Markup and Margin are two interesting measurement for business owners. Both are important as well to determine price and productivity. It is required to understand markup and margin for accounting works.
Terms Understanding
To understand markup and margin, there are three accounting term to be understand:
- Price or Selling Price is about how much the company sell their products or services. The total of selling price in a period of time will impact directly on company Revenue.
- Cost or Cost of Goods Sold (CoGS) or Cost of Revenue or Cost of Sales is about how much the initial expense required to the company that go into making products and services.
- Gross Profit or Gross Profit Margin is the revenue left over after the company pay their CoGS. In a bigger picture, the formula is simply explained by (Price – Cost).
Markup Calculation
Margin Calculation
Both are Important Angle
Understanding Markup and Margin is like comparing two runners: A is faster than B, or B is slower than A. The nuances can be different. The numbers can be complex and misunderstand, especially if there is another numbers from runner C, for example Competitor, that business management cannot really determined if it is markup or margin. Below is the comparison chart between markup and margin.
The chart interestingly show us that margin always smaller than markup. It gives some sense as well that bigger value will affect the gap. This concept is important to understand pricing strategy on the next post. Stay tuned!