By James Bell
Gross Margin is a helpful Profitability metric. It tells us what the profit is for every dollar of revenue. It is also useful as the basis of other formulas. We also refer to this as gross profit percentage as the gross margin ratio.
Cost of Goods Sold
Essentially we divide Gross Profit by Sales. Ratios are great for comparing period to period. This differs from Gross Profit which is just the numerator part of this equation; Revenue – Cost of Goods Sold. This is different from Contribution Margin in that we are using COGS instead of variable costs. These are different because there are some fixed costs in COGS although the bulk of it is variable costs.
Revenue is the top line of the Income Statement. Breaking revenues out by product, department, business unit, location and more can give you greater agility in your analysis. Having more detail to pull for reports and dashboards lends itself to looking at metrics in many different dimensions which is helpful in decision making.
We call the Cost of goods sold COGS because it’s easier to say. This is a common term that you should be familiar with. Cost of Goods sold is traditionally calculated as follows.
COGS= Beginning Inventory + Purchased Inventory during period – Ending Inventory.
Remember that this is the cost, not the quantity of inventories.
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