staff wages) or are dependent on the levels of output (also known as peice rate labor).The various variable costs can be classified as follows: corporate expenses that fluctuate according to the output of production. However, such a metric only evaluates variable costs, i.e. Gross profit is essentially a measure of the ability of a business to utilize its machinery, labor and raw materials to their full potential during the production of finished goods or services. Such a requirement is mandated under the absorption costing methodology endorsed by GAAP. Nevertheless, generally accepted accounting principles (GAAP) directives mandate that businesses assign a part of the fixed costs to each unit of production for external reporting purposes. As such, gross profit excludes from the calculation, fixed costs such as costs associated with rent or lease of assets, advertising costs, insurance premiums paid, and salaries for non-production staff such as employees associated with human resources, housekeeping and security. However, such a standard of measurement only takes into account variable costs such as the cost of materials, labor costs, sales commissions, various fees levied on customer purchases, cost of equipment, cost of utilities consumed during production, and shipping costs. It is a reliable indicator of the efficiency of a business in optimally utilizing its labor and raw material supplies in producing goods or delivering services. Gross profit is typically indicated on an income statement prior to deducting expenses (such as general expenses, administrative expenses and sales expenses) and before factoring in non-operating revenues, non-operating expenses, as well as gains or losses. Gross profit figures are typically denoted on the income statement of the business, and are mathematically represented as, Gross Profit = Net Sales Revenue - COGS, where, COGS = cost of goods sold.īack to: Accounting & Taxation How does Gross Profit Work? In simpler terms, the gross profit is net sales minus the cost of goods sold (COGS). The gross profit of a business, variously referred to as its sales profit or gross income, is the total profit that it makes from sales after deducting the costs associated with producing and selling its products or delivering its services. Update Table of Contents What is Gross Profit? How does Gross Profit Work? Example of Gross Profit Academic Research on Gross Profit What is Gross Profit?
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